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novated lease or buy outright

Financial Smarts: Novated Lease or Buy Outright

Novated lease or buy outright – that is the dilemma.

This decision involves understanding the financial implications and benefits each option offers you. A novated lease can offer significant tax savings and access to wholesale pricing, contrasting with the upfront costs and long-term depreciation associated with buying outright.

Exploring the advantages of buying a car outright includes no finance agreements and having full ownership from the start, but it’s crucial to also consider how a novated lease impacts your financial situation over time. This article will provide a thorough financial comparison for a decision between a novated lease or buy outright, helping you to make an informed decision based on your personal circumstances.

Understanding Novated Leases

A novated lease is essentially a financial arrangement enabling you to acquire a new or used car through repayments made directly from your pre-tax salary under a ‘salary sacrifice’ agreement. This process begins with selecting a vehicle, entering into a lease agreement with a finance provider, and establishing a salary sacrifice agreement with your employer. Your employer then makes the lease repayments on your behalf from your pre-tax income. 

One of the primary advantages of a novated lease is the potential to reduce your taxable income, thereby bundling vehicle expenses into one streamlined payment. Additionally, benefits include not only a reduction in taxable income but also the packaging of car expenses and running costs into a single payment, alongside potential GST savings for employees.

However, it’s vital to consider certain factors, such as the responsibility for repayments in the event of changing jobs or stopping work, the implications of fringe benefits tax, and the importance of seeking professional advice to fully comprehend the financial impacts. A novated lease also allows for 100% personal use of the car with the option to own it at the lease’s conclusion by making a residual payment. 

Notably, no GST is payable on the purchase price of the vehicle, resulting in significant savings, with regular payments made directly from your pre-tax salary covering both the vehicle and its running costs.

The Pros and Cons of Buying Outright

When you buy a car outright, you become the owner from day one with a lot less cash in your account but no debt to worry about and, with the freedom to choose any car without restrictions and without involving third parties. This ownership comes with several advantages:

  1. Saving on Interest: Opting for a cash purchase can save you approximately $1,700 on a $20,000 car, assuming a 5% APR over 48 months.
  2. Avoiding Overspending: Paying in cash helps prevent splurging on unnecessary extras or upgrades.
  3. Immediate Ownership: You gain instant ownership, which can be beneficial if you need to sell the car or use it as collateral.
  4. No Risk of Negative Equity: Without financing, there’s no concern about your car’s value dropping below the loan amount.
  5. Elimination of Monthly Payments: Buying outright means you won’t have a monthly car payment, simplifying your financial planning.
  6. Lower Insurance Costs: Insurance premiums are often lower for cars owned outright compared to those under finance.

However, there are also downsides to consider:

  1. Depleting Savings: Using your savings to purchase a car outright could leave you financially vulnerable to unexpected expenses.
  2. No Credit Building: Financing a purchase can help build your credit score, which isn’t an option when you pay in cash.
  3. Limited Choices: Sticking to a cash-only budget may restrict your options when selecting a vehicle.
  4. Missing Out on Financing Deals: You could forego special financing rates or rebates offered by dealerships to those who finance through them.
  5. Opportunity Cost: If interest rates are low, investing the money instead of buying a car outright could potentially yield a higher return.

In conclusion, buying a car outright provides immediate ownership and saves on interest, but it requires a significant upfront investment and may limit your options based on your budget. This method also misses out on the chance to build credit and foregoes potential investment opportunities, as well as the benefits of attractive financing deals and flexibility in managing cash flow.

Financial Decisions: Novated Lease or Buy Outright

When deciding between a novated lease or buy outright, several factors come into play, including cost considerations, flexibility in vehicle choice, and the distinction between ownership and usage. 

For those contemplating an environmentally friendly option like an electric vehicle (EV), novated leasing can offer a substantial 24.6% saving compared to a traditional car loan, while savings for non-EVs stand at 6.1%. A more detailed financial comparison for a popular model such as the Tesla Model 3 RWD over a 5-year period reveals that opting for a novated lease could result in costs amounting to $76,504, in contrast to $86,902 when buying outright, showcasing a significant cost difference of $10,398. 

This analysis underscores the importance of considering both cost implications and personal circumstances when choosing between these two options.

Comparing Costs Over Time

  1. Novated Lease for a Tesla Model 3 RWD Over 5 Years:
    • Total Cost: $76,504
  2. Buying Outright for a Tesla Model 3 RWD Over 5 Years:
    • Total Cost: $86,902

This comparison highlights the financial advantage of a novated lease over buying outright, especially for those interested in electric vehicles. However, it’s crucial to weigh these savings against other factors such as vehicle choice flexibility and the desire for ownership versus usage.

Make Your Choice: Novated Lease or Buy Outright 

In making the right financial decision, it’s essential to weigh the advantages of reduced taxable income and bundled expenses against the desire for immediate ownership and freedom from monthly payments.

As we conclude, it becomes evident that the choice between a novated lease and buying outright is inherently personal. Reflecting on the broader implications of each option allows for a more informed decision that not only serves immediate needs but also aligns with future financial health. For those leaning towards a novated lease, exploring offerings such as those from Novated Leasing Online could provide the tailored solutions that meet both financial objectives and lifestyle needs, effectively bridging the gap between aspiration and practicality in financial planning for vehicle acquisition.

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