Novated Lease vs Car Loan: Which Is Better for You?
If you’re an employee buying a car, you’ll usually choose between a novated lease through your employer and a standard car loan. Both get you the car. The difference is in how you pay, the tax treatment and how flexible it is.
How a novated lease works
A novated lease is an agreement between you, your employer and a finance company. Your employer pays the lease and car running costs out of your salary, partly before tax. That can lower your taxable income.
- Lease payments, fuel or charging, servicing, tyres, insurance and rego are bundled into one payment
- At the end, there’s a residual (balloon) to pay, refinance, or you can trade the car
- Fringe benefits tax (FBT) usually applies, and is handled through the arrangement
ASIC’s Moneysmart guide to salary packaging explains the basics.
Electric cars and FBT
Eligible electric cars can be exempt from FBT. Under the ATO’s rules, the car must be a zero or low emissions vehicle, first held and used on or after 1 July 2022, and priced below the luxury car tax threshold for fuel-efficient vehicles. For 2026-27, the ATO has set that threshold at $91,661.
Plug-in hybrids generally no longer qualify for new arrangements from 1 April 2025. Read the ATO’s guidance on plug-in hybrids and FBT, and check the details with your employer before you sign.
How a car loan works
With a car loan, you borrow to buy the car and own it from the start. You make repayments from your after-tax income and pay running costs yourself. Secured car loans usually have lower rates than unsecured ones. If the car is mainly for business, a business car loan may suit better.
Side by side
| Novated lease | Car loan | |
|---|---|---|
| Who you deal with | You, employer and lessor | You and the lender |
| Paid from | Pre-tax and post-tax salary | After-tax income |
| Running costs | Can be bundled in | Paid separately |
| If you change jobs | Lease comes back to you to manage | No change |
| End of term | Residual to pay | You own it |
| Best for | Employees whose employer offers it | Anyone, more flexibility |
Things to watch
- Check the real numbers. Compare the total cost, including fees and margins on running costs, not just the tax saving shown in quotes
- Changing jobs can complicate a novated lease, and may affect an FBT exemption
- A novated lease is still debt. Lenders count it when you apply for a home loan
- Plan for the residual at the end
Planning to buy a home soon?
Any car finance reduces how much you can borrow for a home. If you’re saving for your first home, talk to us before you commit to a car. Sometimes waiting, or choosing a cheaper car, can make a big difference to your borrowing power. See first home buyer loans and our first home buyer roadmap.
FAQs
Can anyone get a novated lease?
Only if your employer offers salary packaging. Ask your payroll team.
Can I get a novated lease on a used car?
Yes, usually within age limits set by the lessor.
Is a novated lease cheaper than a car loan?
It depends on your income, the car and the fees. Higher earners and eligible electric cars often benefit most. Get both options costed before deciding.
Albert Waldron is a Credit Representative (407514) of Australian Finance Group Ltd, Australian Credit Licence 389087. This is general information only and does not take into account your personal circumstances. Please seek advice before acting. Finance is subject to lender approval, terms and conditions. Tax information is general only; speak to your accountant about your situation. Novated leases are arranged through your employer and its salary packaging provider.