Novated lease vs car loan
Both put you in the same car. One is paid before tax and bundles the running costs, the other is simpler and yours outright. Here is where each one actually wins.
General comparison only, current for the 2025–26 Australian tax year. Your outcome depends on your marginal rate, employer policy and the vehicle. General information, not tax advice.
The one difference that drives everything else
A car loan is paid with money you have already been taxed on. A novated lease is paid mostly before tax is applied. Everything else — the GST treatment, the bundled running costs, the residual — follows from that single structural difference.
So the honest way to compare them is not the interest rate. Lease rates are often slightly higher than a sharp bank car loan. The lease wins or loses on tax, and the higher your marginal rate, the more it wins.
Where the saving actually comes from
There are three separate savings in a novated lease, and they are frequently confused with each other.
First, income tax. The pre-tax portion of the package reduces your taxable income, so you save at your marginal rate. On a 32% marginal rate that is roughly a third of every packaged dollar; on 45% it is nearly half.
Second, GST on the purchase price. The financier buys the car and claims the GST credit, so the amount financed is generally the price excluding GST — an immediate reduction of about one eleventh of the vehicle cost.
Third, GST on running costs. Fuel, servicing, tyres and rego inside the package are generally handled GST-exclusive too, which quietly compounds over a four or five year term.
Against that sits FBT. For most petrol, diesel and hybrid cars the employee contribution method is used, where an amount equal to 20% of the car's value is taken from post-tax salary each year to reduce the FBT liability to nil. That post-tax slice is the main thing eating into the benefit.
Electric vehicles change the answer completely
Eligible battery-electric vehicles priced under the luxury car tax threshold for fuel-efficient vehicles are exempt from FBT. With no FBT to offset, there is no post-tax employee contribution, so the whole package can come out of pre-tax salary.
That is why an EV on a novated lease frequently costs less per fortnight than a cheaper petrol car on the same term — the comparison inverts. Plug-in hybrids no longer attract the exemption for new arrangements, so treat any PHEV quote that assumes it with suspicion.
Run your own numbers before you take a provider's word for it — our novated lease calculator shows the fortnightly cost after tax, FBT and the ATO residual.
The residual is not a hidden fee, but it is a real obligation
The ATO sets minimum residual values by lease term: 65.63% for one year, 56.25% for two, 46.88% for three, 37.50% for four and 28.13% for five. The longer the term, the smaller the residual, and the more of the car you have actually paid off along the way.
At the end you pay the residual out, refinance it, or sell the car and settle the difference. If the market value has fallen below the residual you cover the shortfall personally, and that shortfall is not deductible.
A car loan with a balloon payment behaves the same way — the difference is that with a loan you can simply choose not to have one.
Where a car loan is the better product
If you are self-employed, a contractor, on a casual contract, or your employer does not offer salary packaging, the lease is not available to you in a useful form. That decides it.
If your income is below roughly $45,000 the marginal rate is too low for the pre-tax deduction to outweigh the packaging fees and the FBT contribution. A sharp secured car loan usually beats it.
If you expect to change employers, a loan avoids the re-novation process entirely. A lease does not end when you change jobs, but it does need your new employer to accept the novation, and if they will not, you carry the payments personally with no tax benefit.
And if you want to own the car outright with no end-of-term decision, a loan with no balloon is the simplest path there.
Comparing quotes without being misled
Lease quotes are usually shown as a net fortnightly cost after tax, with running costs included. Loan quotes are shown as a gross repayment with nothing included. Comparing those two numbers directly is meaningless.
Build both into an annual, all-in figure: repayment plus fuel or charging, servicing, tyres, insurance, registration and any fees. Then apply the tax effect. That is the only comparison that tells you anything.
Ask the leasing provider for the vehicle purchase price they are using, not just the fortnightly figure. If the car has been sourced at retail rather than fleet pricing, a chunk of your tax saving has already been spent before the lease begins.
This is where an independent broker helps: we negotiate the vehicle price separately from the finance, so the two are not bundled into one number you cannot interrogate. See how car brokers work.
Novated lease vs car loan FAQs
Is a novated lease cheaper than a car loan?
For a salaried employee on a marginal rate of 30% or more it usually is, because the package is paid mostly from pre-tax salary and GST is generally excluded from both the purchase price and the running costs. Below roughly $45,000 income, or if you are self-employed, a secured car loan is normally cheaper.
What salary do you need for a novated lease to be worth it?
There is no legal minimum, but the benefit tracks your marginal tax rate. Above about $90,000 the saving is clear. Between $45,000 and $90,000 it depends on the vehicle and the packaging fees. Below that, the fees and the post-tax FBT contribution usually cancel the benefit out.
What happens to a novated lease if I quit my job?
The lease continues — it is your obligation, not your employer's. You either novate it to a new employer, or you keep paying it personally from post-tax income until you do. Only the tax benefit pauses, not the contract.
Do you own the car at the end of a novated lease?
Only if you pay the residual. Until then the financier owns it. You can also refinance the residual or sell the vehicle and settle the difference, keeping any surplus.
Is a novated lease better for an electric car?
Yes, substantially. Eligible battery-electric vehicles under the luxury car tax threshold for fuel-efficient vehicles are FBT exempt, so there is no post-tax employee contribution and the whole package comes from pre-tax salary. An EV can end up cheaper per fortnight than a less expensive petrol car.
Can I get a novated lease on a used car?
Most providers allow used vehicles, typically up to around 7–12 years old at the end of the term, and some allow a sale-and-leaseback of a car you already own. Interest rates on used vehicles are generally higher than on new.
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