Leasing a car feels cheaper because the monthly payments are lower — but the total cost over 3-5 years is often higher. This guide compares novated lease, finance lease, and car loan options with real Australian numbers.
| Option | Description | Own the car? | Tax benefit? |
|---|---|---|---|
| Car loan (secured) | Borrow to buy; repay over 2-7 years | Yes — from day 1 | Interest deductible if business use |
| Finance lease | Use the car, pay residual to own | Optional at end | Deductible if business |
| Novated lease | Salary sacrifice via employer | Optional at end | Yes — pre-tax salary |
| Operating lease (long-term hire) | Use car, return at end | No | Deductible if business |
| Cash purchase | Buy outright | Yes — immediately | Depreciation if business |
Compare monthly repayments under different loan amounts, rates, and terms.
Open Lease Calculator →A novated lease uses pre-tax salary to pay for a vehicle (both the lease payments and running costs). This reduces your taxable income, generating a tax saving that effectively subsidises the car. The higher your tax bracket, the larger the saving.
Scenario: $45,000 car, 3-year term, 15,000km/year
| Item | Car Loan at 8% | Finance Lease | Novated Lease (37% rate) |
|---|---|---|---|
| Monthly payment | ~$1,408 | ~$1,050 | ~$900 (pre-tax) |
| Total payments over 3 years | $50,688 | $37,800 + residual | $32,400 + residual |
| Residual/balloon | $0 (own car) | ~$18,000 to own | ~$18,000 to own |
| Car ownership at end | Yes | Option | Option |
| FBT liability | No | Yes (if private) | Yes (unless EV) |
Since April 2022, battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs — through 31 March 2025) below the luxury car threshold (~$76,950 in 2025-26) are exempt from FBT when provided under a novated lease. This eliminated the main cost disadvantage of novated leasing for EVs.
For a $60,000 EV on a novated lease for someone on a 37% marginal rate: approximately $6,000–$8,000 per year in tax savings with zero FBT liability. This has made EV novated leases one of the most tax-effective vehicle acquisition strategies for eligible employees in 2024-2026.
| Situation | Best Option |
|---|---|
| Employer offers salary packaging | Novated lease — especially for EVs |
| High business vehicle use (>80%) | Finance lease or business car loan (interest deductible) |
| Want to own the car outright, no residual | Car loan or cash |
| No employer packaging, private use only | Car loan at best available rate |
| Want flexibility to change car every 3 years | Operating lease or novated lease with residual return |
Novated lease marketing focuses on the tax saving. The costs sit further down the page, and they are where the arrangement is won or lost.
Every comparison of lease, loan, and cash focuses on finance costs. The largest cost of most cars is neither interest nor fees — it is depreciation, and it is identical regardless of how the car is financed.
A new car commonly loses a substantial share of its value in the first two to three years. Whether you paid cash, borrowed, or leased, that value has gone. Financing determines who bears the cash flow and when; it does not change the underlying loss.
This reframes the question usefully. If you are comparing a new car on a novated lease against a three-year-old car bought with a loan, the tax saving on the lease may be smaller than the depreciation avoided by buying used.
Novated leasing can genuinely reduce the cost of running a car for employees on higher marginal rates, and the exemption available for eligible electric vehicles strengthens that case considerably. It also carries a residual obligation, ongoing fees, and a dependency on remaining with your employer.
Compare total cost over the full term including the residual, remember depreciation is the same however you pay, and be honest about how long you expect to stay in your job. This page is general information only and is not financial or tax advice. Confirm your position with a registered tax agent, since eligibility rules and exemptions change.
What is a novated lease in Australia?
A novated lease is a three-way arrangement between you, your employer, and a finance company. Your employer makes lease payments on your behalf from your pre-tax salary, reducing your taxable income. The tax saving on the salary sacrifice component is the primary financial benefit. Novated leases are only available through employers who offer salary packaging.
Is it cheaper to lease or buy a car in Australia?
Over a 3-5 year period, buying typically results in lower total cost of ownership because you retain the asset value at the end. Leasing has lower monthly payments and no residual risk but you do not own the vehicle. A novated lease through an employer can be cheaper than both when the tax saving is substantial — particularly for higher-income earners in the 37% or 45% tax bracket.
How does FBT apply to novated leases?
Fringe Benefits Tax (FBT) applies to the private use component of a novated lease. Under the statutory formula method, a deemed private use percentage (typically 20%) is applied to the car's base value. Electric vehicles (EVs) under the luxury car threshold are exempt from FBT on novated leases since April 2022 — making EV novated leases particularly tax-effective.
What is a residual value on a car lease?
The residual value (or balloon payment) is the predetermined remaining value of the vehicle at the end of the lease term. With a finance lease, you have the option to pay the residual to own the vehicle, re-finance it, or return it. With an operating lease or novated lease, you typically either return the vehicle or pay a lump sum residual. The ATO sets minimum residual percentages based on lease terms.
Illustrative ordering. Both methods pay minimums on every debt; they differ only in where the extra payment goes first.