A novated lease is a great financing option for aspiring car buyers. Our guide will discuss the key criteria for novated lease eligibility.
Can Anyone Get a Novated Lease: Novated Lease Eligibility Guide
A novated lease can be a great way of getting into the vehicle of your choice, while saving money by taking advantage of the many tax benefits that they provide.
Offered through your employer and a service provider, a novated lease bundles all of your car expenses together (repayments, registration, servicing etc) in the form of a monthly payment, which is taken from your before-tax income – in-turn reducing your taxable income.
While novated leases are a popular option for many employees, there are some key requirements you must first be able to meet. Check out Metro’s handy guide to applying for a novated lease here.
Before you apply for a novated lease, it’s also important to understand its eligibility criteria and how it’s assessed.
Who is Eligible for a Novated Lease?
Novated leases are in essence a financial agreement between you, your employer and a finance provider. The employee leases a vehicle, which their employer makes lease repayments for on the employee’s behalf. To better understand how eligibility is calculated for a novated lease, let’s take a look at what you need to qualify:
Your Financial Status
The first step towards having your novated lease approved is having your financial status assessed. This usually involves two key areas that lenders look at when assessing your suitability for a novated lease:
- your credit score, which is based on your borrowing and repayment history, and
- your debt-to-income ratio, which is the balance between your lease repayment amount and your monthly income
In assessing your financial status, it’s all about highs and lows. A high credit score, and a low debt-to-income ratio, are the preferred financial status indicators that lenders are looking for.
Your Employment Status
As a novated lease is offered via a lender through your employer, you must be employed in some shape or form in order to access one. There are several types or employment statuses that lenders will assess, including full-time and part-time, as well as in some instances, self-employed individuals.
Just as in the process in assessing your financial status, your employment status is used as an indicator of your future ability to meet loan repayments. Full-time employees, for example, are usually preferred by lenders as they typically earn more per month than part-time employees (remembering payments are made by your employer from your pre-tax income) and are considered to have greater job stability.
Self-employed individuals may also be eligible for a novated lease, however they must also meet the same eligibility requirements as full-time and part-time employees, which can be more difficult to assess long-term given the often variable nature of self-employment.
If you have any questions about accessing a novated lease from your employer, it’s best to check with them first. Remember, as an employee you must have first passed your probation period with your employer before accessing its novated lease program if it has one.
Your Chosen Vehicle’s Suitability
The third and final area of eligibility assessment when applying for a novated lease is the vehicle itself. While novated leases are designed to offer flexibility and a variety of vehicle options, the type of vehicle and its age are areas of assessment for lenders.
Both new and used vehicles may be approved for a novated lease, however new vehicles will always be given preference by lenders due to their clean service history and factory warranties.
The type of vehicle is also a consideration, as luxury and high-performance vehicles may have stricter lending requirements.
Frequently Asked Questions on Novated Lease Eligibility
As a leading non bank commercial lender in Australia, we support businesses via our trusted broker network with Commercial Finance, Finance Leases and Novated Leases.
Can I get a novated lease if I’m a probationary employee?
No. In order to access an employer’s novated lease program you typically have to have passed your probationary period, which is usually several months.
Are self-employed individuals eligible for a novated lease?
Yes, but they are assessed against the same requirements as full-time and part-time employees. Because self-employment can be less predictable in terms of financial stability, some lenders will not be able to offer self-employed individuals a novated lease. However, there are also alternative finance options and tax benefits that self-employed individuals may be able to access.
Is my employer’s approval necessary for a novated lease?
Yes. Because your employer makes lease repayments on your behalf if it is essential to have their approval.
How Much will it cost?
That depends on a number of factors, including the length of the lease, the type of vehicle and its running costs. To get a better idea of costs specific to you, it’s best to speak with a reputable leasing provider and ask for a quote.
What’s the financial benefit of a novated lease?
Novated leases offer flexibility of choice, with the predictability of regular lease repayments. Because these come out of your pre-tax income, it instantly reduces your tax liability, saving you money. As your employer is registered for GST, they can also claim this back and pass these savings on to you.
How does it work?
Once you’ve applied for and being granted a novated lease based on the steps above, your employer makes monthly payments on your behalf for the length of the lease, which includes the cost of the car and its running costs. At the end of the lease you can opt to either sell or return the car, start a new lease on another vehicle, or pay out the residual (which is also known as a balloon payment) thereby owning the vehicle.
Who owns the car?
For the term of the lease, the finance company owns the vehicle and you lease it from them.
Do I end up owning the car?
Not during the term of a novated lease. By opting to pay-off the residual amount at the end of the lease you can end up owning the vehicle, however in doing this you forgo any continued tax benefits.
What’s included in the repayments?
Basically everything but an air freshener! Finance, insurance, servicing, fuel, tyres, general maintenance, accident management, and any management fees from the lender.
What happens at the end of my lease?
Again, you have three options:
- Return the car, or alternatively sell the car to pay off the residual and then lease a new vehicle. If you sell the vehicle for more than the residual, any profits you make are yours!
- Extend your lease
- Pay off the residual (balloon payment) and keep the vehicle
Conclusion
By understanding the eligibility criteria for novated lease you’re one step closer to driving the car of your choice! Of course, before entering any financial agreement, its important to consult with your account, employer and financial provider to determine if a novated lease is right for you.
For more information on the types of financial products offered by Metro, including novated leases, talk to your Metro introducer.