Novated lease vs car loan: pros and cons
A novated lease, sometimes known as a salary sacrifice, is where you buy a car through your work using your pre-tax income. But what are the advantages and disadvantages of a novated lease compared to a standard car loan?
02 June 2025
A novated lease, sometimes known as a salary sacrifice, is where you buy a car through your work using your pre-tax income. But what are the advantages and disadvantages of a novated lease compared to a standard car loan?
KEY POINTS
- A novated lease or salary sacrifice can let you buy a car with your pre-tax income, which could potentially offer savings plus tax benefits.
- You’ll need to access a novated lease through your employer, and there may be extra costs and limits to consider.
- A more traditional car loan is available to anyone with an income and a credit score, though the structure may not be best suited to everyone.
How does a novated lease work?
You can organise a novated lease through your employer, who will arrange to purchase a car through a third-party financier. You can choose the type of car you want, and it does not have to be used for work purposes. Once the deal is made, you can drive away with the car.
Your lease payments will be made from your pre-tax salary from the employer. These payments will cover the car’s purchase price plus interest, minus the residual value (how much the car is projected to depreciate over the lease term). At the end of the lease, you may be offered the option to pay off the residual value as a lump sum balloon payment, refinance to pay it off over an extended term, or even upgrade to a different car model.
How does a car loan work?
Traditional car loans are personal loans that are structured with buying a car in mind. Many are secured by the value of the car being purchased, which could mean lower interest rates than unsecured personal loans.
You can pay off your car loan in instalments over time, plus interest charges. By the end of the loan term, your debt will be repaid (unless you choose to add a balloon payment to lower your ongoing repayments).
Novated lease pros
Convenient upkeep
Because your novated lease is managed through your employer, you don’t need to factor payments into your everyday household budget. As well as saving you time and hassle, this could help to reduce the risk of missed repayments or defaults.
Plus, you may have the option to bundle your car’s running costs into the lease. This could include fuel, servicing, tyres, and even car insurance in some cases.
Tax benefits
As a novated lease effectively lowers your taxable income, this could potentially mean paying less at tax time. Additionally, if you use a novated lease to buy an Electric Vehicle (EV), you may be exempt from Fringe Benefits Tax (FBT). And if you don’t plan to purchase the car outright at the end of the lease, you won’t need to pay GST on the vehicle.
It’s important to check the tax laws and consider consulting a tax professional first if you want to make a novated lease part of your tax strategy.
Hassle-free car upgrades
At the end of a novated lease term, you may have the option to trade in your car for a newer model by refinancing its residual value. This means you don’t need to go through the hassle of selling your old car privately or through a dealer.
Novated lease cons
Limited availability
Not every Australian employer will be willing to offer novated leasing as an option in their salary packaging, and you may be limited to only the employer’s preferred financier, even if the rates and/or fees aren’t the best. Plus, novated leasing isn’t an option for most freelancers, contractors, and other self-employed Australians.
Less take home pay
Sacrificing part of your salary to buy a car means you have less income available to save and spend. If you’re not careful, this lack of income could put your personal household finances at risk.
You don’t own the car
Because you are only leasing the car, it doesn’t count as an asset that could be used to help you secure finance elsewhere. You also may not be able to make alterations to the car, and if you lose your job, you’ll become responsible for paying off or selling the vehicle.
Fringe benefits tax
Even though your taxable income may fall under a novated lease, you may still be slugged at tax time by the fringe benefits tax. This can sometimes be complex to work out, and may leave you worse off at tax time. In some cases, making some extra payments out of your post-tax salary can help undo this, though your results may vary – check with the ATO and/or a tax professional for more information.
Higher interest and fees
Novated leases may charge interest at higher rates than comparable traditional car loans. Additionally, there may be administration fees added to your payments.
Car loan pros
Choice of lenders
A wide variety of banks and other specialist lenders offer car loans. If you’re buying a car through a dealer, you may also have the option of dealer finance to consider. This means you can compare several available options and select the best car loan for your circumstances.
Repayment flexibility
Car loans may offer the option for you to make extra repayments when possible. This means you can potentially pay off the loan faster and save money in interest.
Available to anyone
As long as you fulfil a lender’s eligibility criteria, it’s possible to be approved for a car loan. This means even Australians that don’t have employers may be able to access car finance (though interest rates can be higher on these low-doc loans).
Car loan cons
Secured car loans may have limited vehicle choice
Because secured car loans are guaranteed by the value of the car being purchased, lenders may limit the types of cars you can buy. You may only be able to buy brand-new cars (which often have higher price tags) or used cars under a maximum age limit. Some lenders may also limit you to specific makes and models.
Risk of losing the car
Choosing a secured car loan means that if you don’t keep up with your repayments, the lender may be able to repossess and sell your vehicle to cover its financial losses. This would leave you without a car, which you may need for your job or to manage your lifestyle.
May affect your credit score
While both car loans and novated leases involve a credit check when you apply, it may be easier to default on car loan repayments, as you’ll be responsible for paying these out of your post tax income. This could negatively affect your credit score, affecting your ability to borrow money in the future.
Novated lease vs car loan cost comparison
While your exact circumstances may vary, this hypothetical example could help show you the impact a car loan or novated lease could have on your personal finances, whether you’re buying an EV or an ICE car:
Novated lease vs car loan example cost comparison (EV)
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Electric Vehicle (Telsa 3) |
||
|---|---|---|
| Details | Car Loan | Novated Lease |
| Estimated Car Cost (pre on-road) | $ 54,900.00 | $ 54,900.00 |
| Estimated Car Cost (inc. on-road) | $ 57,997.00 | $ 57,997.00 |
| Monthly Finance Costs | $ 974.00 | $ 891.00 |
| Monthly Running Costs | $ 448.00 | $ 459.00 |
| Estimated Monthly Tax Saving | N/A | $ 432.00 |
| Total Estimated Monthly Cost | $ 1,422.00 | $ 918.00 |
| Estimated costs after 5-years | $ 90,472.00 | $ 58,353.00 |
| Estimated Residual Value | $ 14,895.00 | $ 14,895.00 |
| Total Cost After Tax | $ 101,694.00 | $ 71,462.00 |
| Estimated Saving (over 5 years) | – | $ 30,232.00 |
| Disclaimer: The figures presented are estimates prepared by Canstar for comparative purposes only. They are based on a Tesla Model 3 Rear Wheel Drive with an estimated pre on-road cost of $54,900, a car on-road cost of $57,997, a 5-year lease or loan term, and an annual gross salary of $90,000. The interest rate assumed is 8.50% p.a., with the car registered in NSW. Tax savings are calculated based on current salary packaging rules for eligible electric vehicles and do not account for individual tax or financial situations. Actual outcomes may vary based on employer participation, vehicle eligibility, and personal circumstances. This does not constitute financial advice. Please consult a licensed financial adviser or salary packaging provider before entering any agreement. | ||
Novated lease vs car loan example cost comparison (non-EV)
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Non-EV (Toyota Corolla) |
||
|---|---|---|
|
Details
|
Car Loan
|
Novated Lease
|
| Estimated Car Cost (pre on-road) | $ 33,440.00 | $ 33,440.00 |
| Estimated Car Cost (inc. on-road) | $ 36,083.00 | $ 36,083.00 |
| Monthly Finance Costs | $ 607.00 | $ 556.00 |
| Monthly Running Costs | $ 463.00 | $ 470.00 |
| Estimated Monthly Tax Saving | N/A | $ 112.00 |
| Total Estimated Monthly Cost | $ 1,070.00 | $ 915.00 |
| Estimated costs after 5-years | $ 84,120.00 | $ 54,810.00 |
| Estimated Residual Value | $ 9,270.00 | $ 9,270.00 |
| Total Cost After Tax | $ 93,390.00 | $ 64,080.00 |
| Estimated Saving (over 5 years) | – | $ 9,306.00 |
| The figures presented are estimates prepared by Canstar for comparative purposes only. They are based on a Toyota Corolla Ascent Sport with an estimated pre on-road cost of $33,440, a car on-road cost of $36,083, a 5-year lease or loan term, and an annual gross salary of $90,000. The interest rate assumed is 8.50% p.a, with the car registered in NSW. Tax savings are calculated based on current salary packaging rules, including the application of a 20% statutory fringe benefits tax rate for non-electric vehicles, and do not account for individual tax or financial situations. Actual outcomes may vary based on employer participation, vehicle eligibility, and personal circumstances. This does not constitute financial advice. Please consult a licensed financial adviser or salary packaging provider before entering any agreement. | ||
Cover image source: AndreyPopov/istockphoto.com
This article was reviewed by our Finance Editor Jessica Pridmore before it was updated, as part of our fact-checking process.
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