Differences Between Car Novated Leases and Car Loans: A Breakdown
In the world of automotive financing, two popular options stand out: novated car leases and car loans. Let's delve into the key features, advantages, and disadvantages of each, helping you make an informed decision.
A novated car lease is a three-way agreement between an employee, employer, and a novated lease provider. This arrangement allows employees to lease a car using pre-tax salary, potentially reducing taxable income and resulting in a tax saving. The lease term for a novated car lease is usually between one to five years, with a residual value (balloon payment) due before ownership. At the end of the lease term, you have the option to upgrade, refinance, or keep the car.
One major advantage of a novated lease is the budget-friendly payments and tax savings it offers. However, potential limitations on used car choices and the responsibility shift if employment status changes are some cons to consider. It's also important to note that when comparing novated car leases and car loans, it's crucial to take into account the fees associated with each option. Novated leases typically come with ongoing administration fees, while car loans often involve application fees and potentially early termination fees.
On the other hand, a car loan is a traditional financing option where the borrower takes out a loan from a financial institution, with the car used as security for the loan. With a car loan, you'll need to budget and pay for car maintenance, insurance, and registration out of your post-tax salary. The borrower pays back the loan, plus interest, over a set period of time, typically between one and seven years. The interest rate for a car loan can vary and is based on factors such as credit score, type of asset, and loan to value ratio.
One major advantage of a car loan is that you own the vehicle from the start, albeit with a debt that needs to be paid off. If you fail to make repayments, the lender can repossess the vehicle to cover their losses. If you decide to sell a financed car before you've paid off the loan, you'll need to talk to the lender first. Not only will the sale price of the car need to cover the outstanding balance on your car loan, you may face early exit fees.
In 2022, the Federal Government introduced a fringe benefits tax (FBT) exemption for EVs financed under a novated lease, as long as the cost of the car is below the luxury car tax threshold. This exemption is not applicable to car loans. RACV Finance car loans do not require balloon payments at the end of the loan term, unlike novated leases. Additionally, RACV Finance offers car loans with no ongoing fees for new, used, or green car loans.
In summary, both novated car leases and car loans have their unique advantages and disadvantages. It's essential to carefully consider your financial situation, lifestyle, and preferences when deciding which option suits you best. Always remember to compare the fees, interest rates, and terms associated with each financing option before making a decision.
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