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novated lease vs car loan vs cash

Car Finance Options For Your Next Electric Vehicle: Novated Lease vs Car Loan vs Cash

As electric vehicle (EV) adoption continues to surge, securing the right financing option becomes important for making the switch to sustainable transportation. With a wide range of choices available, from novated leases and car loans to cash purchases, understanding the financial implications is key.

Navigating the cost benefits of novated leasing, loan terms, and luxury car tax thresholds can be daunting, but a well-informed decision empowers you to embrace an EV that suits your lifestyle and budget.

Navigating the cost benefits of novated leasing, loan terms, and luxury car tax thresholds can be daunting, but a well-informed decision empowers you to embrace an EV that suits your lifestyle and budget.

What is a Novated Lease and How Does It Work?

Novated Lease Defined

A novated lease is a finance arrangement used with salary packaging. It simply means that your employer pays for your car lease and car running costs out of your salary package through a combination of pre-tax and post-tax salary deductions.

  1. 1. You choose a car – any make or model, new or used, or even the car you currently drive.
  2. 2. A novated lease arrangement is set up between you, your employer, and the finance provider.
  3. 3. Your employer makes payments to the finance provider from your pre-tax salary.
  4. 4. You get the car you want, saving on tax and running costs, including car price, fuel, maintenance, and tyre purchases.
  5. 5. You enjoy the convenience of cashless motoring.

Benefits of a Novated Lease

Tax Savings and Cost Reductions

  • – Your taxable income is reduced by the amount of your novated lease payments made from your pre-tax salary.
  • – Eligible electric vehicles (EVs) are exempt from the Fringe Benefits Tax (FBT), a tax on the personal use portion of a work motor vehicle that applies to petrol cars on a novated lease.
  • – You pay no GST on the purchase price of an EV under a novated lease, as the finance provider can claim an input tax credit.
  • – Running costs like registration, fuel, tyres, and insurance can be packaged into your lease payments without GST.

Incentives and Rebates for EVs

  • – The Federal Government’s Electric Car Discount Policy provides an exemption for the payment of FBT for EVs whose cost falls below the luxury car tax threshold ($84,916 in 2022-23) and is financed under a novated lease.
  • – Any applicable import tax has been removed for new EVs first registered after 1 July 2022 and financed through a novated lease.
  • – The policy applies to all new battery electric vehicles and plug-in hybrid vehicles (until 1 April 2025, with exemptions for existing leases until they expire).

With a novated lease, you can use your car for personal use, and you don’t have to be using the car for work or business purposes. However, keep in mind that if you change jobs or stop working, the responsibility for making the repayments remains with you, and you may have to take over the repayments from your post-tax salary.

Pros and Cons of Car Loans

Benefits of a Car Loan for EVs

  1. Environmental Advantages: Securing a car loan to purchase an electric vehicle (EV) offers significant environmental benefits. EVs produce substantially fewer emissions than traditional internal combustion engine vehicles, leading to a reduced carbon footprint and improved air quality. A study by Belgium’s VUB University found that on average, electric vehicles will emit half the CO2 emissions of a diesel car by 2030.
  2. Long-Term Cost Savings: EV owners can benefit from substantial long-term savings with a car loan. While the upfront costs may be higher, the reduced running costs (electricity being cheaper than petrol or diesel per km) and lower maintenance costs (fewer moving parts) can offset the initial investment over time. EVs also tend to have a higher resale value and longer lifespan than traditional vehicles.
  3. Incentives and Rebates: When financing an EV through a car loan, you may be eligible for various federal and state/territory incentives and rebates. These can include a higher luxury car tax threshold, lower customs duties on EV imports, and potential exemption from the Fringe Benefits Tax.
  4. Ownership and Flexibility: Unlike a novated lease, a car loan allows you to fully own the EV from the start, providing greater flexibility in usage and resale options.

Drawbacks of a Car Loan for EVs

  1. Higher Upfront Costs: While offering long-term savings, the initial purchase price of an EV can be higher compared to traditional vehicles, resulting in a larger loan amount and potentially higher interest payments.
  2. Limited Choice: The range of eligible EVs for green car loans may be relatively limited compared to traditional car loans, restricting your options.
  3. Range Anxiety: Despite improving battery technology, some EV models may have a limited driving range, which could be a concern for those with longer commutes or frequent long-distance travel.
  4. Charging Infrastructure: The current lack of widespread public charging infrastructure in some areas can pose challenges for EV owners, potentially limiting the convenience of long-distance travel.

By understanding the benefits and drawbacks of car loans for EVs, you can make an informed decision that aligns with your financial goals, driving needs, and environmental priorities.

Pros and Cons of Paying Cash for Your Electric Vehicle

Upfront Cost Savings with Cash Purchases

Buying a car with cash upfront can provide significant cost savings compared to financing options like novated leases or car loans. While the initial investment may be substantial, you avoid paying interest charges and additional fees associated with loans or leases. This can result in a lower overall cost of ownership, especially if you plan to keep the EV for an extended period.

Ownership Flexibility and Resale Value

When you purchase an EV outright with cash, you become the sole owner from day one. This ownership flexibility allows you to sell or trade in the vehicle at your convenience without restrictions or penalties from financing agreements. Additionally, EVs tend to have higher resale values compared to traditional gasoline-powered vehicles, enabling you to potentially recoup a larger portion of your initial investment when you decide to sell or upgrade.

Avoiding Financing Obligations

By paying cash, you eliminate the need to qualify for financing or meet specific credit requirements. This can be particularly advantageous if you have a less-than-perfect credit score or prefer to avoid the complexities of loan or lease agreements. Furthermore, you won’t have to worry about monthly payments or the potential risk of defaulting on a loan, providing peace of mind and financial flexibility.

Eligibility for Government Rebates and Incentives

In some regions, cash purchases of EVs may qualify for government rebates or incentives designed to encourage the adoption of sustainable transportation. These incentives can further offset the upfront cost of your EV purchase when paying with cash.

While paying cash for an EV requires a significant upfront investment, it can offer long-term cost savings, ownership flexibility, and potential eligibility for government incentives. By carefully evaluating your financial situation and driving needs, you can determine if a cash purchase is the most suitable option for your electric vehicle acquisition.

novated lease vs car loan vs cash

As you can see, with the 2024 BYD Seal Premium – which costs roughly around $76,304.70 – you will be saving $17,395.21 when compared to paying cash and $40,830.91 when compared to a car loan

2024 Tesla Model Y RWD

novated lease vs car loan vs cash

Long-Term Savings: Which Financing Option Wins?

When considering the long-term savings of each financing option, several factors come into play:

  1. 1. Upfront Costs: Paying cash eliminates interest charges and additional fees associated with loans or leases, potentially resulting in lower overall costs. However, the substantial upfront investment may not be feasible for everyone.
  2. 2. Running Costs: Electric vehicles generally have lower running costs compared to traditional gasoline-powered vehicles. With a novated lease, you can package running costs like registration, fuel, tyres, and insurance into your lease payments without GST, further reducing your expenses.
  3. 3. Tax Benefits: Novated leases for eligible electric vehicles are exempt from the Fringe Benefits Tax (FBT), providing significant tax savings. Additionally, you pay no GST on the purchase price under a novated lease, as the finance provider can claim an input tax credit.
  4. 4. Residual Value: With a car loan, you own the vehicle outright, allowing you to potentially recoup a larger portion of your investment when selling or trading in the vehicle due to the typically higher resale value of electric vehicles.
  5. 5. Interest Rates and Fees: Car loans may have higher interest rates and additional fees compared to novated leases, increasing the overall cost of financing.

Making the Right Choice for Your Electric Vehicle Purchase

When selecting the right financing option for your EV, consider your personal circumstances, budget, and driving needs. If you prioritise tax savings and prefer the convenience of bundled running costs, a novated lease could be an attractive choice, especially if you’re eligible for the FBT exemption.

For those seeking long-term ownership and flexibility, a car loan may be the way to go, particularly if you can secure a competitive interest rate and take advantage of available incentives. However, ensure that the upfront costs align with your financial capabilities.

If you have the means for a substantial upfront investment, paying cash outright could be the most cost-effective option, especially if you plan to keep the EV for an extended period.

Regardless of your chosen financing route, it’s essential to conduct thorough research, compare offers from multiple lenders or providers, and carefully review the terms and conditions before making a commitment. Additionally, consider seeking professional advice from a financial advisor or broker to ensure you make an informed decision that aligns with your long-term goals and budget.

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