What Is The Disadvantage Of A Novated Lease?

Novated leasing is a popular way for Australian employees to drive their dream car with tax benefits and convenient salary packaging. However, like any financial arrangement, novated leases come with some drawbacks you should be aware of before signing on the dotted line.

In this blog, we’ll explore the key disadvantages of a novated lease, helping you weigh the pros and cons so you can make an informed decision.

1. You’re Committed to Lease Payments Regardless of Employment Changes

A novated lease ties you, your employer, and the leasing company together in an agreement. If you change jobs, your new employer must be willing to take over the lease for the arrangement to continue seamlessly. If not, you’re responsible for continuing lease payments personally. This can complicate job transitions and financial planning.

2. Balloon Payment at Lease End

At the end of your lease term, a lump sum residual or balloon payment is due if you want to own the vehicle outright. This amount can be significant and requires careful financial preparation. Failing to pay this residual could lead to financial stress or the need to refinance, which adds complexity.

3. Ownership and Depreciation Risk Lies with You

Even though you lease the car, the residual value risk falls on you. If the car depreciates more than expected, you’ll still need to pay the predetermined balloon payment. Unlike buying outright, where you control selling timing and price, novated leasing locks you into this depreciation risk.

4. Potential Impact on Borrowing Capacity

Because novated leases reduce your reported gross income, lenders might consider your salary packaging commitments when assessing loan applications. This can reduce your borrowing capacity, affecting mortgages or personal loans.

5. Limited Flexibility to Modify or Sell the Vehicle

You do not own the vehicle during the lease term, which means you cannot modify it or sell it without going through the leasing company. This can be restrictive if you want to customise your car or end the lease early.

6. Complexity of Administration

While novated leases offer convenience, they do require setup with your employer and the leasing company. There can be administrative delays or complications, particularly if your employer is unfamiliar with salary packaging arrangements.

7. Not Suitable for All Employment Types

Novated leasing generally requires stable employment with an employer who supports salary packaging. If you’re self-employed, contract-based, or work for an organisation that doesn’t allow novated leases, this option won’t be available.

Is a Novated Lease Right for You?

Despite these disadvantages, novated leasing remains an attractive option for many employees, especially those seeking tax benefits and budget certainty. However, understanding the potential downsides ensures you avoid surprises.

Before committing, consider your employment stability, financial readiness for balloon payments, and your plans for vehicle ownership. Discussing your situation with a novated leasing specialist or financial adviser can help clarify if it’s the best choice.

Conclusion

A novated lease offers many benefits but isn’t without its challenges. Understanding the disadvantages, from job change complexities to financial commitments and ownership restrictions, helps you make a smart, informed choice.

If you want expert advice or to explore novated lease options tailored to your needs, contact Novated Finance Australia today. We’re here to help you navigate every step confidently.

FAQs

• Can I end a novated lease early?

  Early termination is usually possible but may involve fees or penalties. Check your lease agreement for specific terms.

• What happens if I change jobs during a novated lease?

  If your new employer supports novated leases, you can transfer the arrangement. Otherwise, you must continue payments yourself.

• Am I responsible for all running costs?

  Most novated leases bundle running costs like maintenance and insurance, but check your lease details to confirm inclusions.

• Does a novated lease affect my ability to get a mortgage?

  It can reduce your borrowing capacity because lease payments reduce your gross income used in loan assessments.

• What happens if the vehicle depreciates more than expected?

  You still owe the agreed balloon payment at lease end regardless of depreciation, so you bear that risk.