Novated lease: What are the traps?

Novated lease traps

Now, keep your eyes peeled – we’re entering the perceived traps.

Trap #1: You’re responsible for the lease – TRUE

You might have heard that novated leases are a trap because you’re responsible for the lease and not your employer, but, when are you not responsible for paying for your own car? It’s true that you do need to be employed and paid via PAYG to qualify for a lease. It’s also true that, should you leave or lose your job, you’ll need to take on payments of the lease yourself until you find a new job. If your new employer doesn’t offer novated leasing, they can get set up easily (we have an employer guide for that). So, whilst this is commonly perceived as a “trap”, it’s more of a consideration; if you’re someone who worries that they change jobs often or may have long periods between jobs, novated leasing might not be for you (see “Is novated leasing right for me?“ if you want to explore that further). 

It’s worth noting that you can leave a novated lease at any time simply by paying out the lease. You’re not locked in for the term and there are usually no early exit fees (in fact, many financiers give you an interest rate discount if you exit early). A good novated lease provider will set up the lease so that, after the first 6 months or so, your lease payout figure will be less than the value of the car. So worst case, if you sell the car, you should at least be able to pay off the lease with the money raised.

Trap #2: You’ll end up with a car you can’t afford – FALSE

Your novated lease is facilitated by a financier, who needs to approve the credit you’re given, so you won’t be able to borrow more than you can afford. But perhaps more importantly, a good novated lease provider will also go through the details with you and ensure your payments aren’t too high and you’re not burdening yourself with unrealistic outlay. 

Of course your novated lease provider will base your application on the info you provide, so you do need to be honest with them (and yourself) about what you should be spending on a car. However from the novated lease provider’s perspective, it’s not in their interest to write a lease you can’t afford, as they’ll be left untangling everything in the event of a default. A good novated lease provider will be able to provide you good value for as long as you need a car, so it’ll be in their interests to give you a great experience and help you into your next car. They’ll want to ensure that the novated lease package you’re taking on aligns with your goals, and ensure the price you get for each car is fair and, probably, a significant reduction on the price if you buy outright or get a car loan.

When your lease ends, a good novated lease provider will ensure you’ll have a “residual” (the remaining balance on the car) that’s lower than the value of your car, putting you in a solid financial position.

Trap #3: You’ll have to use a novated lease provider’s preferred partners – FALSE

Actually, novated lease packages allow a lot of flexibility. If a novated lease provider tries to force you to use a particular third party provider for insurance, servicing, roadside assistance or another optional inclusion, then they’re probably not the right novated lease provider to go with. A good novated lease provider will let you include only what you want to, and let you use the suppliers you prefer. In some cases, you may be able to bring your supplier to your novated lease package and save money as you would with your novated lease provider’s suggested supplier. If not, you should still be able to use your preferred supplier and pay separately for your novated lease – just be aware that you won’t save as much money because it won’t be out of your pre-tax income. 

Trap #4: Novated calculators don’t show the whole picture – TRUE(ish)

Some novated lease calculators might stack things in – such as showing your expected monthly fee inclusive of all fees, rather than breaking the fees down separately. But this is mainly so the calculator serves its main purpose and doesn’t confuse – most people just want to know what it costs. Calculators are good for giving you an overall picture, but they’re only based on a best estimate of common circumstances. There are individual circumstances, such as tax brackets and business usage, that can make a one-size-fits-all calculator too simplistic for finding out the perfect package for each person’s unique situation. They can’t take into account the various ways you can structure a lease. You should get a personalised quote from a novated lease provider to really understand how much you can save. 

As for interest payments, these are how a financier and your novated lease provider get paid for providing the service they do. Although you do have to pay for your novated lease, your tax savings should far outweigh the interest you’ll pay and the idea is that a novated lease avoids you having to commit a huge sum of money upfront (buying outright) and makes life much more convenient. Your novated lease provider should manage everything for you, which is why they earn their fee (more on that next). Interest payments are usually what make people assume there’s a catch to novated leasing, because standard car loans either have high interest rates or they have seemingly low interest rates that hide costs in the high price of the car. If you’re not sure, ask your provider when you chat to them.

Trap #5: Novated lease fees aren’t clear – IT DEPENDS

If you have a good novated lease provider, they’ll be fully transparent on all costs and fees up front. There really is no good reason for your provider to hide fees from you, as the standard fees are both fair (for the service provided) and relatively low (in comparison to the tax savings you get access to). If you’re struggling to get clarity, you probably need to find another provider. So how do the fees work? 

With a novated lease there are really four parties involved: 

1. You: Payments come from your gross (pre-tax) salary and you’re ultimately responsible for your lease

2. Your employer: They make payments on your behalf from your salary

3. Your novated lease provider: They facilitate the lease, manage the lease and connect all parties involved

4. Your financier: They front the funds for your car

Your financier gets paid via their interest rate, which they receive as a return on their investment for putting up the cash. Your novated lease provider’s fee is made up of three parts: they’ll receive a finder’s fee from the financier, they’ll add a small markup to the interest rate (their “go-between” fee), and there’s a small monthly fee for them to manage your novated lease account – which includes providing support for you throughout your lease, reporting and administering your balance and handling any transactions and out of pocket expenses you want to include (such as fuel if you didn’t use your fuel card and paid yourself). 

One more thing – don’t forget that these fees are out of your tax savings, which is essentially money you ordinarily wouldn’t receive and would pay in tax instead. It’s a bit like when you do your tax return and pay your tax accountant a fair fee for their service out of a greater sum of money they calculate and organise for you (and remember, there’s no such thing as a free lunch).