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Novated Lease

Depending on your financial situation and your circumstances there are a number of ways you can finance the purchasing of your new or used car and one of them is by applying for a loan. Out of all the available options in the market there is one common option known as a Novated Lease. This loan can help you finance the cost of your car and some of its running expenses as well, while also potentially reducing your taxable income. In this article, we will be taking you through what a Novated Lease is and also help you figure out whether it’s the right option for you.

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Novated Lease Overview

A Novated Lease is a financial option that involves an agreement between an employee, employer and a lender. A third party is involved in the car purchasing agreement whereby in this case the third party is your employer.This car loan is also known as โ€œSalary Sacrificingโ€ and it is suitable for employees who want to finance their vehicle as part of their salary package. In simple terms, it means your employer pays for your car lease and car running costs out of your salary package.

Under this car loan, an employer agrees to purchase a vehicle for the employee and makes the loan repayments to your lender on your behalf. The employer then deducts the loan repayments from their pre-tax salary in the form of salary sacrificing. If your employer agrees to these, you can take out the lease with a finance company which may be chosen by your employer. Remember that you are not renting or borrowing a car but you are leasing it. With leasing, you get to use the car while having the benefits of ownership without actually owning it. You only own it fully once you complete the repayments.

Note that if you change jobs, you take the car with you and continue to make repayments directly or transfer your agreement to your new employer. At the end of the lease, you have 3 options;ย 

  • Purchase the vehicle from the financier by paying the residual value commonly referred to as a balloon payment
  • Extend your current lease by refinancing it
  • Trade in the vehicle and use the money to pay off the residual value. After completing the payment you can enter a new lease to get a new car

There are different types of Novated Lease loans available which are fully maintained, non-maintained and Novated operating lease.

This type of lease involves all of the vehicleโ€™s operating costs being included in the salary package. If an employer offers you this lease, it means both the purchase price of the vehicle as well as any finance costs such as fees and interest and its running costs such as fuel, services, registration and insurance will be calculated into the repayments your employer takes out of your pre-tax salary.

For this lease, you will be responsible for the operating costs of the vehicle including maintenance and running costs. Only the lease repayments will come from your pre-tax salary and for the other costs, you will have to cater for that with your post-tax salary.

A Novated Operating Lease is one that allows you to use the vehicle for the duration of the lease and at the end of that lease you have no further obligations. Additionally, you have no further access to the vehicle. Before returning the car, you have to ensure the car is in good condition apart from the usual wear and tear.

Just like with every other finance product, there are normally some pros and cons. This will also help you decide whether this option is a good fit for you or not.

Possible Pros;

  • Tax benefit. Novated Lease repayments made through your pre-tax salary could reduce your taxable income. You can also avoid paying Goods and Services Tax(GST) on the purchase price of the vehicle.
  • You have the opportunity to upgrade your vehicle by trading it in at the end of the lease for a newer one or a different model.
  • You could opt to go for the fully maintained novated lease which covers your payments and all the expenses that come with owning a car. This will definitely make managing your finances easier.

Cons;

  • You donโ€™t own the car. For this finance option, you technically donโ€™t own the car meaning you can’t make any alterations to it.
  • A residual value also known as a balloon payment is due at the end of the lease. The repayments donโ€™t cover the whole car amount over the term of the lease therefore, you will need to pay the value owed.
  • Interest rates and fees are usually higher than regular car loans.
  • The employer may enact restrictions when entering this agreement. For example, you may be restricted from taking the car interstate or given a certain amount of kilometres you are to drive per year. This is normally done to reduce wear and tear.

Speak with your accountant first to determine whether a Novated Lease is the best option for you.

If it is, we will help you compare the different options offered by our financial partners hence providing you with the best offers available in the market for you to decide.

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