Tell me, you haven’t imagined getting inside your dream car and driving off into the sunset? We all have.
And when you get your first paycheck, the impetus to buy a car becomes stronger. Of course it’s a different matter that you may have to forget your dreams and choose the one that matches the digits in your salary!
So, is buying with cash a good option or a novated lease?
When I first thought of buying a car, I was in the same dilemma. But I soon figured it out. How?
Weigh up both sides of the argument - novated lease vs cash. Analyse what each one offers. Simple, isn’t it?
For those who don’t have much idea about novated lease, let me give you a quick run-through.
What Does Novated Car Leasing Mean?
There are 2 types of Novated leasing. Novated leasing for the finance payments only and where you pay for the running costs yourself with your after tax earnings. And the other is a fully maintained novated lease. With this product all the associated running costs of a vehicle such as petrol and services are also covered and the payment is made with your pre-tax earnings by your employer.
A novated lease is a three-way agreement involving an employer, employee, and a financier — your employer makes the lease payments on your behalf and you own the vehicle under a contract.
At the end of your lease term, you can own the car by paying the residual value to the lessor.
It’s a salary packaging arrangement whereby your employer agrees to take on the obligations of making the lease payments for you. They make the deduction out of your pay and send it to your leasing company to manage the expenses on your behalf.
All the associated running costs of a vehicle such as petrol and services are also covered and the payment is made keeping your pre-tax and post-tax salary in mind.
I know this may sound like a complex concept involving tax breaks and residual amount calculations. When I’d first heard about novated leasing, I was skeptical — assuming it’s for big earners looking to dodge tax.
I was wrong!
Once you understand how it works, you can save some serious money due to tax savings.
You can calculate the amount you would be saving by using a novated leasing calculator which most leasing companies offer on their websites. After you enter all the required information – vehicle name, salary amount, and so on, you get an indicative quote based on the same.
Why a novated lease is worth considering
1. Less Tax
Aren’t we always on the lookout for ways to reduce the taxes we pay?
Well, here you get to own a car and at the same time pay less tax. ( this depends on certain factors, so always best to check with your accountant or seek professional advice) Let me tell you how.
The payments are made by your employer from your pre-tax salary before it hits your account. Your car is also covered by warranty and you get repair cost and other upfront expenses covered.
Purchasing your car through a novated lease is both cost-and-tax-effective, which means more cash in hand.
2. No Minimum Kilometers Required
Before 2011, you had to drive a minimum number of Kilometers every year to get the advantages of reduced Fringe Benefits Tax (FBT). It’s not the case anymore.
Today, the rate of FBT liability remains the same at 20%. Isn’t that something to rejoice about?
For those who are unaware of fringe benefits, let me enlighten you. These are non-cash advantages provided to employees and they must pay tax on the value of these benefits at their marginal income tax rate.
Reduced Kilometers no longer means high FBT rate, instead it results in improved vehicle resale value for you and more savings on both maintenance and fuel consumption.
3. Low-Wage Earner Can Easily Own A Car
Don’t we Australians love buying cars? The Australian Bureau of Statistics reveals a good number of new cars being sold despite record-low wages growth.
The last growth was seen in late 2015, when wages rose just half a percentage point in the final three months of the year. There hasn't been any lift-off in wage growth since then.
One of the factors that has kept the trend of car-buying going is that prices have barely risen in Australia. And one best way to get the car you desire is by taking a Novated lease – no deposits required and you can also get a substantial discount on your purchase.
Isn’t that good news?
4. Pay The Residual Amount And Own It Outright
One of the greatest advantages of novation is that you get to select from flexible lease terms ranging between 12 and 60 months.
For my car, I got a lease period of five years. After spending 5 years driving it, I fell in love with it and wasn’t going to give it up at the end of the lease term. I was happy to buy it off the financier by paying the residual amount.
5. A Novated Lease Can Be transferred to a New Employer
If you plan to move to a new job and think your novated lease will discontinue, you are wrong. Novated lease is an obligation taken on by your employer for you and the lease can be transferred to your new employer as long as they offer salary packaging.
Having that said, I also know that many of us are tempted to buy with cash so to get over and done with. And that, of course, comes with its own perks.
Benefits Of Buying A Car With Cash
1. More Financial Freedom
Once you pay the whole amount in cash, you are free from the headache of monthly instalments. You experience the same kind of independence that comes with owning a car.
2. Trade-in For A New Car
Two years into your purchase and you’re already bored with your car? Don’t worry, it happens to most of us. The good news is you can use your car as a trade-in to get a new model and a huge discount. Wouldn’t you like that?
3. No Balloon Payment
Do you like to pay extra? Of course, you don’t. But that’s what you do when you pay interest, residual amount, or penalty.
So if you buy your car with cash, you don’t have the headache of interest, fees or making a balloon payment. As the car owner, you also enjoy complete freedom to sell it off whenever you wish to.
4. Own The Car Outright
We all develop emotional attachments with our belongings. Cars are one of the big ones. So understandably, you won’t like to see yours go at the end of a lease term just like me.
At the same time, there can be questions in your mind such as whether it is cheaper to maintain an old vehicle or go for a new purchase.
But if you buy your car outright with cash, you spare yourself this conflict and your car can also have a better resale value.
5. Satisfaction Of Being the Ultimate Owner
Buying a car with cash in one go, does result in a dip in your savings.
But the thought of being its undisputed owner from the start can bring a great sense of achievement. We all love to own things and not owe the banks these days. Being debt free is what we all aspire to. Plus, there’s great happiness in ownership. Don’t tell me you think otherwise.
So, Which Is A Better Option: Novated Lease Or Cash?
Clearly, both the options come with their own advantages. However, you should know that each has downsides too.
Purchasing a car through novated leasing means you never own the car until you pay the residual payment at the end, which may seem like a drawback for some.
Because low monthly instalments means high residual value at the end.
Check out the table above to see how you can lower monthly instalments. That’s why it’s important to lease a car that holds the value well, otherwise you’d end up paying more than you should.
Since the car is essentially yours, it will show up as both an asset and liability.
And while buying a car with cash may seem like a breeze, you must be aware that you are spending your money on a depreciating asset rather than keeping it and appreciating in your bank or some other appreciating asset.
So it all boils down to choosing a feasible option, rather than asking which one is better. I suggest you take a close look at your lifestyle, car essentials, needs and preferences to arrive at a decision. And also ask yourself these questions:
Your answers will give you a clearer picture. Consider them carefully and if you think you’ve arrived at a decision, we can get you a fair and transparent deal to assist in your next car purchase.
For more information, you can always get in touch with us. We are here for you!
Whenever in doubt, please always seek advice from your accountant before entering any financial product.