Novated Lease vs Car Loan: Understanding the Difference for Personal Use

Choosing how to finance a car can feel overwhelming, especially when you’re weighing up a novated lease against a standard car loan. While both options can get you behind the wheel quickly, they work very differently and can impact your tax, take-home pay, flexibility and long-term costs.

Below is a straightforward look at how each option works, including tax benefits, fees and restrictions, eligibility considerations, and important notes for employees in public hospitals, charities and other FBT-exempt organisations.

What Is a Novated Lease?

A novated lease is a three-way agreement between:

1. You,

2. Your employer, and

3. A leasing company.

Your employer deducts the lease payments from your salary (usually partly pre-tax and partly post-tax) and sends them directly to the financier. The running costs—fuel, servicing, rego, tyres, insurance—can also be bundled into the lease as a single monthly deduction.

Key Benefits

• Potential tax savings:

  Because part of the cost is paid using pre-tax dollars, your taxable income may be reduced.

• Budget-friendly:

  Running costs are packaged into one predictable payment.

• Convenience:

  The lease company handles a lot of the admin.

• Can be used for new or used cars, depending on employer policy.

❗️Important Considerations

Employer involvement is required – if they don’t offer salary packaging, you can’t take out a novated lease.

You don’t own the car during the lease – you take ownership only after paying the residual (balloon) at the end.

Residual value is mandatory under ATO rules.

Fees may include establishment fees, monthly admin fees and payout costs.

Restrictions can include approved vehicle types, age of the car, running-cost management and kilometre estimates.

What Is a Car Loan?

A car loan is simpler: you borrow money from a bank or lender to purchase the vehicle outright. You own the car from day one and repay the loan over a fixed period with interest.

Key Benefits

• Full ownership from the start.

• No employer involvement.

• Flexible structure – choose terms, deposit, and whether to include a balloon payment.

• No restrictions on how you run or maintain the car.

❗️Important Considerations

• No tax benefits for personal use – repayments come from post-tax money.

• Running costs are separate and your responsibility.

• Fees and interest rates vary between lenders.

• Credit and income eligibility apply—approval depends strongly on your financial profile.

🪙 Fringe Benefit Tax (FBT) and why it matters for Novated Leases

FBT Exempt Employees are Employees of:

• Public hospitals,

• Charities,

• Not-for-profit organisations,

Certain health or community organisations, may be FBT-exempt or have access to special FBT concessions.

These employees can access significant tax advantages through novated leasing because the employer can package part of the vehicle cost without incurring Fringe Benefits Tax (or with reduced FBT). This can make a novated lease far more cost-effective compared with standard PAYG employees.

Employers that do pay Fringe Benefit Tax

For most private-sector employers, a novated lease attracts FBT, which is typically offset using the post-tax portion of the employee’s contribution.

This means:

The employee covers the FBT cost through post-tax deductions, and the employer doesn’t carry additional tax burden.

💲Fees and Running Costs

Novated Lease Fees

• Establishment fees

• Ongoing admin/salary packaging fees

• Lease management fees

• Potential early termination costs

• Mandatory residual value at the end

Car Loan Fees

• Application or establishment fee (if any)

• Interest over the loan term

• Early payout fee (varies by lender)

• Running costs (fuel, rego, insurance, tyres) are separate and not packaged into the loan.

Which Option Is Better?

There’s no one-size-fits-all answer. It depends on your employment situation, income and how much you value convenience versus flexibility.

A novated lease may suit if:

🫴 Your employer offers salary packaging,

💰 You want potential tax benefits,

🔮 You prefer predictable, bundled running costs,

🏨 You work for an FBT-exempt employer (e.g., public hospitals, charities).

A car loan may suit if:

💲You want full ownership,

💡You prefer to shop around for the car and lender independently,

⛔️ Your employer doesn’t offer salary packaging,

🛣 You want fewer restrictions and more flexibility.

Both novated leases and car loans can be effective ways to finance a vehicle for personal use. A novated lease can provide tax efficiency and simplicity—particularly for employees in FBT-exempt sectors—while a car loan gives you straightforward ownership and complete control. Understanding your employment conditions, tax position and preferences will help you decide which structure delivers the best value for your situation.

As with all financial decisions, remember to consult with your tax accountant and/or Financial adviser before making a decision. The information in this blog is of general nature and does not take into consideration your personal and financial circumstance.