Novated Lease vs Car Loan: Which Is Better for You?

How each works

Car loan

A car loan is a straightforward debt product. You borrow money to buy a vehicle, make regular repayments of principal plus interest, and own the vehicle outright at the end. The repayments come from your after-tax salary — there's no interaction with your employer and no tax advantage beyond standard deductions for business use.

Novated lease

A novated lease is a three-way arrangement between you, your employer, and a financier. The financier leases the vehicle to you; your employer "novates" (takes on) the obligation to make the lease payments on your behalf, deducting them from your pre-tax salary. Running costs — fuel, insurance, registration, servicing — are also typically bundled into the package and paid from pre-tax salary. You choose the vehicle and are responsible for it, but the payments come out before tax, reducing your taxable income.

If you leave your employer, the lease novates back to you — you either take over the payments personally or refinance. It's not stuck to the job, but you need to plan for the transition.

The tax advantage: where the novated lease wins

The tax saving in a novated lease comes from two mechanisms:

1. Pre-tax salary reduces taxable income — lease payments and running costs are deducted before income tax is calculated. On a $120,000 salary with $20,000 in annual packaging, you pay income tax on $100,000 instead of $120,000 — a saving of roughly $6,500–$8,000 per year at typical marginal rates.
2. GST recovery — the employer (not you) pays GST on the vehicle purchase and lease instalments, and claims it back. This passes through to you as a lower effective cost — roughly a 1/11th saving on vehicle price and running costs. On a $60,000 vehicle, that's approximately $5,454.

Against this, FBT applies. Under the statutory method, FBT = vehicle cost × 20% × days held / 365, grossed up and taxed at 47%. For a $60,000 vehicle held for a full year, the FBT taxable value is $12,000, grossed up to $22,642 (Type 1) and taxed at 47% = $10,641 employer FBT cost. This is typically passed to you through your packaging.

The ECM (Employee Contribution Method) lets you make post-tax contributions to reduce the FBT liability dollar-for-dollar. In practice, many packaged employees contribute enough ECM to eliminate or substantially reduce FBT, making the pre-tax saving largely intact.

For BEVs: no FBT at all — qualifying battery electric vehicles under the LCT threshold are exempt from FBT entirely, making the saving dramatically larger. See our EV FBT exemption guide for detail.

Worked example: same vehicle, both arrangements

Vehicle: $65,000 petrol SUV in NSW. Employee salary: $110,000. Term: 60 months. Running costs: $12,000/year. Marginal tax rate: ~39% (including Medicare).

Car loan

• Amount financed: ~$68,500 (after 5% deposit of $3,250, plus on-roads ~$6,750)
• Rate: 8% p.a., 60 months
• Monthly repayment: ~$1,388
• Total repayments: ~$83,280
• Total interest: ~$14,780
• Running costs (after-tax): $12,000/year = $60,000 over 5 years
• Total after-tax cost: ~$143,280 over 5 years

Novated lease (ECM to eliminate FBT)

• Pre-tax lease payment: ~$1,100/month (estimate; exact figure depends on residual and financier rate)
• Pre-tax running costs: $1,000/month
• Total pre-tax packaging: ~$2,100/month
• Income tax saving at 39%: ~$819/month = $49,140 over 5 years
• GST saving on vehicle and running costs: ~$8,000 over 5 years
• ECM contributions (post-tax, to eliminate FBT): ~$180/month = $10,800 over 5 years
• Net saving vs car loan: approximately $21,000–$26,000 over 5 years

Use Motorate's calculator with the Novated Lease mode to model this precisely for your own figures — the tax saving varies significantly with salary.

How salary affects the saving

The novated lease saving scales with your marginal tax rate:

• Under $45,000 (19% marginal rate): the tax saving is modest and FBT may erode most of it. A car loan is often more cost-effective.
• $45,001–$120,000 (32.5% marginal rate): a clear saving, particularly for vehicles over $30,000 with significant running costs.
• $120,001–$180,000 (37% marginal rate): the saving is substantial. A novated lease is almost always the better choice if the employer offers it.
• Over $180,000 (45% marginal rate): the highest return on salary packaging — every dollar packaged saves 47 cents in tax (including Medicare). The limit is the employer's packaging cap.

Flexibility: where the car loan wins

A car loan gives you more control:

• No employer involvement — you can change jobs, go self-employed, or take time off without restructuring your vehicle arrangement.
• No approved vehicle list — some employers' packaging providers restrict vehicle makes, models, or ages. A car loan has no such constraints.
• Early payout — most variable-rate car loans allow early repayment without penalty. Breaking a novated lease early often involves a payout of the residual and potential FBT implications.
• Simpler accounting — you pay for insurance, registration, and servicing yourself. There's no residual to manage at end of term.

Running costs: bundled vs self-managed

Novated leases typically bundle running costs into the pre-tax package. This is convenient and tax-effective, but requires setting an annual budget upfront — underestimate your fuel costs and you'll face a shortfall; overestimate and unused funds don't automatically roll over (rules vary by provider).

With a car loan, you manage running costs yourself with after-tax dollars. This is less tax-efficient but gives you full control over where and how you spend on the vehicle.

End of term: residual vs ownership

• Car loan: at the end of the term (or when you make the final payment including any balloon), you own the vehicle outright. You can keep it, sell it, or trade it in — no further obligation to the lender.
• Novated lease: at the end of the lease term, a residual payment is due. You can pay the residual and own the vehicle, refinance the residual with the same or a different provider, or trade the vehicle in and roll into a new lease. The ATO sets minimum residual percentages (28.13% of cost for a 60-month lease), meaning you always owe a meaningful sum at maturity.

Decision guide: when to choose each

Choose a novated lease if:

• Your employer offers salary packaging and their provider includes novated leases.
• Your salary is above $60,000 — the higher your marginal rate, the larger the saving.
• You want to package running costs (fuel, insurance, tyres) from pre-tax salary.
• You're buying a new or near-new vehicle (older vehicles may not meet the financier's age/km policy).
• You're buying a qualifying BEV — the FBT exemption makes the saving even more significant.
• You plan to stay with your employer for most of the lease term, or are comfortable managing a transition if you change jobs.

Choose a car loan if:

• Your employer doesn't offer salary packaging or novated leases.
• You're self-employed — novated leases require an employer.
• Your income is below $45,000 — the FBT cost may outweigh the tax saving.
• You want to buy an older vehicle, a private import, or a vehicle outside the financier's approved list.
• You expect to change jobs frequently or plan to leave employment within the lease term.
• You prefer simplicity — a car loan is straightforward to manage and exit.

Model both scenarios side-by-side on Motorate's calculator — switch between Loan and Novated Lease mode with the same vehicle price, term, and rate to see the difference in real dollars for your situation.

This guide provides general information only. Tax outcomes depend on your individual circumstances, employer policies, and current ATO rates. Consult a tax adviser or salary packaging specialist before making a decision.