You are working out how to fund your next car, and two options keep surfacing: a novated lease or a car loan. On the surface they both get you behind the wheel and spread the cost over a few years. Underneath, they could hardly be more different. One bundles the car into your salary with a tax perk attached. The other you own outright from day one. Which leaves you better off depends entirely on your circumstances.
Get the choice right and you can save real money. Get it wrong and you can lock yourself into an arrangement that does not suit you, or miss a tax break you were entitled to. This is a straight comparison of a novated lease versus a car loan: the six differences that actually matter, and how to work out which one fits.
What is a novated lease?
A novated lease is a three-way arrangement between you, your employer and a finance company. You choose the car, and your employer agrees to take the lease payments out of your salary, a mix of pre-tax and post-tax dollars, and pass them on to the financier. Because part of the cost comes out before tax, you lower your taxable income, which is where the savings come from. It is a form of salary packaging.
The lease usually bundles the running costs too, so registration, insurance, fuel, servicing and tyres can all be paid out of your salary the same way. You do not own the car during the lease; the financier does. At the end of the term you pay a lump sum, the residual value, if you want to keep it. The ATO sets minimum residual values based on the term, from roughly 65 per cent on a one-year lease down to around 28 per cent on a five-year lease. Our guide to balloon payments and residual values explains how that lump sum works.
One important point: it is arranged through your employer’s salary packaging provider, not through a finance broker, and it only works if your employer offers salary packaging in the first place.
What is a car loan?
A car loan is the straightforward option. You borrow a lump sum from a lender, buy the car, and own it from day one, with the loan secured against the vehicle. You then repay it in fixed instalments from your take-home pay over a term of one to seven years. There is no employer involved, no salary packaging and no tax perk on a personal car, but there is total freedom.
Because you own the car, you can do what you like with it: sell it, modify it, drive unlimited kilometres, or pay the loan out early. A car loan is open to everyone, whether you are a salaried employee, self-employed, or buying through a business. As an accredited finance broker, Get A Loan compares car loan options across our panel of more than 70 lenders, and our service is free for you.
Novated lease vs car loan: 6 differences that matter
Here is how the two stack up on the things that actually change the outcome.
| What matters | Novated lease | Car loan |
|---|---|---|
| Who owns the car | The financier, until you pay the residual | You, from day one |
| Tax treatment | Paid partly from pre-tax salary, plus GST savings | Repaid from post-tax income, no personal tax benefit |
| Who can get one | Salaried employees whose employer offers salary packaging | Almost anyone, including the self-employed |
| Running costs | Can be bundled and paid from salary | You pay them separately |
| If you change jobs | The lease reverts to you to manage | Nothing changes, the car is yours |
| End of term | Pay the residual, refinance, or lease again | Loan is paid off, no lump sum |
1. Ownership
With a loan you own the car outright from the start. With a lease the financier owns it, and you only take ownership if you pay the residual value at the end. If owning your car outright matters to you, that is a point for the loan.
2. Tax
This is the lease’s big drawcard. Paying part of the cost from pre-tax salary lowers your taxable income, and you also avoid GST on the car’s purchase price and running costs. A car loan offers no such perk on a personal car. For a salaried employee, the tax saving can be substantial, which is the whole reason these arrangements exist.
3. Who can actually use it
A car loan is available to just about anyone with the income to service it. A lease is not. You need to be an employee whose employer offers salary packaging, which rules out the self-employed, sole traders, and anyone whose workplace does not offer it.
4. Running costs
A lease can roll rego, insurance, fuel, servicing and tyres into the one salary-packaged payment, tidy and paid with pre-tax dollars. With a car loan, those costs are yours to manage separately out of your take-home pay.
5. What happens if you change jobs
This is the catch that trips people up, and we come back to it below. A loan does not care where you work; it is your loan on your car. A lease is tied to your employer, so leaving your job unravels the arrangement.
6. The end of the term
A car loan simply ends: once the final repayment clears, the car is yours free and clear. A lease leaves you with a residual value to deal with. You either pay it to own the car, refinance it, or roll into a new lease on a new car.
When a novated lease makes sense
A novated lease can be the smarter choice when:
- You are a salaried employee and your employer offers salary packaging.
- You are eyeing an eligible electric car. Because eligible EVs are exempt from fringe benefits tax, the savings can be significant. Our guide to electric car finance digs into how that exemption works.
- You like the idea of bundling all your running costs into one pre-tax payment.
- Your job is stable and you are comfortable with the residual at the end.
- You are a higher earner, since pre-tax savings are worth more the higher your tax rate.
When a car loan makes sense
A car loan is usually the better fit when:
- You are self-employed, a sole trader, or your employer does not offer salary packaging.
- You want to own the car outright from day one.
- You value flexibility, such as buying privately, modifying the car, or paying it off early.
- Your job situation is uncertain and you do not want finance tied to your employer.
- You are buying a cheaper or older car where the tax savings would be modest anyway.
If you are buying for a business, a car loan or a chattel mortgage is usually the road to take, since a novated lease needs an employee arrangement.
The novated lease catch: changing jobs
This is the part worth taking seriously before you sign. A novated lease is novated, meaning the obligation is transferred to your employer while you work there. If you leave, resign, or are made redundant, that arrangement ends. The lease does not vanish; it reverts to you. You then have to either take over the payments yourself from your own pocket, novate the lease to a new employer if they agree, or pay it out entirely.
For someone in a stable, long-term role this is a manageable risk. For anyone whose work is uncertain, it is a real one. A loan carries no such catch, because it was always yours to begin with.
How to decide
Run your situation through these questions:
- Does your employer offer salary packaging? No means a novated lease is off the table.
- Is the car an eligible electric vehicle? If so, the FBT exemption tilts the maths towards a lease.
- How secure is your job? The less certain, the more a car loan’s independence appeals.
- Do you want to own the car outright? If yes, a loan gets you there without a residual.
- What is your tax rate? The higher it is, the more the pre-tax savings are worth.
Because a novated lease turns on your tax position, it is well worth running the numbers with your accountant before committing either way.
Where a broker fits in
For the car loan side of this decision, a broker does the legwork. As an accredited finance broker, Get A Loan compares car loan options across our panel to find one that suits your budget, and our service is free for you. A lease, by contrast, is set up through your employer’s salary packaging provider rather than a broker, so if you lean that way, that is who to speak to, along with your accountant. Either way, it pays to read our warning about borrowing and our main car finance guide before you commit. The Moneysmart car loans guide is a solid neutral primer too.
Novated lease vs car loan: the quick verdict
- A novated lease is salary-packaged through your employer, with tax and GST savings.
- A car loan is borrowed in your own name, and you own the car from day one.
- A novated lease suits salaried employees, especially those buying an eligible EV.
- A car loan suits the self-employed, businesses, and anyone wanting to own outright.
- Leaving your job unravels a novated lease, but not a car loan.
- A novated lease turns on your tax position, so check with your accountant.
Final Thoughts
Neither option wins outright, because the right answer depends on you. A novated lease can be excellent for a salaried employee on a decent income, especially one going electric, who values the tax savings and the bundled running costs. A car loan wins on ownership, flexibility and simplicity, and it is the only real option for the self-employed or anyone without salary packaging. Work out which side of that line you fall on, and the choice usually makes itself.
Disclaimer
The information in this article is general in nature and does not take into account your objectives, financial situation or needs. It is not personal advice, tax advice, legal advice or a recommendation to apply for any product. FBT, GST and salary packaging rules are set by the ATO and can change, so seek independent financial and tax advice for your circumstances before acting.
Get A Loan Finance Pty Ltd is not a lender and does not arrange novated leases. We are an accredited finance broker and work with a panel of lenders and finance providers for car and other loans. Product features, eligibility criteria and availability can change without notice, and all finance is subject to lender approval.
