April 23rd, 2021 | Updated on December 11th, 2021
Americans regularly struggle with auto loan debt, as the national total peaked at $1.2 trillion in 2018. With that said, it’s hard for most adults to get through life without owning a car.
So how do you own your own car without breaking the bank? What’s a cost-effective way to actually afford a decent car in 2021?
That’s where novated leases come in. These leases bring in third-party purchasers to strike a deal with the car owner.
In this article, we’ll be outlining what a novated lease is and how it can help you get the car you want. Read on to find out more.
What is a Novated Lease?
So what is a novated lease anyway?
Think of it as a car-purchasing agreement that involves three different parties. There are the car salesmen, a third party (usually an employer), and you.
The third party takes responsibility for some of the lease’s obligations. As the car owner, you’re essentially paying a lease for a car you don’t fully own.
If an employer joins you in a novated lease, they’re a part of the purchasing agreement. This lets you as the employee pay for the car as part of your salary package.
In other words, car payments are taken out of your pre-tax earnings. Many take on novated leases for the convenience of sharing the cost responsibility with an employer. It also lets lessees avoid paying the GST, or the purchasing price of a car.
How Does it Work?
When you take on a novated lease, you get to drive the car for a set amount of time. This might be a couple of years or up to 4 or 5.
At the end of that period, you can upgrade to a new model and sign another lease. This means you’re never stuck with an old or unfashionable car.
If you really liked the car you leased, you can pay the purchasing fee at the end of the lease to keep it forever. As we mentioned earlier, your novated lease payments are taken out of your pre-tax salary. Your employer makes novated lease repayments to the lender on your behalf.
This means the amount of money that shows up in your bank account each month already has the car payments taken out.
If you leave your job and want to keep your car, you can keep paying your old employer or come to another agreement.
It’s important to know that you’re leasing the vehicle, meaning you don’t fully own it. This lets you change from car to car every few years with less commitment.
Novated leases allow employers to lease a car on behalf of an employee. The employee, however, takes responsibility for the payments.
Understand that if you leave the job associated with your car, you still have to pay your obligations.This will depend on what you and your old boss agree on. The payments might be transferred to your new employer, or you might have to make the repayments yourself.
The federal government considers novated leases as fringe benefits. You’ll have to pay the proper taxes, which are passed on to you from your pre-tax salary.
Getting car loans is also complicated, so finding a novated lease requires a good amount of research. If you’re looking for a reliable car loans guide, we have one right here.
Pros and Cons of Novated Leases
The idea of having your employer help pay for the car of your dreams sounds like a sweet deal, right?
In many cases, yes it’s a fantastic arrangement.
There’s no denying that novated leases have their benefits. However, there are plenty of other factors to think about here.
Let’s outline some novated lease advantages and disadvantages here to get a better picture:
Pros of Novated Leases
The low-hanging fruit with novated leases is taht you can drive your car freely with your employer helping you out with the finances. Unlike a typical company car, you can drive it for personal use as well.
This is obviously a benefit for those who don’t want to commit tens of thousands of dollars to a new whip. It can also be very cost-effective when monthly payments are taken out of your pre-tax income.
For example, if your annual income is $60,000 and you pay about $10,000 in novated lease payments, you pay less tax. With an annual income of $50,000, you get to pay a lower tax percentage than you would otherwise.
If you’re lucky, your employer might package things like insurance with your novated lease deal. Some even allow you to contribute payments in addition to your novated lease.
Of course, there’s also the exemption from paying GST, or goods and services tax. This is the purchasing price of your car that can be waived with novated leases.
Cons of Novated Leases
With all that said, novated leases aren’t perfect for the borrower. We already talked about how payments can be complicated if you move jobs or get fired.
In many cases, you lose the car or you’ll have to pay for it out of your own pocket. Novated leases also have high administration fees. Additionally, a novated lease interest rate is usually higher than with a typical car loan.
As such, we recommend doing a full estimate of how much your novated lease will be compared to a regular lease. Depending on your income level, it can be more advantageous to take on other loans.
Leverage Novated Lease For Your Next Car
So is novated leasing a good idea?
It depends. They definitely provide a unique opportunity to drive new and reliable cars without breaking the bank. Use this guide to help you decide whether you want to pursue a novated lease with your employer.
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