If your employer offers salary packaging, you have probably wondered whether a novated lease would beat a standard car loan. The answer depends on your income, the car you choose, how long you plan to stay in your job and whether the car is electric. This guide compares a novated lease vs car loan side by side so you can see which is likely to suit you.
This article is general information only and is not tax or financial advice. Speak with your employer, leasing provider or a registered tax agent about your own situation.
What is a novated lease?
A novated lease is a three-way agreement between you, your employer and a leasing company. Your employer makes the lease payments, and usually bundled running costs such as fuel, servicing, registration and insurance, from your salary. Part of the cost comes from your pre-tax pay, which can reduce your taxable income. At the end of the lease there is a residual (balloon) payment set with reference to the ATO’s minimum residual values, for example about 28% of the car’s cost for a five-year lease. You can then pay out the residual, refinance it or start a new lease.
What is a car loan?
With a car loan you borrow from a lender to buy the car and own it from day one, with the lender usually taking security over the vehicle. Repayments come from your after-tax income, you choose whether to have a balloon payment, and the loan is not tied to your employer. Rates vary between lenders, so it pays to compare; our guide to car loan interest rates in Australia explains what affects the rate you are offered.
Novated lease vs car loan: key differences
| Feature | Novated lease | Car loan |
|---|---|---|
| Ownership | Leasing company owns the car during the lease | You own the car (lender holds security) |
| Repayments | Deducted from your salary, partly pre-tax | Paid by you from after-tax income |
| Running costs | Often bundled into the lease | Paid separately by you |
| End of term | Residual payment required | Balloon optional |
| Changing jobs | New employer must agree, or you take over or pay out the lease | No effect |
| Who can apply | Employees whose employer offers salary packaging | Employees, self-employed and others who meet lender criteria |
The electric car FBT exemption
Novated leases on eligible electric cars have been especially popular because of the electric car fringe benefits tax (FBT) exemption. According to the ATO, the exemption applies to battery electric and hydrogen fuel cell cars first held and used on or after 1 July 2022 that are valued below the luxury car tax threshold for fuel-efficient vehicles. Plug-in hybrids have not been treated as eligible since 1 April 2025, apart from some arrangements already in place.
The rules for this exemption are changing. The Government has announced a phased reduction: from 1 April 2027 the full exemption would apply only to eligible EVs costing $75,000 or less, with a 25% FBT discount for dearer eligible EVs, and from 1 April 2029 all eligible EVs would receive a 25% discount. The Government said existing leases would not be affected. Because tax rules can change, always check the current position with the ATO or your leasing provider before you sign.
When a novated lease may suit you
- You are a stable employee and your employer offers salary packaging.
- You are on a higher marginal tax rate, so pre-tax savings are worth more.
- You want an eligible electric car and can take advantage of the FBT exemption.
- You like having running costs bundled into one regular deduction.
When a car loan may suit you better
- You are self-employed, a contractor or may change jobs soon.
- You want to own the car outright from day one with no compulsory residual.
- You are buying a cheaper or older used car, where lease fees can outweigh tax savings.
- You want to compare rates across many lenders and keep your finance separate from your employer.
Things to watch with either option
- Compare the total cost, not just the weekly figure. Include fees, interest, the residual or balloon and running costs.
- Check bundled costs. Unused running-cost budgets and administration fees vary between leasing providers.
- Reportable fringe benefits. The ATO notes that exempt electric car benefits are still reportable, which can affect some income tests.
- Plan for the end of the term. Make sure you can pay or refinance a residual or balloon when it falls due.
Business owners: consider a chattel mortgage
If you are self-employed or buying a vehicle mainly for business use, a novated lease is usually not the right fit. A chattel mortgage lets your business own the vehicle from the start, and your accountant can advise on any GST credits or deductions available. If you are considering an electric vehicle, see our guide to EV car finance in Australia.
How SB Finance can help
Our Hills District brokers compare car loans across 40+ lenders for new, used and private-sale cars. If you are weighing up a novated lease offer from your employer, we can show you car loan options side by side so you can compare the total cost. For car finance, our brokerage fee is included in the loan amount and explained upfront before you commit. Book a free consultation or start a quick car loan quote.
Novated lease vs car loan: frequently asked questions
Is a novated lease cheaper than a car loan?
Not always. It often works out better for employees on higher tax rates or for eligible electric cars, but fees, bundled costs and the residual payment can make a car loan cheaper for others. Compare the total cost over the full term.
What happens to my novated lease if I change jobs?
Your new employer may agree to take over the arrangement. If not, you can usually continue the lease payments yourself from after-tax income or pay out the lease. Check your agreement for the exact terms.
Do I own the car with a novated lease?
Not during the lease. The leasing company owns the car until you pay the residual at the end of the term.
Can I use a car loan for a used or private-sale car?
Yes. Many lenders finance used and private-sale cars, although rates and terms can depend on the car’s age and the seller.
