When you’re working for a company and you want a car but can’t afford to buy one, taking out a novated lease is a smart decision. As you drive around in your new vehicle looking professional and dapper, your employer will take charge of the monthly payments and car running costs by paying them with your pre-tax salary.
Aside from reducing your taxable income, this arrangement also allows you to choose the car you want and take it with you if you change employers. Convenient, right? But what happens at the end of a novated lease?
Can you keep your car?
Novated leases are a type of secured car loan. At the end of the loan term, which typically runs for between one to five years, the lender interest over the car will be removed and the car will be 100 per cent yours.
Unlike other leasing options, you won’t return the car to the financier at the end of your lease.
You can choose to:
- Pay the balloon payment to finalise the loan and take full ownership of the car.
- Refinance the residual value and continue to pay off your car.
- Trade-in or sell your car privately and buy a new car.
Finalising Your Novated Lease
Novated leases are different from other leasing arrangements in that it is a secured car loan. The main difference between novated leases and regular car loans is that with novated leases, your car loan payments come out of your pre-tax income, giving you tax and GST benefits.
Just like a regular car loan, you’ll own the car outright at the end of your lease agreement. Under Australian legislation, novated leases will have a minimum residual value that must be paid at the end of the loan term to finalise your car loan.
Here are your options:
1. Pay the residual value
All novated leases will have a residual value that is applied to help reduce your liability for Fringe Benefits Tax (FBT).
Hopefully, you found out what the residual value for your car loan is at the beginning of your car loan, and you’ve saved up the lump sum you need to drive away free of encumbrance.
Paying out your car loan means you can enjoy owning the car you’ve purchased for as long as you like. You’ll notice a sudden ‘pay rise’ too as your employer isn’t taking your car loan payments from your pre-tax income.
Sit back and enjoy the extra income, plus a car that you’ve bought with reduced taxes.
2. Refinance
You might not have enough saved to pay out your car loan, but this doesn’t mean that you’ll need to hand back the car. You can refinance the residual value and continue with regular payments until it’s paid off.
If you need to refinance the residual value of the loan, you can choose to stay with the same lender or choose a different lender.
3. Trade-in or sell your car
If you’re looking to upgrade your car, you can renew your novated lease to purchase the next model or a different car that better fits your evolving lifestyle needs.
What If You’re Changing Employers?
If you’re moving to a new employer, it’s possible to transfer the novated lease to your new employer as long as they are willing to administer it. Most employers are happy to do this, as they’re giving you a benefit that doesn’t cost them much. This will also save you on early payout fees.
You can also choose to refinance your novated lease into a personal loan or secured car loan.
Paying Out Novated Leases Early
If you need to finish your lease early, there’s usually a termination fee that you’ll need to pay.
You’ll have to pay this fee if:
- You use cash to pay out your novated lease in full before the due date
- You refinance your novated lease
Once the termination fee, residual value and remaining loan balance are paid in full, the car is yours. You’re free to sell the car or use it as you choose.
Some lenders will charge a flat termination fee whenever you choose to end the lease, others will charge you a fee based on how long you have to remain on your lease term.
Ending Your Novated Lease
Whether you’re at the end of your novated lease, or you’re doing a novated lease early termination for any reason, this guide has given you the options you can choose to take.
Now you can plan your next step wisely, remember to consult with your accountant or financial advisor to confirm the best way to finalise your novated lease.
Calculate how much you can afford for a novated lease now.
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