Novated lease vs car loan vs cash: which really costs less?

Most people fund a new car in one of three ways: a novated lease through their employer, a car loan, or simply paying cash. On the dealership sticker they look interchangeable. After tax, they are not — and which one comes out cheapest depends heavily on your salary, the car, and whether it qualifies for the electric-vehicle FBT exemption.

Novated lease

With a novated lease, your employer pays the lease and running costs out of your pre-tax salary, which lowers your taxable income. You also effectively buy the car GST-free and save GST on running costs. The trade-offs: there is usually a residual (balloon) payment owed at the end before you own the car, and — for petrol and diesel cars — Fringe Benefits Tax applies, normally handled through the Employee Contribution Method (a post-tax contribution that offsets the FBT).

Car loan

A car loan is paid with post-tax money. You own the car from day one and build equity, but you carry an interest cost and get no tax benefit on the repayments (unless the car is used for business). It is simple and familiar, with no residual surprise at the end.

Paying cash

Cash avoids all interest and fees, and you own the car outright immediately. The hidden cost is opportunity cost — the return that lump sum could have earned if it stayed invested or sat in your mortgage offset. For a large purchase, that foregone return can be significant.

The GST and tax angle

The novated lease's edge comes from tax: pre-tax salary funding plus GST savings on the car and its running costs. The size of that edge scales with your marginal tax rate — the higher your rate, the more a pre-tax structure saves you.

The electric-vehicle game-changer

If the car is an eligible electric vehicle under the price threshold, the novated lease can be FBT-exempt — which removes the biggest drag on the structure and often makes it dramatically cheaper than a loan or cash. We cover this in detail in is an EV novated lease worth it?

So which wins?

As a rough guide: an eligible EV usually favours a novated lease; a higher earner buying a mainstream car often finds the lease competitive once tax and GST savings are counted; and someone on a lower tax rate, or buying cheaply, may be better off with a loan or cash. The only way to know for your situation is to run the actual numbers side by side.

This is general information, not personal advice. Provider quotes vary, so use a formal quote for the final figure on your chosen car.