When buying a vehicle, there are several financing options to help you afford the vehicle you need.
Car loans can be a good option for many people, but if you need the car solely for work purposes, you may want to consider a novated lease.
A novated lease is a tax-effective way of purchasing a vehicle, especially if the vehicle is predominantly for work purposes or if you receive a car allowance.
A novated lease is an agreement between you, your employer and the lender who finances your vehicle. The car and finance are arranged in your name, but your employer makes the loan repayments on your behalf, from your pre-tax salary.
A novated lease can last between one and five years and is not limited to any particular car type, model or make unless specified by your employer.
This service can be implemented into businesses as an employee benefit or program.
If you leave your employer, you retain the vehicle but you have to take over responsibility for the loan repayments. You can re-novate the lease with a new employer, provided they accept the novated lease arrangements.
There are two types of novated leases, a fully-maintained lease and a non-maintained lease.
A fully-maintained novated lease involves both the purchase price of the vehicle (including fees and interest) and its running costs (including fuel, services, registration and car insurance) being calculated into the repayments.
Non-maintained novated leases involve only the purchase price of the vehicle, plus administration fees and interest being calculated into the lease repayments. This means you will be responsible for the running costs of the vehicle.
Before applying for a novated lease, you need to talk with your employer about whether they offer this benefit, as you can only get a novated lease if your employer agrees.
Your lender will set up a lease agreement, with details on the duration of the lease, the expected kilometres per year (to calculate running costs if included in the lease), and the type of car.
A novated lease means that your employer is a party to your purchasing agreement, and allows you to pay for your vehicle as part of your salary package, with your employer paying your car payments for you out of your pre-tax salary. The agreement needs to be made before your salary is deposited into your account, as you are not able to salary sacrifice the cost of the vehicle after you’ve been paid.
There are numerous benefits to a novated lease. As your loan repayments are made from your pre-tax salary, a novated lease can reduce your taxable income. The loan amount of your vehicle excludes the GST payable, which lowers the overall loan amount and interest, and the GST on the vehicle is claimed back by the lender on your behalf.
A fully-maintained novated lease consolidates all your car expenses into one deduction from your pre-tax salary, so you won’t have to worry about keeping up with various fees and payments.
With a novated lease you also generally have the opportunity to upgrade your vehicle at the end of the lease.
One thing to keep in mind with a novated lease is that you don’t own the vehicle, so you will not be able to claim it as an asset for financial purposes.
The repayments for a novated lease don’t cover the whole cost of the car over the term of the lease, so unless you renew the lease, you will have to pay the residual value at the end of the lease. If you lose or change your job, you may also be liable for taking over the payments of the car unless your new employer is willing to take over your novated lease.
Novated leases can sometimes come with administration fees calculated into your repayments and higher interest rates than regular car loans.
It’s important to make sure a novated lease is suitable for your situation, as there can be benefits as well as drawbacks. Make sure you understand the contractual obligations before agreeing to a novated lease to ensure you can afford the repayments coming out of your pre-tax earnings and the residual payments you may have to pay at the end of the lease.
Finance only novated leases can be arranged through 360 Finance for those looking to purchase a vehicle for work purposes. We can help you find the right vehicle and organise the agreement between you and your employer.
For more information on novated leases or if you’re wanting to apply for a car loan, contact our team.