Novated Lease vs Car Loan: Which Is Better for You?

When financing a vehicle in Australia, two of the most popular options are a novated lease and a standard car loan. Both allow you to drive a new or used car while spreading the cost over time, but they work in fundamentally different ways — and the right choice depends on your employment situation, tax position, and personal preferences. This comprehensive comparison covers every aspect of both options, from tax treatment and ownership to flexibility and total cost, so you can make an informed decision.

How a Novated Lease Works

A novated lease is a three-way agreement between you (the employee), your employer, and a leasing company. Your employer agrees to make the lease payments from your pre-tax salary, reducing your taxable income. The lease covers the vehicle's financing costs, and an optional running cost budget can be bundled in to cover fuel, insurance, registration, tyres, and servicing. The key benefit is the tax saving. Because payments come from pre-tax income, you effectively pay for the car with dollars that would otherwise be taxed at your marginal rate. For someone earning $100,000, each dollar paid through the novated lease costs roughly 62 cents after accounting for the tax saving (assuming a 32.5 per cent marginal rate plus Medicare levy). At the end of the lease, you have options: pay the residual value and own the car outright, refinance the residual, trade in and start a new lease, or return the vehicle.

FBT Exemption for EVs

Since 1 July 2022, electric vehicles and plug-in hybrids below the luxury car tax threshold for fuel-efficient vehicles ($91,387 in 2025-26) are exempt from Fringe Benefits Tax when provided through a novated lease. This makes novated leasing particularly attractive for EVs, as it eliminates the FBT component that normally reduces the overall tax benefit. For a $60,000 EV on a novated lease, the FBT exemption can save $10,000 to $15,000 per year compared to a non-exempt vehicle, making the total cost of ownership dramatically lower.

How a Car Loan Works

A car loan is a straightforward credit arrangement between you and a lender. You borrow a fixed amount, agree on an interest rate and term, and make regular repayments until the loan is paid off. Secured car loans use the vehicle as collateral, resulting in lower interest rates. Unsecured car loans do not require collateral but carry higher rates. With a car loan, you own the vehicle from day one (for secured loans, the lender registers a security interest until the loan is paid). There is no employer involvement, no pre-tax salary deductions, and no FBT considerations. The loan is repaid from your after-tax income.

Detailed Comparison

Tax Treatment

Novated lease: Payments are made from pre-tax salary, reducing your taxable income. FBT applies unless the vehicle is an eligible EV. GST credits may be available on the purchase price. Running costs can be bundled and also paid pre-tax. Car loan: Repayments are made from after-tax income with no tax benefit for personal use. If the vehicle is used for work purposes, you may be able to claim a limited deduction via the cents-per-kilometre method or logbook method, but the benefit is modest compared to a novated lease. Winner: Novated lease, especially for EVs and higher-income earners.

Ownership

Novated lease: The leasing company owns the vehicle during the lease term. You gain ownership after paying the residual value at the end of the lease. Car loan: You own the vehicle from day one (subject to the lender's security interest). Once the loan is repaid, you have full unencumbered ownership. Winner: Car loan, if outright ownership is important to you.

Flexibility

Novated lease: Tied to your employment. If you leave your employer, the lease obligations revert to you, and you lose the pre-tax salary sacrifice benefit until you find a new employer who will novate the lease. Most leases can be transferred to a new employer. Car loan: Completely independent of your employment. Changing jobs has no impact on your car loan. Winner: Car loan, for those who change jobs frequently or are self-employed.

Vehicle Choice

Novated lease: Most lease providers accept new vehicles and used vehicles up to a certain age (typically less than 5 to 7 years old at the start of the lease). Luxury vehicles are permitted but attract higher FBT. Car loan: Wide range of vehicles accepted, including older used cars (up to 15 to 20 years old with some lenders). More flexibility for unusual or niche vehicles. Winner: Car loan, for older or niche vehicles. Novated lease for new vehicles.

Running Costs

Novated lease: Running costs (fuel, insurance, registration, servicing, tyres) can be bundled into the lease and paid from pre-tax salary, providing additional tax savings. The leasing company often manages these items, reducing your administrative burden. Car loan: Running costs are separate and paid from after-tax income. You manage insurance, servicing, and other costs independently. Winner: Novated lease, for convenience and tax efficiency on running costs.

Total Cost of Ownership

The total cost comparison depends heavily on your income, the vehicle chosen, and whether FBT applies. As a general guide: For an EV costing $55,000 on a three-year term, a novated lease with FBT exemption typically saves $15,000 to $25,000 compared to a car loan when you factor in tax savings, GST savings, and bundled running costs. For a petrol vehicle costing $45,000, the novated lease still offers savings of $3,000 to $8,000 over three years for someone earning $90,000 or more, after accounting for FBT. For lower-income earners (below $60,000), the tax savings from a novated lease are smaller because the marginal tax rate is lower. In some cases, a competitive car loan may be the simpler and more cost-effective option.

Who Should Choose a Novated Lease?

A novated lease is typically the better option if you are a permanent or long-term contract employee with a stable employer, your employer offers salary sacrifice and novated leasing, you earn more than $70,000 per year (the tax benefit increases with income), you are purchasing a new or near-new vehicle, or you are purchasing an EV or plug-in hybrid (due to the FBT exemption).

Who Should Choose a Car Loan?

A car loan is typically the better option if you are self-employed, a casual worker, or a contractor without salary sacrifice access, you prefer simplicity and outright ownership, you change jobs frequently, you want to buy an older used vehicle, or you are a lower-income earner where the tax benefit of a novated lease is marginal.

Can You Use Both?

Some borrowers use a combination approach — a novated lease for their primary vehicle (to maximise tax benefits) and a car loan for a second vehicle or for a partner's car. This can be an effective strategy for dual-income households.

Getting Expert Advice

The choice between a novated lease and a car loan is not one-size-fits-all. Your income, employment status, vehicle choice, and personal preferences all factor into the decision. Our vehicle finance specialists can model both scenarios for your specific situation and recommend the option that delivers the lowest total cost of ownership.