How Do Novated Leasing Companies Make Money?

11 Oct

Novated leasing companies earn their revenue through several different streams, allowing them to provide leasing solutions while staying profitable. Here’s a breakdown of how they do it:

1. Establishment Fees

When you set up a novated lease, there is often a small establishment fee. This fee helps cover the costs of setting up the lease agreement and handling any administrative processes involved.

2. Residual Value Profits

One of the main ways leasing companies make money is by selling the leased vehicle at the end of the lease term. During the lease, you make payments based on the projected residual value of the car—the amount it's expected to be worth when the lease ends. If the company sells the vehicle for more than its residual value, they keep the difference as profit.

3. Extended Lease Payments

At the end of the initial lease term, you may have the option to extend your lease. If you choose this, the leasing company can renegotiate the payments based on the vehicle's current, reduced value. These extended payments generate additional income for the leasing company.

4. Fringe Benefits Tax (FBT) Savings

Novated leasing offers tax benefits to both employees and employers. By using methods like the Employee Contribution Method (ECM), leasing companies can minimise or eliminate FBT. This allows them to offer attractive packages that increase disposable income for employees while still keeping the leasing company profitable.

5. Discounts from Bulk Purchasing Power

Leasing companies usually buy cars in bulk, which allows them to negotiate significant discounts on both vehicle prices and running costs like maintenance and insurance. The savings are passed on to the customer in the form of lower lease payments, but the leasing company benefits by being able to manage the overall lease package effectively.

In conclusion, novated leasing companies have several ways to generate income, from establishment fees and residual value profits to extended lease payments, FBT savings, and bulk purchasing discounts. These factors combine to make novated leasing a viable business while offering customers attractive leasing options.

Thinking about novated leasing?

Mathew Lloyd