How to finance a car with a novated lease

Women talk about financing a car with a novated lease

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Not everyone has the cash to spare to buy a new car when they need one. The good news is there are ways you may be able to finance your big purchase, including novated leasing – otherwise known as salary sacrifice.

When you’re looking to finance a new or used car purchase, you might think your only choices are to empty your savings account and buy outright or get a car loan. But a third option may be available to you – novated leasing.

While novated leasing isn’t for everyone, it could help you simplify car costs, save on tax and get behind the wheel of your new car sooner.

Read our real-life guide to novated leases to learn how they work and decide if novated leasing might be an option for you.

What is a novated lease?

A novated lease is an agreement between you, your employer and a finance provider. In this agreement, you don’t own your vehicle – instead you pay to use it. Once your lease term ends, you may need to pay the remaining value of the car or negotiate another novated lease if you want to keep it.

How does a novated lease work?

Your employer pays your car lease repayments directly to a finance provider from your pre-tax salary - commonly known as a ‘salary sacrifice’ arrangement. Generally, the lender will set up and manage the lease and take care of all the required administration and coordination.

There are two types of novated lease:

Fully maintained

With this type of lease, the purchase price of your new car, as well as running costs such as fuel, services, insurance and registration, are factored into your lease payments.

Non-maintained

A non-maintained novated lease only includes the purchase price of your car, administration fees and interest. You’ll tend to pay fuel, servicing, registration and other running costs separately.

How to get a novated lease

Getting a novated lease is simpler than you might think. Here’s a guide on what you need to do:

Ask if your employer offers novated leasing

If they do, check for restrictions on the type and value of vehicle you can lease, and speak to your accountant to find out how the lease will affect your tax payments.

2. Apply for approval

The employer coordinates most novated leases. They’ll provide information about your income, expenses and living circumstances to the finance provider, and you’ll generally need a credit check, so it could be a good idea to understand your credit rating before applying.

3. Set up your lease agreement

Your lease agreement, or deed of novation, should be set up between your finance provider and your employer before you buy a car. It explains the terms and conditions of your novated lease, including its duration, how many kilometres you will travel every year and the type of car you are looking at buying.

4. Find a car

What happens when your novated lease ends?

Once your lease term is up you have options. You can opt to pay off the remaining cost of the vehicle so you own it outright. Or you may also have the option to renew your lease for a new term, upgrade to a new car on a new novated lease, or even sell the car to pay off the remaining cost and keep any profit.

Novated lease vs. buying outright

It’s easy to see how a novated car lease could help if you can’t buy a car upfront. But what if you can?

A novated lease may have tax benefits over an outright purchase. With a novated lease you don’t pay GST on the cost of your car or its running costs, petrol and servicing. Whether or not this will save you money will depend on your financial circumstances and novated lease terms.

Novated car leasing can be great, but it won’t be right for everyone. We take a look at some of the differences between Novated Leases and buying a car outright so you can decide the best option for your situation.

Possible benefits

Because a novated lease is paid from your before tax salary, it could potentially reduce the tax you owe. And because you don’t pay GST on your car purchase or running costs, you may save even more.

Some people find a novated lease can simplify their vehicle expenses, as everything is included in one monthly payment. And, because you don’t own your car outright, upgrading to a new one could be easier than having to sell your existing car and buying a new one.

Tip: If you lease an electric vehicle (EV), you may be able to save even more under a government scheme that exempts electric vehicles from fringe benefits tax.

Potential drawbacks

You may have to pay the remaining value of the car when the lease ends if you want to keep your vehicle. There may also be some fees and charges, including administration fees, interest costs and fringe benefits tax. These can potentially make novated leasing more expensive than buying a car outright.

Because your novated lease is tied to your employment, if you lose or change jobs, you may need to pay the lease out. Depending on your circumstances, you may be able to keep paying your lease directly or transfer your agreement to your new employer.

If you’re self-employed, you typically won’t be eligible for a novated lease, but you may be able to finance a vehicle through a chattel mortgage.

Car loan vs novated lease: what’s the difference?

While car loans and novated leases can both help you finance a new or used car, it’s important to know the differences.

Car Loan

You pay to your finance provider
Doesn’t include running costs
Available to anyone who meets lending criteria
Agreed upon by you and your lender – your employer is not involved
Paid from your after-tax salary
Doesn’t come with fringe benefit tax

Novated Lease

Your employer pays the finance provider
Can include running costs
Only available if your employer offers it
Paid from your pre-tax salary, potentially saving you tax
Requires an end of lease payment to own the car
Includes Government incentives for eligible EVs.

Can you pay out a novated lease early?

Yes, in some cases you may be able to pay your novated lease out early, along with the residual cost of your vehicle and any GST that is due. Just be aware there may be penalty fees.

Looking to set up a novated lease?

Get in touch with one of our lending specialists on 137 377 and find out which of our loan options might work for you and your employer.

Before entering into a novated lease agreement, it’s important to understand how this and any other financial implications as a result of entering into this arrangement can impact you, so be sure to seek help from an accountant or financial adviser.

Contributor | Andrew Gamble, Head of Sales - Asset Finance

Andrew brings more than 20 years of experience in the finance industry. His strategic vision, leadership and his customer centric approach has contributed to the significant growth of Pepper Money's Asset Finance business. Read more.

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