Quick answer: A novated lease is usually cheaper for a PAYG employee whose employer offers salary packaging — the tax savings can be worth thousands a year, especially on an eligible electric car. A car loan wins on simplicity and ownership: the car is yours from day one, nobody’s permission is needed, and changing jobs changes nothing. If you’re self-employed or your employer doesn’t offer salary packaging, a car loan is your only option of the two. (ATO has the official rules on how salary-packaged cars are taxed.)
How a Novated Lease Works
A novated lease is a three-way agreement between you, your employer and a finance company. Your employer pays the lease (and optionally your running costs — fuel or charging, servicing, tyres, registration and insurance) out of your salary, largely from pre-tax dollars. That lowers your taxable income and cuts your income tax. You also save GST on the car’s purchase price and on the running costs bundled into the package.
The car isn’t yours during the lease. At the end of the term (usually one to five years), a residual value — sometimes called a balloon payment — falls due. The ATO sets minimum residual percentages: 65.63% for a one-year lease, 56.25% for two years, 46.88% for three years, 37.50% for four years, and 28.13% for a five-year lease. You then pay the residual to keep the car, refinance it, or trade the car in. The residual has to be paid with after-tax money — it can’t be salary sacrificed.
One more thing that makes leases very attractive right now: eligible electric cars can be exempt from fringe benefits tax entirely, which means the whole package — lease, charging, rego, insurance, servicing — can come from pre-tax salary. The price threshold for that exemption is indexed by the ATO every 1 July, so check the current figure before you sign. If you’d like the full background, read our guide: What Is a Novated Lease? A Simple Guide.
How a Car Loan Works
A car loan is simpler. You borrow money from a lender, buy the car, and the car is yours from day one. You repay the loan in regular instalments over one to seven years. If it’s a secured loan — which most car loans are — the lender holds security over the car and can repossess it if you default, but that doesn’t affect your day-to-day ownership: you can drive it, modify it and sell it when you like (the loan is paid out from the sale).
Repayments come from your after-tax income. There is no tax saving on a car you use privately — a loan only gets tax benefits when the car is genuinely used for business. You manage all running costs yourself: insurance, rego, servicing and fuel. You can buy new, used or through a private sale, and some lenders add an optional balloon payment at the end.
Novated Lease vs Car Loan: Side-by-Side Comparison
| What matters | Novated lease | Car loan |
|---|---|---|
| Who owns the car | The financier, until you pay the residual | You, from day one |
| Who can get one | Salaried employees whose employer offers salary packaging | Almost anyone who meets lending criteria, including the self-employed |
| Tax treatment | Paid partly from pre-tax salary; GST savings on car and running costs; FBT exemption for eligible EVs | Repaid from after-tax income; no personal tax benefit unless used for business |
| Typical terms | 1–5 years | 1–7 years |
| Indicative rates | Typically from about 7.00% p.a., depending on your situation | Roughly 5.50% to 20% p.a., depending on borrower profile (figures: Oct 2026) |
| Running costs | Can be bundled into one salary-packaged payment, paid with pre-tax dollars | You pay them separately from take-home pay |
| End of term | Residual (balloon) payment due — e.g. 28.13% of the car’s cost after 5 years | Loan ends; the car is yours with nothing further to pay |
| If you change jobs | The arrangement has to be restructured, paid out or transferred — it can get messy | Nothing changes; the loan is yours regardless of where you work |
Rates above are indicative only and change often — always compare the comparison rate, not just the advertised rate, before you commit.
Which Is Cheaper?
Honest answer: it depends almost entirely on your income and whether the tax savings apply to you.
For a PAYG employee on a decent income, the novated lease usually wins on total cost. The saving comes from two places: the income tax you don’t pay on the portion of your salary that goes to the lease, and the GST you save on the car and running costs. On a $50,000 car over three years, the tax saving alone can run into thousands — and on an eligible electric car under the FBT exemption, the gap is wider still. That’s the whole point of salary packaging; without the tax angle, a lease is just an expensive way to borrow.
For a low-income earner, the maths can flip. If you pay little income tax, there’s little tax to save, and the lease’s admin fees plus the mandatory residual can leave you worse off than a simple car loan. If you’re self-employed, there’s no comparison to make: you can’t get a novated lease at all, so the car loan wins by default.
Either way, run the numbers on your own salary and your own quotes before deciding — providers differ, and so do interest rates. Our take on when the numbers stack up is here: Is a Novated Lease Worth It? The Honest Answer.
Who Each Option Suits Best
A novated lease suits you if: you’re a PAYG employee, your employer offers salary packaging, you plan to stay in the job for the lease term, you’re buying an eligible electric car, or you like the idea of one bundled payment covering the car and all its running costs.
A car loan suits you if: you’re self-employed or your employer doesn’t offer packaging, you change jobs often, you want the car in your name from day one, you’re buying a used car or through a private sale, or you simply want the simplest arrangement with no residual to manage at the end.
The Catch Most People Miss
Two things trip people up with novated leases. First, the lease is tied to your employment. If you resign, get made redundant or go contracting, the arrangement unravels: you may have to pay it out, pay the residual early, or transfer it to your new employer — and that rarely works smoothly. A car loan doesn’t care where you work.
Second, the residual is real money. People budget for the fortnightly deduction and forget that at the end of a five-year lease on a $50,000 car, around $14,000 (the 28.13% ATO minimum) falls due in one hit. It’s not optional, and it comes from after-tax savings. Go in with a plan for it.
So, Novated Lease or Car Loan?
Choose the novated lease if you’re a salaried employee with packaging on offer, you earn enough to make the tax saving meaningful, and you’re comfortable with the residual at the end. The savings are genuine, and for eligible EVs they’re hard to beat.
Choose the car loan if you value ownership, simplicity and freedom to change jobs — or if salary packaging simply isn’t available to you. A loan is also the more sensible pick for lower incomes, where the tax benefit is too small to outweigh the fees and the residual.
Neither is a trap and neither is free money. They’re just two different ways to pay for a car, and the better one is the one that fits your employment, your income and your plans.
Frequently Asked Questions
Can I get a novated lease if I’m self-employed?
No. Novated leases need an employer to make the payments through salary packaging. If you’re self-employed, a car loan or a chattel mortgage are the usual options.
Is a novated lease always cheaper than a car loan?
Not always. It tends to be cheaper for middle-to-higher income employees because of the tax savings, and much cheaper for eligible electric cars. For low-income earners the saving can be too small to beat a cheap car loan.
What happens to my novated lease if I change jobs?
You have to deal with it: pay it out, keep paying it directly, or transfer it to your new employer if they offer salary packaging. None of these are automatic, so ask your provider about the exit terms before you sign.
Do I own the car with a novated lease?
Not during the lease — the financier owns it. You only take ownership if you pay the residual at the end.
General information only: this article is not personal financial advice. Car finance involves real commitments and tax implications that depend on your circumstances — consider getting independent financial advice before you sign anything.
