Is it Cheaper to Buy a Car Outright or Novated Lease?
Buying a car outright or choosing a novated lease are two popular ways Australians finance vehicles, but which one actually costs less? The answer depends on your financial situation, tax bracket, and personal preferences.
Let’s explore the full financial picture of each option, including upfront costs, tax implications, running expenses, resale considerations, and who each option best suits.
Buying a Car Outright: Pros, Cons, and Costs
Buying a car outright means you own the vehicle from day one, but it comes with both advantages and drawbacks. Understanding these pros, cons, and associated costs will help you decide if this option fits your financial goals and lifestyle:
Advantages
Full Ownership from Day One: You have complete control over your car.
No Ongoing Lease Payments: No interest or lease fees to worry about.
Freedom to Modify or Sell: You can customise or sell whenever you want.
Costs and Considerations
Large Upfront Payment: Requires significant cash or loan commitment upfront, impacting liquidity.
Depreciation: The car’s value decreases rapidly, meaning resale value may be considerably lower over time.
Running Costs: Insurance, maintenance, registration, and fuel are paid separately and can fluctuate.
No Tax Benefits: Unlike novated leases, buying outright does not reduce your taxable income.
Novated Lease: Pros, Cons, and Costs
A novated lease offers a flexible and tax-effective way to drive a vehicle without the hefty upfront costs of buying, but it’s important to weigh the benefits alongside potential drawbacks and ongoing expenses.
Advantages
Tax Savings: Lease payments are made from pre-tax income, reducing taxable income and boosting take-home pay.
Bundled Costs: Insurance, maintenance, tyres, registration, and fuel/charging often included in one fixed weekly payment, helping budget control.
Lower Initial Cost: No big upfront payment, freeing up cash flow.
Flexibility: Option to upgrade or refinance at lease end.
Costs and Considerations
Residual Payment: To own the car, you must pay the balloon (residual) amount at lease end.
Ongoing Commitments: Lease payments continue during the term, even if you change jobs (unless your new employer supports novated leasing).
Depreciation Risk: You bear the depreciation risk if you buy the car after the lease.
Limited Modifications: Lease agreements usually restrict car modifications.
Cost Comparison Example: Tesla Model 3 Over 5 Years
| Cost Component | Buy Outright | Novated Lease |
|---|---|---|
| Purchase Price | $80,000 | $80,000 |
| Tax Savings | $0 | Approx. $10,000* |
| Insurance & Maintenance | Paid separately | Included in lease |
| Fuel / Charging | Paid separately | Included in lease |
| Residual / Balloon Payment | N/A | $30,000 (payable to own) |
| Total Estimated Cost | $80,000 + running costs | $76,504 (including tax savings) |
*Estimates vary depending on income and lease structure.
Decision Matrix: Which Option Suits You?
| User Profile | Best Option | Reason |
|---|---|---|
| Have large cash reserves | Buy outright | Full ownership, no ongoing payments |
| Want predictable budgeting | Novated lease | Fixed payments, bundled running costs |
| High-income earners | Novated lease | Maximise tax savings |
| Plan to keep car long-term | Buy outright | Avoid lease residual payments |
| Prefer flexibility to upgrade | Novated lease | Option to upgrade at lease end |
| Self-employed / no employer | Buy outright | Novated leases require employer involvement |
| Need low upfront cost | Novated lease | No big deposit or cash outlay |
Final Thoughts
Is a novated lease cheaper than buying outright? For many, especially higher earners, novated leasing offers considerable tax savings and predictable costs, making it more cost-effective in the short to medium term. However, buying outright might be a better fit if you want full ownership immediately and don’t benefit from salary packaging.
Understanding all costs and your personal financial situation is key. To make the best decision, use a novated lease calculator, consult a financial advisor, or speak with a novated leasing specialist.
Ready to explore your options? Contact us today for a personalised cost comparison and expert guidance.
FAQs
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It depends on your income, tax bracket, and financial goals. Novated leases often save money for higher-income earners due to tax benefits and bundled costs.
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No. Ownership requires paying the residual balloon amount at lease end or refinancing it.
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Yes. Many novated leases bundle insurance, maintenance, tyres, registration, and fuel or charging.
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Yes. You bear depreciation risk and ongoing lease payments, even if you change jobs.
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Often yes, as novated leases rely on employer salary packaging, which self-employed individuals typically cannot access.