But no matter how exciting it might be, buying a car could prove to be quite expensive. With so much money on the line, it’s essential to take some time to consider which method of purchasing a car is the right one for you.
In this article, we’ll compare the process of buying a car with a car loan to salary sacrificing for one, a.k.a. a novated lease.
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According to the ATO, salary sacrificing is an arrangement you make with your employer to forgo part of your salary in return for some benefit of a similar value. For example, some people agree to sacrifice their salaries for gym memberships, school fees, or childcare costs. Some companies might even offer to pay a portion of their employees' rent out of their pre-tax income.
Salary sacrifice is quite common in Australia. Research from the Melbourne Institute in 2017 found that 15.9% of employees reported having a salary sacrifice arrangement with their employer!
One of the most common reasons for salary sacrificing is to buy a car. That process is called novated leasing.
Salary sacrificing with your employer for a car is known as novated leasing. With a novated lease, you agree with a lender to purchase the vehicle and then ‘novate’ the finance agreement to your employer. If they agree, they will then take on the debt and be responsible for all of the repayments agreed upon in the loan contract.
In return, the repayments will be taken out of your pre-tax income in equal amounts, as well as the running costs and Fringe Benefits Tax (more on this later). So you're essentially sacrificing some of your salary in return for your employer paying for your car, as well as some potential tax benefits to boot.
By reducing your pre-tax income, you’re essentially increasing your net disposable income as you’re paying less tax.
Car loans are different from novated leases in that they cut out the middleman. Rather than having your employer pay for the loan and deduct it from your salary before it hits your bank account, you pay a lender directly for a car loan.
Car loans don’t have the tax benefits that novated leases do, and you also have to pay your car’s running costs separately. If that’s the case, you may be wondering why someone would choose a car loan over salary sacrificing.
As we’ll get into below, novated leases have some distinct pros and cons that you need to consider.
As mentioned, the key benefit of a novated lease is the potential tax benefit of your employer taking the repayments out of your pre-tax income.
Say your car loan repayments are $650 a month: usually, you’d pay for that with your after-tax income. However, with a novated lease, your employer makes the repayment first and reduces your monthly taxable income by $650.
You’re still making the same amount of money technically, but now, you’re paying less tax than you otherwise would if you’d made the repayments out of your own pocket.
Overall, the pros of novated leases include:
Novated leases definitely have flaws, which, depending on your situation, could provide some distinct reasons to reconsider getting one.
Arguably, the biggest drawback of novated leases is the lack of flexibility. There can be many restrictions on the type of car you can get and what you can do with it. For example, some leases might restrict you from driving more than a certain number of kilometres each year.
Novated leases can also attract the Fringe Benefits Tax (FBT). This can sound a bit complicated, but essentially, the FBT is a tax employers have to pay on the pre-tax benefits they provide to employees (unless they’re a non-profit organisation).
The employer could choose to pass this tax on to you, eliminating some of the tax benefits we discussed above.
The cons of novated leases can be summarised as follows:
To top it all off, actually applying for a novated lease can be a more complicated process than a standard car loan, which we’ll discuss below.
Getting a novated lease involves quite a few steps and can differ depending on your circumstances, but generally speaking, there are several vital steps in the process:
This is a much-simplified version of how applying for a novated lease works, and it’s still a lot to take in. Car loans generally have a much easier application process, as only two or three parties are involved - you, the seller and the lender.
Novated leases, on the other hand, could involve four or more parties at any one time: you, the lender or finance company, your employer, and the car seller.
Ask your employer for more details about how such an arrangement would work, as each workplace could have different processes.
It’s nearly impossible to definitively say whether car loans or novated leases are better than the other because there are so many factors at play. A novated lease being better for one person doesn’t mean it’ll be the better option for another, who might prefer a car loan.
If you’re purely after a short-term money-saving solution, then a novated lease could be the better option if your employer allows one. This is due to the strong tax incentives a novated lease can offer, especially if your car’s running costs, like maintenance and insurance, are bundled into the package.
Novated leases can also suit people with secure employment who like to upgrade their cars more than the average person, and high-income earners, in particular, stand to benefit from the reduced taxable income.
But there are just as many situations where a car loan could be the preferred option instead. For one, not all places of employment allow salary sacrifices, so they aren’t available to as many people as a standard loan. What’s more, regularly using a novated lease to get a car becomes less financially beneficial the longer you do it.
This is because car loans actually let you take ownership of the car. Instead of leasing a car and swapping it out every few years, the car becomes yours to do with as you please with a car loan. You can upgrade it, sell it, or use it as equity to get another car loan, and once you’ve paid off the loan in full, you no longer have to make repayments.
One final benefit of car loans against novated leases is their simplicity. There’s no back and forth with another party when applying for a car loan, and you generally have a much greater degree of choice over who you choose to borrow from.
Ultimately, choosing between a car loan and a novated lease will depend on your personal situation. Both might be equally good for you, but we encourage you to take plenty of time to research your options before deciding.
One of our customer service representatives would be happy to explain to you why a Jacaranda Finance car loan is worth considering.
If you’re in the market for a car and don’t like the sound of a novated lease, a Car Loan with Jacaranda Finance could be the right choice for you. We offer secure and flexible Car Loans of up to $25,000, with loan terms of up to 48 months and fixed repayments.
We don’t charge any fees for extra repayments or paying your loan off early, so you can adjust your repayment schedule to your needs.
Even better, we offer same-day pre-approvals2 on our car loans and the ability to check if you qualify for a loan first without impacting your credit score at all.
Apply in just a few minutes1 and get the confidence to shop around within your budget today!
$3,000 - $25,000
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