Both novated leases and car loans let you finance a new or used car through instalments over a fixed term. But that’s where the similarities end. At their core, these two options are structurally worlds apart.

So, how do you decide which one saves you more money? We’re here to help you make an informed choice. Below, we break down the anatomy of both financial arrangements, highlighting their structures, benefits, and drawbacks. With this side-by-side comparison, you’ll have all the information you need to choose the best option for your needs.

Traditional Car Loans: A Quick Refresher

When buying a car outright isn’t feasible, financing through a car loan often becomes the go-to solution. With a car loan, you’ll borrow a lump sum and repay it in regular instalments, including interest, over a set period. On average, car loans span about seven years.

There are two main types of car loans:

1. Secured Car Loans

• The car itself is used as collateral.
• If you’re unable to repay the loan, the lender can seize and sell the vehicle to recover the amount owed.
• Typically offers lower interest rates, making it a more cost-effective choice for borrowers.

2. Unsecured Car Loans

• The car isn’t tied to the loan as collateral, so borrowers retain full ownership of the asset.
• Provides more flexibility and control, but at a cost.
• Due to the higher risk for lenders, unsecured loans generally come with higher interest rates, making them a pricier option over time.

Understanding these distinctions can help you weigh the pros and cons of each type of loan and choose the one that best fits your financial needs.

Novated Lease: The Essentials

Novated leases have shaken up the market, changing how Australians drive and manage vehicle expenses. This three-way “salary sacrifice” arrangement involves you, your employer, and a financial institution. Your employer handles your car payments directly, deducting the bundled costs from your pre-tax income and paying them to the financial institution.

In 2022, 5% of Australia’s new car market was financed through novated leases, and the numbers continue to climb. So, what’s driving this surge in popularity?

• Tax Savings: By deducting car payments from your pre-tax income, you effectively lower your taxable income, which means paying less in taxes.
• All-In-One Convenience: Car payments, running costs, maintenance, and insurance are bundled into a single monthly payment. This simplifies budgeting and eliminates the hassle of tracking multiple expenses.

For many Australians, a novated lease offers a tax-effective, stress-free way to stay on the road.

The Similarities

Choosing the right car financing option can feel overwhelming, but we’re here to make it simpler. Understanding what a novated lease and a traditional car loan have in common is a great starting point. Here are the shared traits of both arrangements:

• Personal Use Flexibility: Both options allow you to use the vehicle for personal or business purposes, with no restrictions on how it’s employed.
• Ongoing Payments: Whether you opt for a novated lease or a car loan, you’ll need to make regular payments—either monthly or as arranged—throughout the term. If you decide to end the agreement early, a break fee may apply.
• Fixed Term: Both options involve financing the car over a set period, typically a few years, making budgeting predictable.

Understanding these commonalities is a helpful first step toward making an informed decision about which arrangement best suits your needs.

The Differences

Here’s where novated leases and traditional car loans diverge. Novated leases stand out precisely because they offer unique advantages that traditional car loans don’t. Let’s break it down:

• For Employees Only: A novated lease requires an employer to make payments on your behalf, making it exclusive to employees. Car loans, on the other hand, are available to anyone who qualifies financially.
• Facilitated Financing: Novated leases are typically arranged through a leasing company, like carbar, which acts as a mediator. With car loans, you can apply directly to a lender or go through a broker.
• Tax Savings: Novated lease payments are deducted from your pre-tax salary, reducing your taxable income and offering significant savings. Car loans don’t provide this benefit since payments are made using after-tax income.
• All-Inclusive Payments: A novated lease bundles your car, maintenance, and running costs into one simple monthly fee, eliminating the need for tracking separate expenses. Car loans require you to manage and budget for these costs independently.
• Low or No Upfront Costs: While car loans often involve upfront payments, novated leases typically minimize or eliminate these costs, offering a more liquidity-friendly option.
• No GST: With a novated lease, GST is covered by the financing institution, giving you extra savings. Traditional car loans don’t provide this exemption.
• End-of-Term Options: With a car loan, you own the car outright and can sell it at any time. A novated lease, however, includes a residual value—the amount remaining at the end of the lease term. To own the car, you’ll need to pay this residual value. Alternatively, you can refinance it or simply upgrade to a new vehicle.
• EV Incentives: The government exempts EVs leased under salary-sacrifice arrangements (like novated leases) from Fringe Benefits Tax (FBT) to encourage the adoption of low-emission vehicles. Car loans don’t offer similar tax incentives.

With these key differences, it’s clear that novated leases aren’t just an alternative to car loans, they’re a transformative way to manage your vehicle needs.

Which is Cheaper in the End?

While owning a car may be the more cost-effective choice in the long term, novated leases shine when it comes to affordability and convenience in the short term. They offer an accessible way to drive a car without needing substantial upfront cash. Plus, you save significantly on GST and taxes due to the pre-tax salary deductions—and even more if you’re leasing an EV, thanks to exemptions from Fringe Benefits Tax (FBT).

Novated leases also provide the flexibility to upgrade your car every few years without taking a financial hit. Additionally, the monthly repayments for novated leases are generally lower than car loan instalments, giving you extra cash flow to work with. For employees needing a car right away, a novated lease is hard to beat in terms of cost efficiency and ease.

Carbar Handles the Hard Work for You

At carbar, we make getting your next car effortless. From providing a no-obligation quotation to managing all the paperwork, we take care of every detail. Whether you’re exploring novated lease options or looking for the perfect car, we’re here to help.

Learn more about carbar’s Novated Lease or reach out to us at 1300 620 685 to find a car that fits your needs seamlessly.