When purchasing a vehicle it is important to choose the right option for you. A common question we ask ourselves in this situation is, is it better to lease or to apply for a car loan. To make an appropriate decision regarding this we need to look at the pros and cons of each option.
Novated Lease
A Novated lease is an agreement between the Finance Company, the Employer and the Employee. As per the Employees agreement with the Employer, the Employer will make regular payments to the Finance company. The payments will come from the Employees pre-tax salary (Salary Sacrificing) therefore reducing the employees taxable income. A Novated Lease can last between 1 to 5 years. Novated Leases can be applied to new or used vehicles.
Despite the employees taxable income being reduced this method of lease is subject to Fringe Benefit Tax (FBT). You can offset any potential FBT through a method known as the Employee Contribution Method (ECM). By paying using the ECM method, you reduce the taxable value of the car, which in turn reduces the FBT payable to nil.
Novated Leases are useful in budgeting for the vehicles ongoing costs such as:
Registration
Services
Maintenance
Insurance etc
These costs are taken into account, budgeted for and put aside each pay period. These payments can also be adjusted to take into account changes in running costs over time.
Another benefit of a Novated Lease is that there is a saving on the cost of the car as GST is not payable on a Novated Lease. Depending on the cost of the vehicle the saving can be quite substantial.
It is important to note that once the Novated Lease ends that there is always a residual or balloon payment amount upon maturity. This means that the lease payments being made through the lease term did not cover the amount of the whole lease. The amount left over at the end is known as the residual.
Car Loan
A car loan is when a financial institution provides you with a line of credit so that you can purchase a vehicle. A car loan makes you the owner of the vehicle and with each repayment you increase the amount of equity you own of the asset.
As you own the vehicle you are free to drive it as much as you want and modify the vehicle. Upon completion of the loan term you can sell the vehicle and recover a resale value from the sale.
With a car loan you have the power to shop around for a loan product that suits you and your needs.
There are many pros and cons of each option. The table below has summarised these for you.
Novated Lease Vs Loan Example
Novated Lease:
Value of the vehicle: $57,000
Repayment per month: $1,429
Vehicle: Large SUV or Similar
Term of Novated Lease: 3 Years/ 36 Months
Distance Traveled per Year: 20,000kms
Savings Comparison Novated Lease Vs Loan
If you are unsure of which option is best suited to your needs please call us on 02 9299 7044 or email us on admin@lockwood.com.au to book in an appointment.