The novated lease: advantages & disadvantages, pros & cons

If you’ve heard of novated leasing and you’re thinking that it all sounds too good to be true, you’re probably hunting for a reliable pros and cons list so you can assess for yourself. The dreary product name doesn’t help, and sometimes novated leases can get a bad rap by being unfairly bundled with old school loans and the negative connotations that come with them. We’ve gathered the advantages and disadvantages to help you make an informed decision.

The pros: Advantages of a novated lease vs buying outright vs car loan

It’s before tax

First up, novated leases operate predominantly out of your pre-tax income. As with salary sacrificing on other items – like your computer or additional contributions on super – your novated lease payments are taken out of your income before tax, meaning that you’ll lower the tax you have to pay. A novated lease also keeps cash in your pocket, so to speak, so you can put your savings to work for you in other ways, whereas buying outright costs a massive amount of money up front for a depreciating asset.

No GST

Unlike buying a car outright, with novated leases you save on GST, as it doesn’t apply to the product. On a $44,000 car that’s a $4,000 saving straight off the bat. Coupled with the fact that novated leases are predominantly out of your pre-tax income, whereas standard car leases are not. It’s like a saving on top of a saving. And with novated leasing, you also won’t pay GST on fuel, servicing, insurance, tyres, registration and any other consumables for your car.

Better deal on your car

Novated lease companies can get you access to fleet pricing – which effectively means wholesale prices. Even better, your novated lease provider should be able to get you parts and labour at wholesale (fleet) pricing too, which could save a bundle. You might be able to find this perk if you buy outright or take out a standard car loan, but don’t forget that those options will be out of your post-tax income, so won’t save you as much. And one further thing to consider – if you see a low interest rate on car finance at a dealership, be aware that you probably won’t be getting as a good a deal as you think; chances are that the cost of the car is higher to compensate for the enticing low interest rate. 

All running costs included

This is where novated leases can really shine. If you really want to cut your costs and maximise your savings, you can choose to include your fuel, servicing, roadside assistance, insurance and your rego in the package for one smooth monthly fee. It’s optional, but will give you a saving equal to your tax rate (most likely between 32.5-45%) on each item. If your novated lease provider is good, they’ll manage all of this for you and keep your budgeting simple and clear, so you don’t have to worry about it. Some people prefer to use their own insurance and mechanics for servicing, and your novated lease provider might have preferred suppliers, so that’s one to consider (see disadvantages below). 

Plenty of options

At the end of your novated lease, you have lots of options. 

1. You can choose to buy your car (pay what’s called the ‘residual value’ or ‘balloon payment’), or you can upgrade and switch to a different car. 

2. If you prefer, you can sell your current car yourself, pay off the residual and keep the profit. But even if your novated lease provider trades your current car for you for more than the amount left on your loan (the residual value), most providers will allow you to pocket the difference. This profit is tax free.

3. If you’d prefer to keep the car you have, you can refinance and lower your payments (and your residual) further. 

Naturally, with a car you’ve bought outright, you’d have the option to sell too, but it’s a common misconception that novated leases don’t offer this benefit.

The cons: Disadvantages of a novated lease

Your employer’s involved

Unlike a standard car loan or buying outright, you need to be comfortable with your employer being involved in the process of car salary packaging, which is probably not an issue for most people but it is worth noting. As a novated lease is deducted from your pre-tax salary, your employer needs to be set up for novated leasing too – and they'll need to approve the provider you want. One big fear is that it’s a problem if you switch jobs or it’s difficult to get your employer set up on your chosen novated lease provider. With a good novated lease provider, both of these things should be painless, and you can transfer your payments to a new employer if need be.

It’s not available for everything

Novated leasing isn’t available for cars with more than nine seats or cars with a payload capacity of more than one tonne. So if you’ve got more than six kids, or need to transfer heavy machinery often, novated leasing may not be for you.

If you’re living on the edge, there’s a risk

Similar to a standard loan, there’s a risk of losing the car if your job is unexpectedly terminated and you can’t afford the repayments. The responsibility of lease payments will be transferred to you whilst you’re looking for another job, and if you can’t pay the lease, you risk losing the car. That said, financiers and good novated lease providers are usually very flexible and understanding, and will put solutions in place to avoid this outcome. If you don’t have adequate savings to cover this scenario, and there’s a risk you could lose your job, it’s worth assessing if this is the right product for you.

There’s more to consider

Unlike buying outright, there’s probably a few more things to consider with a novated lease, such as deciding what you want included in the package – check out our article “Is novated leasing right for me?” if you want to dig deeper. Bear in mind that a good novated lease provider will not only facilitate the whole process but also answer any questions and guide you through the process, so if you choose your provider wisely there’s really no reason not to benefit from the considerable savings a novated lease can offer.

The bottom line

You need to be sure you choose the option that’s right for you, but all weighed up novated leases can offer incredible savings that keep a lot of money in your pocket. They also can give you a predictable and balanced payment each month with not just your car but also all running costs included. The broad options at the end of your lease, coupled with wholesale fleet pricing to get the best deal on the car you want, make them the best of both worlds if you don’t need to own your car up front. You do need your employer on board, but it’s easy to set them up if they don’t offer the provider you want (you can use our nifty suggest us to your employer feature).