Novated lease Vs buying outright: Which will cost more?
Being able to buy a car outright with cash is a great position to be in. And not being able to decide whether buying with cash is better than the tax advantages of a novated lease is what I’d call a ‘nice problem to have.’
The very fact that a novated lease is at all comparable with paying for a car with cash is a sign that the advantages are pretty good. But whether it’s actually better than buying with cash will come down to the specifics of the situation.
If you want a refresher on novated leasing, we’ve covered that in our guide to how a novated lease works.
Here we’ll focus on the specific considerations for whether a novated lease is better than buying a car outright with cash.
Novated lease vs buying with cash compared
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Novated lease vs buying outright: Which will cost you more?
Obviously this will depend on your situation so there’s no one answer – except to say if you’re buying an EV, it will work out cheaper to get the car through an EV novated lease in a lot of cases.
This is because these EVs and PHEVs are exempt from fringe benefits tax through a novated lease. It means you can cover all of your car payments and car running costs with pre-tax salary through the lease.
Essentially every dollar you spend on the car with a novated is one less dollar you pay income tax on. Depending on your income, that’s a discount of between 19% and 45%.
Here’s an example breakdown of costs…
Novated lease vs cash: Tesla Model 3 (Long Range)
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* Calculation assumes a driver in NSW with annual gross salary of $120,000 driving 15,000km per year. Running costs include electricity, comprehensive car insurance, registration and CTP, servicing and tyres.
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Novated lease vs cash: Toyota Corolla (SR Hatch)
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This example is based on a car that’s not eligible for the FBT exemption.
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* Calculation assumes a driver in NSW with annual gross salary of $120,000 driving 15,000km per year. Running costs include fuel, comprehensive car insurance, registration and CTP, servicing and tyres. Car finance rate assumed to be 7.50% p.a.
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So, in this situation the novated lease works out about $43 more expensive per month over five years. But you don’t need to be Warren Buffet to know that had you held onto your $36k in cash and did something else with it for those five years, the outcome could be quite different.
That’s up for you to decide (with your financial advisor) but the point is, there’s an opportunity cost to tying up a significant portion of cash in a depreciating asset like a car. A novated lease has its pros and cons, but it means you’re not making a significant up-front outlay and gives you the opportunity to put your savings to a more productive use.
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