Breaking free from a novated lease: Is a car loan the right move?

For many Aussies, a novated lease offers a convenient way to buy a car while reaping potential tax benefits.

But what happens when your circumstances change, or you decide you want to pay out the lease early?

Whether you’ve changed jobs, your circumstances have changed, you want to own the car outright, or simply want a bit more cash in your pocket, using a car loan to pay out your novated lease is an option many Aussies consider.

But is that the best thing to do?

Here are some tips on how to navigate the world of novated leases and car loans

How does a novated lease work?

A novated lease is basically a three-way agreement between an employee, an employer, and a finance company, and is often referred to as salary sacrificing.

The employer makes lease payments from an employee’s pre-tax salary, which can reduce the employee’s taxable income. Most novated leases come with balloon payments at the end, which means you need to pay a lump sum at the end of the lease to own the car outright.  

Can you refinance a novated lease with a car loan?

Yes — once the lease term ends, you can choose to pay out the residual (balloon) value using your own funds or refinance it with a car loan. Some people also refinance mid-term if they leave their job or if their lease terms no longer suit their needs.

Pros of using a car loan to pay out a novated lease:

• Ownership control: Once refinanced, the car is yours. You’re no longer bound by lease conditions, employment terms or a balloon payment at the end.
• Flexible terms: With a car loan you can choose repayment periods that suit your budget, over a period such as 48 months.
• Potential for lower interest rates: Depending on your credit profile and various terms and conditions, you might secure a better interest rate on a car loan than the original lease.
• Better budgeting: Fixed loan repayments such as those you get with Jacaranda’s car loans can provide more certainty and help with financial planning and your own budgeting.
• You’re in the driver’s seat: Car loans can be a quick and easy way to pay out your novated lease, with some lenders offering an easy, quick online application process.

The pitfalls of using a car loan to pay out a novated lease

• No more tax benefits: You do lose the salary packaging tax advantages once the lease is refinanced into a car loan.
• Interest costs: Remember, all car loans carry interest rates and over time that will add to the total cost of owning the car.
• Ending the agreement: Exiting a novated lease generally comes with a penalty of fees and this can be dependent on a number of factors, including how far through the lease term you are, and termination fees as outlined in your agreement. Be sure to check what the exit fees are on your particular lease arrangement.

Refinancing a novated lease with a car loan means filling in an online application and going through an approval process. When applying for a car loan, there are influencing factors lenders will often look at, such as:

• Your credit score and financial history: Be sure your credit score and history of paying down loans is in the best position possible and fix any issues prior to applying. You can check your score for free via our Better Credit app, with no impact.
• Existing debts: Other debts and repayments are all considered in the application process to ensure you can make the payments, but also to see a regular, on-time payment pattern.
• Negotiate the balloon: Some lenders allow you to roll the residual value into the new loan, so be sure to look into this.

Breaking free from a novated lease using a car loan can offer you flexibility and control, but only if you choose wisely.

Evaluate your financial position, understand the true cost of refinancing, and compare loan options carefully. With the right approach, you can turn your leased vehicle into a fully owned asset without blowing your budget.