Explore the differences between the two options to finance your car.
Looking to get behind the wheel of a new car? The good news is there are lots of different ways to make this happen, but how you go about things will depend on your personal preferences and financial situation.
In this blog we’ll take a look at two of the most commonly-used financial solutions to access a new car:
A car loan, which usually involves borrowing money from a lender in order to purchase a vehicle and pay it off over time.
A novated lease, which is a three-way arrangement between an employee, their employer and a financier, whereby the employer makes lease payments to the financier on their employee’s behalf with money deducted from the employee’s pre-tax salary – also referred to as salary sacrifice.
Both have their benefits but finding the right fit will depend on an individual’s personal situation like their employment, as well as what they intend to do with their vehicle long-term.
What is a novated lease?
As we’ve covered, a novated lease is a type of financial product that is often used by employers as a benefit for their employees. Employees get to lease a vehicle for themselves (and sometimes their immediate family members as well) and have lease payments deducted from their salary before it is taxed, which results in additional savings over a traditional car loan.
What also differentiates a lease from a loan is how novated lease payments also bundle the vehicle’s running costs including insurance, registration, fuel servicing and maintenance into the agreed monthly amount paid, whereas with a typical car loan the owner covers these costs themselves outside of any loan repayments.
Ultimately, a car loan is for you if you are looking at purchasing a vehicle and owning it outright, and a novated lease is perhaps a better fit if you are looking to use a vehicle regularly while not necessarily owning it in the long run.
What is a car loan?
As we’ve explored, a car loan is your most direct path to car ownership and can be tailored to suit your specific needs and desired outcomes. Usually a car loan involves borrowing money from a lender like Metro in order to purchase a vehicle of your choice and then paying it off over time via monthly instalments, which includes interest.
With a car loan, there are also ways to reduce your monthly payments up-front, either by using some of your own money for part of the vehicle purchase, or electing to have a pre-determined balloon payment at the end of the loan term.
Novated lease vs car loan: Key differences
| Novated lease | Car loan | |
|---|---|---|
| People involved | You, your employer and a novated lease provider | You and a lender |
| Ownership during term | Not owned during the lease term, with the option to own it at the end of term | Owned from the start |
| What repayments include | Car, maintenance, and running costs bundled | Car only |
| GST discount | Financed amount doesn't include GST | Financed amount includes GST |
| Tax treatment | Salary packaging | None unless for business use Click here to learn about commercial car loans |
| Repayment method | Payment deducted from a combination of pre- and post-tax salary | Pay yourself according to the loan payment schedule (weekly, fortnightly, monthly) |
| Vehicle age accepted | Up to 12 years at end of term | Up to 15 years at end of term |
| Fees with Metro Finance | Establishment fee Origination fee |
Establishment fee Origination fee Account keeping Early repayment (if applicable) |
| End-of-term payment | Residual payment: one-off payment of the remaining amount for the car for you to own the car or choose to refinance for the remaining cost | Balloon options available Click here to learn more about balloon payments |
| Risks | When changing jobs, need to ensure your future employer accepts the novated lease | Responsibility to repay the loans on time Will have to cover any unexpected issues yourself (e.g. a blown tire) |
Get started with financing your car today
At Metro, we pride ourselves on offering tailored financial solutions for Aussies of all walks of life. Backed by our friendly team of real humans based in Australia and an extended national network of trusted, accredited brokers, we are multi-award winners for our customer service – just ask one of our thousands of happy customers why they love financing with Metro.
Got a specific vehicle in mind or want to crunch the numbers on what might be the best financial solution for your needs? Get in touch with a member of our team or a broker now to start a conversation.