*Please note, Aussie Car Loans is no longer offering Novated Leasing. Read below on Novated Leases vs Secured car loans to see if there maybe another option available for you*
The time has come; you’re finally ready to buy a new car! With so many ways to finance your new car purchase, finding the right fit can be a challenge.
As you look up loan options, you’re probably going to stumble upon novated leases and secured car loans. But what are these exactly? To help you make an informed decision on your car finance, we’ve detailed these two loan options with their pros and cons.
A novated lease allows a business to lease a motor vehicle for (or on behalf of) its employees. The employer will commit to making payments for the lease of the vehicle as well as its running costs.
However, the responsibility for the lease payments will still be on the employee. The employee will pay for the lease using their pre-tax income, this is also known as salary sacrificing or salary packaging.
Some people like novated leases because it lowers their pre-taxable income and overall, lowers their taxable income. Additional maintenance costs can also be packaged into the lease payments which could save money in the short term.
However, there are a few significant drawbacks to a novated lease. Depending on the agreement with your employer, the use of your new car may come with a few restrictions. For example, if you want to modify your vehicle, you might have to get approval from the lease company. Or you could be restricted on how many kilometres you can travel over time. And if you breach these terms, you may end up paying hefty fees.
For those who want to have full control of their vehicle and own it outright, then a novated lease is not the ideal choice for you. A novated lease limits your ownership while putting you on the hook for payments.
The main drawback of a novated lease is that even after you’ve made the repayments (through your employer) you still won’t own the car unless you make a balloon payment. In short, you’d have to pay the residual value of the lease term before you’re able to own the car outright. This is on top of the lease payments you’ve already made. This could end up costing you even more compared to just purchasing the car yourself.
At the end of your novated lease, you have a few options aside from paying a lump sum. You can trade in the car you’ve been leasing and take out another lease on a new car. Or you can extend the lease on the current car. Neither of these options, however, will lead to you owning your car.
Another significant disadvantage of a novated lease is that you’ll be tied to your employer for the duration of the lease. If you leave your position at the company, you’ll still be responsible for making the rest of the payments. This may restrict your job options and limit career opportunities. If you can’t see yourself staying at your job for years, then a novated lease is definitely not the right car finance for you.
A secured car loan, as the name suggests, is a loan taken out to purchase a car. A lender will loan the buyer a specific amount to buy the car. The buyer will repay the lender the principal amount (or the amount used to make the purchase) plus interest on the loan over a set period of time. The average term for car loans is around three to five years; it can be shorter or longer depending on the agreement with the lender.
Taking out a car loan is more straightforward compared to a novated lease. Unlike novated leases, a car loan lets you buy the car outright and make payments directly to the lender. A secured car loan typically has lower interest rates compared to unsecured car loans too.
Compared to a novated lease, you might be paying off higher repayments with a secured car loan. But an important distinction is that when you pay off a secured car loan, you’re paying off the entirety of the car’s cost. At the end of the day, you’ll be owning the car you’re making payments on instead of paying your employer to let you drive a car.
After the novated lease term ends, you won’t have anything to show for your payments unlike with a secured car loan where you’ll have a car at the end of it all.
Aside from the major advantage of owning your car from the get-go, another great perk of a secured car loan is flexibility. You can shop around for the right car loan that fits your needs and discuss payment options with your lender. Finding the right car loan can also help save you money in the long run.
You won’t be tied down to an employer and you won’t have to abide by restrictions on your car usage too. A secured car loan gives you the freedom to do whatever you want with your own car. You can use it for your business, make some extra cash by doing rideshares, or sell it to pay off your loan at any time.
Ultimately, the right car financing depends entirely on your financial situation. However, given all the facts, the more practical option is to take out a secured car loan. Even if a novated lease has less expensive monthly payments, the benefits of purchasing a car through a secured car loan outweigh any disadvantages.
With a secured car loan, you’ll be gaining an asset because you’ll own the car. It also affords you much more freedom and flexibility to better accommodate your needs.
You can also apply online by getting a quick quote and we’ll reach out to you as soon as possible.