Novated Lease VS Taking Out a Loan For First Car Purchase

Retailer123 on 15/05/2019 - 07:54
Last edited 15/05/2019 - 19:47

Hi All,

I was looking at buying my first car, I'm a 23 y/o with a entry level job at the moment. Just looking at my best options here.

Thing is, I really wanted to increase my Credit Score because I have little to none at the moment, have always bought things outright.

Few questions I had:

  • Do Novated Leases count towards my Credit Score rating?
  • Anyone made the decision between taking out a loan / doing a salary sacrafice for a car purchase who could provide some input on what's the better choice?

Thank you in advance!

Financial

Comments

  • DBBROS on 16/05/2019 - 07:52
    +1

    Please don't make the same mistake like I did. It is best to buy the car outright or used. Novated lease quotes look attractive but they won't often reveal the interest rates and other fees. My issues were mostly with budgeting and the lease company wasn't listed at some of the service centres and tyre shops and was a big pain getting them to authorise any work on the car.

    • apptrack on 16/05/2019 - 11:13
      +1

      I got shafted as interest was calculated up front not P/A.

  • Briefcase Mong on 16/05/2019 - 11:10

    Like others have suggested I'd definitely buy something cheap the money you save can be invested into something else instead of a depreciating asset

  • apptrack on 16/05/2019 - 11:12

    It you want it purely to increase credit rating, I'd recommend getting a low rate credit card with minimum balance from the big 4 banks. They do comprehensive credit reporting which can bring your score up over time.

  • Devastator0 on 16/05/2019 - 11:41
    +1

    I just feel like I need to post on this one for you. For anyone informing you to get a credit card of any form to assist in a credit rating, disregard that information completely. I have spoken with multiple professionals in the industry, both Mortgage Brokers and bank staff and they say that having a credit card (even if you do not use it and/or accrue any interest on it etc etc) is a negative hit against your potentially existing credit rating. Most financial institutions consider it a "bad" debt and consider you a risk when you go to borrow for a home loan.

    I am very much like you in the sense that I have always bought everything I wanted outright. I've never had to finance and/or take a direct loan (except for my home) and I can tell you with a 100% certainty that you don't need to hold a line of credit (i.e. existing loans and/or credit cards) to have a good credit rating and/or be appealing to a financial institution to consider you a good prospect for a home loan.

  • rave75 on 16/05/2019 - 12:15

    Get a $1000 limit credit card. Put like one purchase every payment cycle and pay it on time to build your credit score

  • jenkemjunkie on 16/05/2019 - 12:20

    Mate…You’re young, buy a money pit whilst you can…I recommend a series 6 RX-7…you’ll love the sound of that rotor BRAPPPPPPPP and the sideways drift action you can get …when it’s working…veilside kit will look mad on it

    All I’m saying is…don’t get a i20, i30…I mean they’re good cars but you’ll look like a nerd.

    Actually all I’m saying is don’t buy a car over 10k at 23. You just started your new job and it already looks like you’re starting your journey into wagecuckery - as an indentured servant to your 9-5 job life. 25k + Novated leases, yuck. That’s poor people, wage serfdom talk.

    Actually just don’t get a car…

    Also, you’ve been reading too much AMERICAN information on credit scores…American information creep seems to be increasingly invasive in Australia…

  • Noophe on 16/05/2019 - 14:23

    im on my second (4 years into it) 5 year novated lease

    22k car and now a 30k car

    you need high running costs to make it worth while as well. being in 37c+ tax bracket also means you benefit more from it

    just remember when you sell the car at the end if the residual is 7k you're probably going to be able to sell the car for 14k+

  • kindra on 16/05/2019 - 15:21

    NL is great if you were planning to take out a loan anway, you do save money. The only down fall is if you change employers and they have their own leasing company. I recommend doing 2 year NL terms max 3. You can also novate 2nd hand cars from dealerships.

  • lddv04 on 16/05/2019 - 15:23

    And don't forget to thank the Gillard government for stuffing up the Fringe Benefit Tax on notated leases, making it less attractive. Previously, the more kilometers you traveled per year, the lower the rate of FBT. The assumption was that more was collected via the fuel excise. Since 2014 it's been 20%, regardless of distance traveled.

  • dtgold on 16/05/2019 - 16:22
    +1

    There are some big variables which will affect your calculations:
    - The price of the car (and whether the novated leasing company can get you a better price than you could get yourself)
    - Your tax rate
    - Kms driven per year
    - How expensive the car is to run

    This last consideration is sometimes underrated. On a novated lease, you're really just tax deducting the running costs of the car (not the purchase price). If the car is very expensive to run, it makes the novated lease more attractive, and vice versa.

    If you could pay cash, but you get a novated lease instead, what would you do with the cash? If you've got somewhere to put it with good returns (e.g. a high-interest savings account), then this helps offset the interest you're paying to the lease company. It also makes sure you can afford the residual payment when it comes along.

    For me - at 37% tax rate, buying $23K Holden Astra (new), the break-even point was around 10000km per year. I drive more than that, so I got a novated lease and put the cash into my home loan offset account.

  • ge on 16/05/2019 - 17:37

    Don’t.

  • aussieolfaction on 16/05/2019 - 19:22

    There's no magical answer that will suit everyone.

    The appropriate answer for your personal situation will depend on several factors like if the car is new or used, your annual salary, the amount being financed, the interest rate on finance, length of the lease (repayment period), balloon payment, how many kilometers do you expect to drive the car for annually, etc.

  • BestofOZB on 16/05/2019 - 19:47

    Best is cash.
    Then novated lease.
    Then car loan.

    But for a first car, don't get a new one.

  • Jabberwocky on 16/05/2019 - 21:50

    Depends on your work profile.

    If you are into a field job, go with Car Loan (if it's less than 7%). With a field job (sales, marketing , customer visits etc)that requires substantial travelling you can easily claim tax rebate and write off your car.

    But if you are in a job which requires just to & back from workplace, go novated lease as there's not much of a chance to claim taxes on car usage.

    Considering CASH is not an option

  • Tnetennba on 17/05/2019 - 08:47
    +1

    $25k is WAY too much to be spending on a car for what I'm assuming is a $40-55k a year job?

    You do not need a 'credit score' to buy a house. I bought one at 22 without one. The main thing is ability to save and show them spending habits. This is not America and credit scores (while they technically exist) do not hold anywhere near the same weight here.

    You should be looking at a used car for under $5k or risk paying off a massively depreciating asset for several years. It will set you back on your house, especially if your salary is low. Pay cash.

  • souleaterX on 17/05/2019 - 11:47

    "Credit Score" to buy a house is a scam created by banks to get you to take out more products with them.

    Worked for a bank for 10 years. Was a common thing they wanted staff in branches to tell young kids to get them to take out more products. Get a loan for that car or take out a small credit card.

    If you can get around it, just buy a cheaper car and don't take out a loan. Not having a loan in the past will not affect your property purchasing in the future. Just save a huge deposit, that's all they care about these days.

    If you do end up deciding to get a loan regardless, with a Novated Lease I believe its not necessary to have a balloon. Just make sure your employer agrees to it before it happens. Some will, some wont.

    If its an older vehicle, higher credit team may need to approve a balloon or the loan if its outside of whats in standard policy.

  • brownbag on 17/05/2019 - 12:09

    I did the calculations and compared novated lease vs owning a car outright. This took into account lost interest due to the purchase cost of the car (I have savings not mortgage so I calculated this based on after-tax lost income) - about 2%.

    Or course it depends on many factors (the car price, fuel economy, maintenance, buying through dealer or private, your marginal tax rate) but in the end the major factor was the price of the car. Assuming you don't have cash flow issues, the main benefit of the novated lease is the ability to get tax deducations on the servicing, fuel, etc, but the benefit of buying outright is the lower cost of paying off the car. So the novated lease is more beneficial for lower priced cars, but as the price of the car creeps up you find that you're better off buying it outright. In my case they seemed to even up at a car price of about $30,000, but for anything lower than that, it was better to buy it outright.

    Keep in mind that for you the interest rate may be more than what my lost interest rate, and therefore you may find that the odds are slightly more in favour of the novated lease.

  • DangerNoodle on 17/05/2019 - 12:24

    If you want to build up a credit history without paying much interest, get a credit card with low limit and low rate. Use it to buy what you need and pay it back straight away or within the interest free period. Sign up to receive offers of limit increases. You don't need to accept the credit limit increases but usually they're a good sign that you're doing well.

  • [Deactivated] on 17/05/2019 - 14:57
    +1

    Just my 2 cents. I've had one novated lease previously and just signing up for another presently.
    Best way to reap greatest benefits are the following:
    - You are in a higher tax bracket
    - Take out a 1 year novated lease.(costs more for the first year but also allows you to pay off more pre-tax so greater savings. Also should you want to break the lease only have to pay interest for the remaining part of the year) Should you wish to extend you can always do so.
    - Get the lease company quote for vehicle first then negotiate down yourself dealer vs dealer
    - DIY the insurance to get the best price
    - DIY your fuel
    - Running costs are estimates only, you pay for actual in reality less GST
    - Should you have any credit at the end of the lease (diff between estimated and actual), use it to prepay future expenses i.e. new tyres, rego for the next year, insurance etc. You want to minimise the payout as it will be taxed at the normal rate
    - Can help to reduce your taxable income which may allow you to get greater government benefits (Do your calculations first)
    - Sell the car for at the end of the lease whether 1, 2 or 3 year lease for market value. Not worth hanging onto greater than 3 years as value drops considerably and usually running costs/maintenance goes up
    - If you have cash & a home loan, rather than pay for the car outright stick it in the home loan offset account until you need to pay for the residual on the car. Effectively reduces your home loan interest, in effect offsetting the car loan interest.

    • knasty on 17/05/2019 - 19:15

      Agree with almost everything here except selling when the lease expires. I ran rolling 1 year leases until the residual was minimal and loaded up on maintenance (new tyres brake pads etc) just before it ceased so now I have a vehicle that's very cheap to maintain as no major work required for at least 50,000ks.

      • [Deactivated] on 17/05/2019 - 19:39

        Agreed you can do this too. Just comes down to your personal choice. Last car I kept a further 2 years past my 3 year lease, no issues with it at all. My biggest issue was I was running 20kms p.a. which was mounting up and similarly dragging down the market value.

    • brownbag on 20/05/2019 - 13:17

      Agree on all except the 1 year lease recommendation depends on the car. I would do this on a new (or almost new car) and renew each year - this enables you to pay off as much as you can over the life of the leases.

      But keep in mind that if you're going for a cheaper car that is only slightly above the leasing company's minimum car value (which if the car is suitable gives you the maximum financial benefit for the novated lease), then after 1 year, the car will be worth too little to get another year's lease. So in that case you would be better off going for as long a lease as possible.

      I have
      an almost new Peugeot 308 with a 1 year lease that i'll roll over and probably sell at 4 years.
      a Hyundai i20 which I bought for $6000 with a 5 year lease, as if I got a one year lease the residual would be too low and I'd have no option to renew.

  • swen83 on 17/05/2019 - 16:56

    I've met very few people that have come out of a novated lease in front.

    Don't do something in the hope it will improve your credit score, this isn't America, your self worth isn't determined by a credit score. I bought a <600k house 5 years ago having never had a loan in my life.

  • Soluble on 17/05/2019 - 17:55

    I was looking for a new vehicle about 3 years ago(2 years, 7 months ago to be precise), chose the novated lease option. Crunch the numbers for yourself based on kms, servicing, tyres, rego etc.Also crunch the tax numbers based on your salary.

    I went through every suitable car through the novated lease company and landed on a Corolla hybrid, the prius c would have worked out slightly better from memory but I wasn't a big fan of the car.

  • jtc13 on 17/05/2019 - 20:12

    Hi OP - I weighed up this decision for many years and always opted to get a loan rather than novated lease as I could not make the NV lease work from a maths perspective. Then at a new employer they offered an NV on very favourable terms as the employer made significant contributions and it became very favourable.

    Points to note:
    A lot of the benefits of an NV are overpriced compared to how I / you would normally maintain a vehicle. The best test in my view is to estimate your running costs for any vehicle then add in the loan coast and compare against novated lease. I always found their running costs way more than what I would pay to run a car by myself.

  • lunartemis on 17/05/2019 - 20:13

    We started novated leasing since the end of last year and it all depends on your income.
    You don't pay GST on running costs (fuel, maintenance, and insurance/rego)

  • 2ndeffort on 17/05/2019 - 23:19
    +1

    Ive had loads of leases. It works best if you are in a high tax bracket and do lots of kms (buy lots of petrol and operating costs). If you can buy outright this is the best way. Dont overstretch yourself just because you can.

    A lot of the stuff people are sayign that you just pay off depreciation and dont own the car …. so what. If you buy a car with a loan you will literally be paying off depreciation for the first 3-4 years anyway. Depending on your marginal tax rate you could be paying all your operating costs out of pre-tax money along the way. The tax office has a formula for car depreciation and this is normally used to work out what the car should be worth at the end 0f the lease. Because this is a general average number there are some cars that depreciate faster and others slower. Find a car to buy that depreciates slower than the rate, find one that will be easy to sell and will retain value and you should be able to flip it, pocket $7K and lease another at the end of the lease. Subaru WRXs have worked for me in the past.

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