Up until recently, I’ve always bought my cars with cash. I was taught from a young age that buying a depreciating item with money you don’t have is a bad financial move. Maybe you’ve done it, and guarantee you’d know someone who has. If you aren’t aware of the massive cost of buying a car on credit, I’d suggest you look into it a bit. It can have some nasty, long lasting consequences.
However, our replacement 4WD is on a novated lease, which in essence, is a packaged loan. I spent many, many hours looking into this, and eventually decided it was the best pathway for us, in our current stage of life.
I wanted to purchase a replacement vehicle for our 80 Series Land Cruiser, and I did the sums. We had a Toyota Yaris as the family vehicle, and the 80 Series Land Cruiser for trips away. After making multiple spreadsheets, it was pretty clear that if we sold the Yaris, and put the money saved towards paying for a new vehicle on a low interest rate we’d still be well in front. Of course, this ignores depreciation, which I’ll touch on later.
I’d made the decision that I was going to sell the 80 regardless, and the only way was to move to something else. If you want to know why, check this out – swapping from an 80 series Land Cruiser to an Isuzu Dmax.
For the purpose of this article, know that we were comparing the novated lease against using money from our house (offset), or getting a personal/car loan.
What is a Novated Lease?
I’m surprised some clever marketer hasn’t come up with an easy way to explain what a novated lease is, because I’ve yet to find a super clear and concise explanation. The term is completely confusing, and even when you’ve spent hours trying to understand it, many still don’t.
I’ll make it as simple as I can. A novated lease is a three way agreement between yourself, your employer (where you work) and a lease company. It incorporates a vehicle loan and all of the vehicles expenses into a fortnightly payment. There are some tax benefits for doing this, and it is made simple in the fact that you don’t have to budget for random bills coming in, regarding the vehicle. Every fortnight (or what ever your pay cycle is, you have a portion of your income directed to pay for the lease, for the entire duration of the lease).
For example, you might pay $500 a fortnight for 5 years to buy a 4WD on a Novated lease. The amount you pay depends on a heap of factors that we will go into below.
What is included in a Novated Lease?
Your Novated lease covers every expense involved with the vehicle, for the term of the lease. This includes
- Interest repayments
- Registration costs
- Insurance costs
- Servicing costs
- Fuel costs
- Tyre costs
- Roadside assistance costs
- Management fees
Essentially, everything you’d spend money on for a vehicle is rolled into one, and you pay a fee every week, fortnight or month (depending on how its set up) to cover this. There is a balloon repayment at the end too, if you want to keep the vehicle. You can nominate to remove some of these things off your lease (as in arrange and pay for the servicing yourself, outside of the lease), so there is some flexibility.
Things to be aware of
Don’t sign up to a novated lease without some serious consideration. Talk to those who have them, talk to a financial advisor, talk to your partner and really think about what you are doing. It’s a pretty substantial commitment, and if you don’t fully understand it you could be in a world of pain later on.
I have read of people signing up without realising there is a balloon repayment at the end. You will have to pay a chunk of money at the end of the lease. The longer the lease, the less it is, but it can still be a big chunk of money. After 5 years on our Dmax, its about $11,000. You need to be prepared and have this money available! Once you’ve paid the Balloon, you own the vehicle. Alternatively, you can give the vehicle back, and take out a new lease.
Understand what you are getting into
I mentioned above that you need to know what you are getting into. The Novated Lease companies do a great job of telling you of all the perks, and what you’ll save, but they are happy to hide the fee’s that you are paying, the interest rate they’ve signed you up on and the balloon payment you have to pay at the end of the lease. Look at it short term, long term and how its going to affect your use of the vehicle.
What are the downsides
There’s no free lunch when it comes to Novated Leases, and whilst they can save you a fair bit of cash, and make life easy, they aren’t perfect by a long shot.
It locks you in
This is a formal agreement, for however long you take it out. You have the option of paying it out early (it will still cost the same as not doing this), or shortening the lease, or making it longer, but you are still locked in one way or another.
You can’t just throw the car on Gumtree and sell it that afternoon if you get tired of it; there is a process that has to be followed. It’s not impossible to do, but its certainly much harder than if you owned the vehicle outright.
Beyond this, if you decide to resign, or get sacked, or made redundant, the lease is still in place, and you are still expected to pay for it. Often this can be rolled onto a new employer, but if for some reason they aren’t keen to take it on, you can be in a bit of a pickle. Paying it out will always be more than the value of the vehicle, and you won’t make any savings by paying it off earlier, as its a fixed contract.
Dealing with a third party can be a pain in the backside
The most frustrating thing for me is dealing with another party. When you own a car, if you want to change insurance you just ring around and do it. If you want to get a transmission cooler installed for towing, you just pay for it and get it done.
When you have a Novated Lease, it all goes through the leasing company. They will generally go along with what you want to do, but you still have to get them to sign it off, and pay for it, and its another set of hands that get involved in the process.
I had a few experiences with our novated lease company where they’ve been slow to react, or not done their part and I’ve had to follow up a number of times to keep the process rolling. It might seem minor, but the idea of not having 100% control over the vehicle is a bit annoying.
It hurts your borrowing capacity badly
One of the things I never really thought about much was borrowing capacity. Obviously, a novated lease is treated like a loan, so when it comes to taking out a mortgage, you will be badly hurt by having a novated lease (the same as if you had a personal loan, or a car loan).
We had intended on staying in our house for a number of years, but we’ve now outgrown it, and struggle to upsize as the banks factor our lease in and reduce our borrowing capacity too much. Hindsight is a wonderful thing!
Modifications and 4WDing are not its forte
Novated leases are set up for normal vehicles, used under normal conditions, by normal people. That’s not to say you can’t use them if you own a 4WD and want to modify and use it off road, but it requires a bit more attention. I went ahead with the lease, with permission from Toyota Fleet Management to modify it how I pleased (providing it was legal), and I paid for all of the accessories separate to the lease.
This meant that I had to get the value it was insured increased, which couldn’t be done, as TFM only do market value. Not great when you have a vehicle with 20k of accessories on it. I also had to ask questions about what I could use it for – off road driving, beach driving, and towing, and it was pretty hard to get information out of them.
You can over spend
Ever wondered why so many companies don’t advertise the price of anything anymore? They just say $200 per week, or what ever the repayments are. It’s a way to suck you in, thinking ‘that’s not too much money; I can afford that’.
A novated lease can do exactly the same thing. You can end up buying a vehicle that is more expensive than what you probably should get, but because it seems cheaper you make the leap. If you are going to get a new vehicle regardless, then just compare getting a lease versus not getting one, and using a car loan, equity in your house, or cash if available.
What are the benefits of a Novated Lease
I mentioned above that there are some tax benefits involved in a novated lease, which is where you can make a significant saving. Essentially, a portion of the costs of owning the vehicle come out of your pre-tax income, with the remaining coming out of your post tax income.
To make it simpler, I’ll give you an example. If you earn $100,000 per annum, you would pay $23,000 in tax, meaning you walk away with 77k in hand. If you took out a Novated Lease though, your taxable income might drop to 92k, and therefore your tax reduces to $20350. This is effectively saving you $2650 in tax, which has gone towards funding your vehicle of choice.
The tax savings are probably the primary reason that makes Novate leases attractive. If you took them away, it wouldn’t be worth doing. This is of course, dependent on how much money you make, and what tax bracket you fit into. The less you earn, the less savings are possible.
You get a new (or near new) vehicle
Most Novated Leases are done on brand new, or demo vehicles. Each Novated Leasing company is different though, and some will allow you to buy a vehicle up to 7 years old and still have it on a lease. In this way, you get the benefits of a lease, on a much cheaper vehicle.
Either way, if you are upgrading from an older 4WD this can be a pretty significant attraction. You get improved comfort, technology, reliability and a hugely important one – safety. I feel so much better driving my little family around in a modern 4WD with full air bags and crumple zones than I did in our 80 Series, which was basically a heavy lump of steel on wheels!
It’s one simple payment
If you don’t like dealing with multiple bills, and paperwork, a Novated Lease makes life pretty simple. On your pay slip, you just see a portion of money taken out to pay for the car, and that’s it. You don’t have to pay anyone else for the life of the lease. When you need tyres, or a service, or insurance it is all paid for by the leasing company, and they should deal with it all too.
GST and Fleet savings
One of the other ways you can save money with a lease is that you don’t pay GST on the purchase price of the vehicle, and the running costs. That means your fuel, servicing and everything else comes with a 10% saving, as you don’t pay the GST. On top of this, your fleet company should have negotiated cheaper servicing rates, tyres and so forth due to the larger volume of vehicles that are under their care.
You can get a great price
Novated leases are extremely common, and done by large companies that negotiate great rates. That’s not to say you won’t get a similar rate if you haggle, but a good Novated Lease Company should be able to get you a significant discount off a new vehicle, without you doing a thing.
What are your personal circumstances?
Ultimately, a novated lease can be a great decision, providing you know what you are getting into, and your personal circumstances suit the lease. You need to think about your personal circumstances; what you earn, how much tax you pay, what tax deductions you already have, whether you are planning to get any other loans in the next 5 years, what your financial goals are and so on and so forth.
I won’t provide advice because of this, but just wanted a simple post for people to understand more about taking out a novated lease. Please spend a lot of time thinking about whether this suits your personal circumstances.
How do you set it up?
Most larger businesses that you work for have existing contacts with a Novated Lease Company. If this is the case, you just need to get in contact with them, and they can find you a car, or you can find one, and it gets rolling that way. If your business has no contact, you can speak to any Novated Lease company, and providing your employer is happy to take it on, you can put it through this way.
Overall; is it worth it?
There are lots of things that I like about the Novated lease arrangement. It saves us a fair chunk of money, its been reasonably convenient and has worked OK for us. However, there have been times where I’d have rather been in full control. In another year and a half our lease will end (unless I extend it, which is looking possible for further savings), and I’ll review again. At the moment, I’m still in the ‘It was worth it’ category, but not by a landslide amount.
My circumstances are going to be different to you, and that is exactly why you need to think about whether it suits you, or not.
For us, it worked out to be about 15k saved over 5 years, as a pose to buying the vehicle outright with money in an offset account (effectively paying your mortgage interest rate for the vehicle). Going down the path of a personal loan or car finance wasn’t even close to being worth it, as they couldn’t get anywhere near good enough interest rates to be competitive.
I was comfortable taking the lease out knowing that if I did lose my job, or it all went pear shaped I could afford to pay it all out, and we could move on. Thankfully, that hasn’t happened yet!
What questions do you have about Novated Leases? Have you used one? Would you do it again?