What is the difference between a novated lease and a personal car loan?

Let’s look at these two different types of car loans and see which could be the best option for you.

It’s useful to understand the pros and cons of each and to think about your current circumstances and which option may be best. Situational factors such as whether you’re in full-time employment will play a big role in your decision.

Novated Lease

A novated lease is a type of car lease where you will own the vehicle under a contract which has a balloon payment (sometimes referred to as a residual value) at the end of the loan term.

Like other types of car financing, a novated lease runs for a fixed period, ideally over a time that you wish to keep the vehicle for. At the end of your lease, you have the option to:

  1. Refinance the vehicle
  2. Pay off the residual value of the vehicle and keep it
  3. Enter into a new novated lease with a newer car
  4. Return the car to the lender

One of the key differences between a novated lease and a personal car loan is that a novated lease is between three parties instead of two:

  • You
  • Your employer
  • The lender

The biggest financial benefit of a novated lease is the post-tax salary benefits you’ll enjoy. The payments on a novated lease are made by your employer and come out of your pre-tax earnings. This means that when you purchase a novated lease, you don’t finance the GST—giving you a big saving.

Novated leases generally offer lower monthly payments and fewer upfront costs.

Novated Leases are easy to manage and, as your employer is responsible for making the payments, you won’t be in danger of defaulting or missing payments—keeping your credit record clear.

If you want a smarter car or have a job that requires your car to really impress, novated leases allow you to drive a better car for less. You’ll generally have more opportunity to buy a bigger or more expensive car with a novated lease.

In addition, all cars purchased through novated leases are covered by warranty, giving you the chance to upgrade your vehicle at the end of the lease. This could also save you money on repairs further down the line.

The major drawback of a novated lease is generally seen as the fact that the balloon payment remains to be paid at the end of the lease.

You’ll also need to consider taxes since the car is seen as your own, it will show as an asset and a liability on your personal finance documents.

  1. People in full-time employment
  2. People wanting a more expensive or larger car
  3. People needing to use their car for work
  4. People wanting to regularly upgrade their vehicle
  5. People looking for convenience and minimal administration

Personal Car Loan

personal car loan is when you borrow a lump sum of money which you repay, with interest, over a set term. This type of loan is not secured against the value of the car—meaning that you will own the vehicle from the first day of the car loan.

One of the key differences between a novated lease and a personal car loan is that a novated lease is between three parties instead of two:

  • You
  • The lender

The biggest advantage of a personal car loan is that you will own the car outright after you have paid off the loan in full. This gives you independence and many people like the idea of not being tied to a lender at the end of the term.

With a personal loan, you also have more options to pay the loan off earlier, meaning that you can be more flexible in your payment options—you’re in charge of these rather than a fixed contract with your employer (as in a novated lease).

You’ll be able to build up resale value and the car will be yours at the end of your loan term so it’s up to you to decide whether you want to keep it, trade it in or make improvements to it.

Generally, personal car loans have higher monthly repayments than novated leasing (where you are not paying off the residual value).

There are also fewer pre-tax salary benefits and GST savings with a personal car loan.

If you want to upgrade or trade in your car, you’ll have to do this yourself rather than referring back to the lease agreement.

  1. People wanting to own their own car
  2. People in flexible or casual employment
  3. People with a large down payment or deposit
  4. People who are organised and happy to do their own administration

Which is the best car finance option for you?

Whether to choose a novated lease or a personal car loan depends heavily on your personal circumstances and employment status.

If you’re unsure of the best choice for you, speak to us today – we are passionate about finding the right car finance options and we have access to a wide range of lenders to help save you time, money and stress.

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