Novated leases can be a great way to save yourself the upfront costs of purchasing a new car, while potentially saving you money on running costs over the length of the leasing term. As always, when financing something as large as a car, it is important for you to do your research and make sure this is something you can actually afford.
At Car Search Brokers, we are in the business of finding you a car that matches a finance solution and suits your individual needs. To help you understand novated leases more, here are the 5 things you need to keep in mind:
1. Tax deduction / Salary Sacrifice
What makes a novated leases so appealing is that they can reduce your taxable income. A novated lease is a three-way arrangement with yourself, your employer and a financier. When you go into the agreement, your employer commits to making your lease payments on your behalf out of your pre-tax earnings. This means your taxable income is reduced and you are taxed less. In some cases, novated leasing can leave you with more disposable income.
The money you can save from a novated lease depends on a range of variables including your choice of car, income and length of the lease. You must do the math and ensure that you can afford these repayments in the long term. Although your employer is making these payments on your behalf, it is your responsibility to make sure they can be paid.
2. Inclusive of vehicle running costs
Unlike other car finance agreements, your novated lease payments include running costs such as:
- Vehicle registration,
- Mechanical expenses,
- Fuel, and more.
The convenience of using your pre-tax dollars means you may be able to save money on the additional costs of owning a car. On top of this, you are able to bundle your vehicle’s expenses into simple payments, avoiding the large once a year payments.
3. End of Lease “Balloon Payment”
At the end of your novated lease term, you will be faced with a decision:
Do you keep the car, or sign-up for a new lease and receive a brand new car?
If you choose the path of ownership, you will need to pay what’s known as a “balloon payment”. The balloon payment is an amount that is agreed to at the beginning of your novated lease (this amount is usually a percentage of the original purchase price and differs depending on your lease term), meaning there is no budging on the figure if you want to own the car at the end. The name stems from the payment being quite large, and one that you need to pay outright.
If you break your lease, you may still owe a significant proportion of money on the car. This means you may have to pay more than what you could potentially sell the vehicle for (this term is typically known as “Negative Equity”).
4. You are responsible for repayments, not your employer
As mentioned previously, you need to remember that although your employer is making the payments, you are responsible for the lease. If you move on or lose your job from the employer that you made the original novated lease agreement with, you need to ensure that your new employer takes over the lease. If they are unwilling, you may have to terminate the lease, possibly resulting in a hefty payout of what is owing, including possible additional charges.
5. Possible unknown fees
Like many finance agreements, there are additional charges involved, such as administration fees. However, there are some fees you can avoid. Firstly, ask questions about the fees involved and what you should expect. Be aware of what you are paying for exactly, for instance, you may be paying unnecessary insurance fees for policies you may not require. You should also take note of the interest rate you are being charged. Your financier should disclose all of this information to you upfront or at the very least be able to immediately answer any questions you may have. If you feel that your financier isn’t being forthcoming you should definitely seek independent financial advice.
If you would like more information about novated leases or how one could work for you, talk to Car Search Brokers today.