Novated Lease vs Car Loan: What’s the Difference?

When comparing a novated lease vs car loan, the right choice depends on your financial goals, tax situation, and how you want to manage your car expenses. Both options let you finance a car, but they work in completely different ways.

A novated lease allows you to salary-sacrifice your car payments, potentially saving you thousands in tax, while a traditional car loan gives you full ownership from day one with repayments you manage yourself.

So, which one suits you best? Let’s break it down so you can make an informed decision.

How a Novated Lease Works

A novated lease is a three-way agreement between you, your employer, and a finance provider. Instead of making loan repayments yourself, your employer deducts the lease payments from your pre-tax salary and sends them to the lease provider.

A fully maintained novated lease also lets you bundle in running costs like fuel, servicing, registration, insurance, and tyres, simplifying your car expenses into one fixed payment.

At the end of the lease, you can:

• Buy the car by paying the residual value.
• Trade it in for a new lease on another vehicle.
• Extend the lease for a longer term.

It’s a tax-efficient way to finance a car, especially for employees who want predictable expenses and minimal financial management.

How a Car Loan Works

A car loan is a personal finance agreement where you borrow money from a lender to buy a vehicle. You own the car from day one and repay the loan through fixed weekly, fortnightly, or monthly repayments.

Unlike a novated lease, you handle all running costs separately. The loan term typically ranges from one to seven years, and you may have the option to make extra repayments or pay off the loan early.

If you want full control over your vehicle and finances—and don’t mind paying for everything separately—a car loan might be the better choice.

Novated Lease vs Car Loan: Key Differences

Factor	Novated Lease	Car Loan
Who can apply?	Only available if your employer offers it.	Available to anyone who qualifies for a loan.
How do repayments work?	Payments deducted from your salary before tax.	You make repayments directly to the lender.
Do you own the car?	Not until the residual (balloon) payment is made.	Yes, you own it from day one.
Can running costs be included?	Yes, with a fully maintained lease.	No, you pay these separately.
Are there tax benefits?	Yes—reduces taxable income, no GST on purchase price.	No tax benefits.
Is there a residual payment?	Yes—must be paid if you want to own the car.	Optional (if you choose a balloon payment).
Can I change jobs?	You must transfer the lease or take over payments.	Your loan remains unaffected.
Can I make extra repayments?	Usually not, but depends on the lease provider.	Yes, depending on the lender.

Which One Saves You More Money?

A novated lease can offer serious tax savings, especially if you earn a higher salary or are considering an electric vehicle (EV). However, not everyone’s situation is the same.

Let’s look at a real-world cost comparison.

Example: Tesla Model 3 (5-Year Lease vs Car Loan)

Expense Type	Car Loan	Novated Lease
Vehicle Price	$64,201	$64,201
GST Saving on Purchase	$0	$5,736
Weekly Cost (incl. running costs)	$369.93	$209.23
Residual Payment	N/A	$18,090
Total Cost Over 5 Years	$96,182	$72,491 (💰 $23,691 saved!)

For an EV like the Tesla Model 3, a novated lease is almost 25% cheaper than a car loan! This is because EVs leased through salary sacrifice are exempt from fringe benefits tax (FBT), adding to the tax savings.

When a Novated Lease is the Better Option

A novated lease is the better option in a number of situations:

• You want tax savings – If your employer offers novated leasing, the potential tax benefits (especially for EVs) can make it significantly cheaper than a car loan.
• You like predictable expenses – A novated lease bundles your repayments and running costs into one payment, making budgeting easier.
• You upgrade cars frequently – If you prefer driving a new car every few years, a novated lease makes it easy to switch without worrying about depreciation.
• You want fleet discounts – Novated lease providers often negotiate bulk discounts, potentially lowering the purchase price of the car.

When a Car Loan is the Better Option

There are several advantages to a car loan, however, and it can be the better option in certain scenarios, including:

• You want to own the car outright – A car loan lets you own the vehicle from day one, giving you complete control.
• You’re self-employed or work for a small business – If your employer doesn’t offer novated leasing, a car loan is likely your best option.
• You want flexibility with repayments – Many car loans allow extra repayments and early payoffs, helping you reduce interest costs.
• You’re planning to keep the car long-term – If you want to own the car for many years, a car loan can be more cost-effective.

Start Your Journey to Car Ownership with Credit One

For many people, a novated lease is more tax-efficient and cost-effective, especially if you’re looking at an EV or want to keep your car expenses simple. However, if owning the car outright is a priority, or if you don’t qualify for a novated lease, a traditional car loan might be the better fit. If you’re not sure which option is right for you, we can help. At Credit One, we offer both novated leases and traditional car finance, and our experienced and knowledgeable team are here to help guide you to the right option for your budget, business, and lifestyle. Contact us today to speak to a member of the team and start your journey to car ownership with Credit One!