You've probably heard one of your friends or family say that they've leased their car through their work. So how can you upgrade your car through your work?
If you are a PAYG employee, you can choose to buy a car using a novated lease through your workplace.
How Does a Novated Lease Work?
A novated lease is a car loan, but instead of making payments from your income after it hits your bank account, your car loan payments are made by your employer from your pre-tax income.
You are ultimately responsible for the lease payments, so if you stop working or move to a different employer, you'll need to put arrangements in place to transfer the lease or refinance it to a regular car loan.
What are the pros and cons?
Key advantages for you as the employee with a novated lease are that you reduce your taxable income, you have the option to include some of your running costs in your pre-tax lease payments, and you don't have to worry about making payments on time as it's taken care of by your employer.
The disadvantage is that you have to pay Fringe Benefits Tax - there's really no way to escape tax entirely. Depending on your income this might not work out cheaper than buying the car with a regular car loan.
How Do I Get Set Up With a Novated Lease?
Your employer may already have an arrangement set up with a novated leasing company, which may even give you access to fleet discounts on certain cars.
If there's no existing novated leasing arrangement in place, you can, with your employer's permission, arrange one through a novated leasing company or car loan broker. There will be a small administrative requirement for your employer to give you this benefit.
What sort of car should I buy?
When you take out a novated lease, you might be tempted to buy a car that's a little fancy. Remember that you are still paying for the car, even if it's coming out before you receive your paycheck.
When shortlisting potential cars, you should set your budget in the same way as you would if you were taking out a regular car loan. Work out how much you can afford to spend on a car each week or fortnight, remembering to include your running costs.
Most novated leases have a 4-5 year term, with a lump sum balloon payment at the end. To calculate what you can afford to spend, you'll need to know how much extra income you have to put towards the car, taking insurance into account too.
Always allow extra room in your budget for changes in tax rates, or the possibility of being out of work.
Is a novated lease a good idea?
Whether a novated lease is a good idea for you comes down to your personal financial and employment situation. If you intend to change employers within the next couple of years, it might not be the right option right now.
If you are considering a novated lease to buy your next car, get your accountant to check that you'll be financially ahead based on your current income.
In particular, check how much the lump sum at the end of the contract is so you can prepare by saving this amount during your lease term.
You should also read the proposed loan agreement carefully before signing it so you understand the terms and conditions.
Article provided by Positive Lending Solutions
