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Novated lease vs car loan, what is the best option? There isn’t really a simple answer to this question as both have their own benefits and drawbacks. Unfamiliar with these types of finance? Well, pop on your learning cap and take a ride with Nifty as we go through novated lease vs car loan.
So, what actually is a novated lease? Essentially, it is a type of car finance that is established through an agreement between an employee, their employer and a third-party financier. The employee takes out a lease on a car with the financier and, through an agreement with said financier, their employer makes the lease repayments on the employee’s behalf using their own pre-tax income.
The term of a novated lease will usually fall between two to five years. During this period, the employee will have access to the vehicle for both private and work-related uses. It is important to note, though, the vehicle is not actually owned by the employee, and as such, cannot be used for secondary finance. By the end of the period, the employee will often have the option to either; purchase the vehicle through a lump-sum payment (balloon payment), re-lease the vehicle or trade the vehicle in and enter a new lease agreement.
When looking at novated lease vs car loan, the benefit in a lease is in the fact that the employee can lower their annual taxable income by the amount of the annual repayments, thus providing themselves with a vehicle without having to pay income tax on the income used for the vehicle. Depending on how the lease is set up, consumers are able to use their pre-tax income to cover most of the running costs of the vehicle, this could include the following:
Including these expenses within their pre-tax payments will allow the employee to further decrease their annual taxable income. Now, this isn’t to say you can completely eliminate the need to pay tax on these items as you may still need to through a Fringe Benefits Tax (FBT) and/or Luxury Car Tax.
The FBT is a tax that is levied by the ATO and is charged to employers that are providing a fringe benefit to their employees. Fringe benefits are a form of remuneration awarded to an employee that is not a re-reimbursement for work-related expenses or a part of their cash salary. Common fringe benefits include employer-provided gym memberships, insurance, stock options and novated lease agreements. As FBT is technically an employer’s obligation, it is generally the case that any FBT amount arising as a result of a given benefit is charged to the employee’s salary post-tax.
In the case of novated lease agreements, the amount of FBT paid can be calculated in two different ways. These two methods are known as the ‘statutory formula’ method and the ‘operating cost’ method. Employees are able to choose whichever method yields the lowest taxable value.
The operating cost method is the more complicated of the two as it requires the employee to track the operating costs of the vehicle (fuel, registration and mechanical), the number of work-related kilometres travelled and the number of private kilometres travelled over the course of an entire FBT year (similar to a fiscal year, though covering the dates from the 1st of April to the 31st of March).
The taxable value of the fringe benefit is found as a percentage of the total cost of operating the car during the FBT year. The percentage varies with the extent of actual private use. So, the lower the incidence of actual private use, the lower the taxable value. This method allows for a more nuanced calculation and can be useful for those who primarily use their vehicle for work-related activities.
The statutory formula is a simpler but less flexible way to calculate the cost of FBT. It is essentially a base-line percentage that is used to gauge the approximate operating costs for a vehicle during the FBT year. Any novated lease entered after the 1st of April, 2014, will have a standard statutory percentage of 20%, regardless of kilometres travelled throughout the year. Akin to the previous method, FBT is only incurred on days in which the vehicle is available for private use. The formula and a real-world example of the cost of FBT using the statutory formula is shown below:
|The value of the vehicle||A|
|Days available for private use||C|
|Number of days in the year (366 in a leap year)||D|
|Amount of employee contribution||E|
Statutory Method Formula – ((A x B x C) ÷ D) – E = FBT
Example – ((30,000 x 0.20 x 365) ÷ 365) – $0.00 = $6,000
As you can see, the amount of FBT, which is tax paid on top of lease and operation repayments, totals $6,000 for the example circumstance.
You may have noticed that ‘employee contribution’ is subtracted from the total FBT balance at the end of the equation. This is available to employees using both methods as a way to reduce their total FBT. Essentially, an employee is able to make contributions from their post-tax income to cover a portion or all of the operating costs for the vehicle.
This can be useful if the vehicle is used for private purposes for the majority of the time. Rather than the employer paying the FBT tax rate, which is 47% per annum, and passing it on to the employee; the contributions can be made from the employees post-tax pay throughout the year, which will likely have a tax rate far below 47%. Employee contributions may be made directly to the employer or by covering the operating costs of the vehicle directly.
Now that you know a little more about novated leases, let’s have a quick break down for the pros and cons of this option:
Although still a type of finance used in obtaining a vehicle, car loans are fundamentally different when compared to novated leases. On a basic level, a car loan is just a type of personal loan that is used to purchase a vehicle. As in, you will have to pay both the loan and interest over a fixed term. The repayments and term for a car loan will often differ depending on both the loan amount and the provider – though, there are a few consistencies that should be noted.
Applying is fairly simple as the contract of a car loan will usually only involve two parties, the borrower and the lender – there is no need to involve your employer. If you are applying for a relatively large car loan, you may be required to place a deposit on the loan, making the initial cost higher when looking at novated lease vs car loan. When it comes to repayments, instead of them being paid through your pre-tax income, like with a novated lease, the obligation to make the repayments will fall on you, though most modern lenders will have systems to take payments automatically from a clients bank account.
One significant advantage that car loans have over novated leases, is that the borrower becomes the owner of the vehicle once the loan has been established. With a novated lease this is often not the case. Now, there are a few different options for car loans that we would like to discuss. If you would like to know more, read on!
When looking into either a novated lease vs car loan, it is important you understand the difference between a secured and unsecured car loan. When applying for most car loans, the vehicle that you end up purchasing will then be placed as security against the loan. This means that the lender has the ability to repossess the car if the loan fails. This is really only a last resort, though, but is something to keep in mind.
There are some benefits to secured loans. For one, they will often come with a lower interest rate than an unsecured loan. In some instances, they may also be easier to be approved for due to the decreased risk to the lender.
As you may have gathered, with unsecured car loans you do not need an asset to be used as security. This may be an option if you’re looking at purchasing a car through a private avenue, such as from a family member. Though, there are some downsides to this option. It is common for unsecured loans to have stricter lending criteria and higher costs. This, again, really boils down to the risk incurred by the lender.
In order to get a better understanding of what is offered, it will always prove useful to compare different products with different providers. For your convenience, we have provided a handy table detailing the different comparison points you may look to when choosing between different car loan products.
|Interest Rate – Fixed or Variable|
Below is a quick summary confirming the good and bad of a car loan when looking into novated lease vs car loan:
With all of this talk on novated lease vs car loan, you may be wondering who we are. Well, Nifty is an Australian based lender offering loans completely online! Now, we would like to take this opportunity to state that we do not offer novated leases. So, if you’ve decided on a novated lease, we won’t be able to help, unfortunately.
Though, if you’re looking for a car loan, we’re glad you stuck around! Currently, Nifty offers two different car loan services. If you’re looking at purchasing a second car, you could look at applying for a loan directly through Nifty. Or, if you’re looking into something a little more substantial, we have a broker-finding service designed specifically for our clients! More on this later, though.
With car loans through Nifty, we have a few options you may be interested in. As seen in the table below, we offer three different types of personal loans that can be either secured or unsecured. One other thing, our loans do not have to be used strictly for cars! Think repairs, registration or almost anything else, we have you covered! Take a squiz below to see our different loan types!
|Small Cash Loans||Unsecured||$300 – $2,000|
|Medium Personal Loans||Can be Secured||$2,100 – $4,600|
|Large Personal Loans||Often Secured||$5,000 – $10,000|
Interested in applying for one of our fast personal loans? Fantastic! Before you apply, it is worth checking that you meet our base criteria. To be eligible to apply, you must:
As our in-house funded loans only range up to $5,000, we have partnered with a broker in an attempt to bridge the gap for our client’s looking for something more. Our broker of choice? Diversifi Finance. A highly-awarded finance broking company, supported by Choice Aggregation Services, Diversifi is one of Australia’s foremost team of brokers.
Using state-of-the-art software, the Diversifi broker team is able to find finance solutions efficiently, matching your unique financial needs. All brokers have extensive experience in the finance sector and commit to ongoing training, as well as holding Australian Credit Licenses.
With the help of Diversifi, our clients are able to apply for loans of $10,000+. Chosen between novated lease vs car loan? Enquire through Nifty and Diversifi will be able to assist you in applying for a car loan online.
Of course, we’d like to help everyone, though, our broker-finding service works a little differently than our personal loans. Our brokers require that you meet the following requirements before applying:
And that’s it! If you’re interested in this service, scroll the top of the page and select the ‘over $10,000’ option. In a few short steps, you could be on your way to sourcing a new camper trailer loan!
If there is anything else you want to know, don’t be a stranger, give us a call on 1300 471 328 or send us a message from our contact us page, and one of our friendly customer service staff will be able to assist you.
Since founding Nifty in 2016, Bell has continued to make waves within the local financial sector for his continued ambition and willingness to adopt emerging technologies.Read More
$5,000 - $10,000
$2,001 - $4,600
$300 - $2,000
* Not applicable. Small loans do not charge an annual interest rate.
** WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Different loans may include other payable fees and charges. All fees and charges will always be displayed on your loan contract.