Car ownership is deeply embedded in Australian life. According to Australian Bureau of Statistics (ABS) data, 92% of Australian families own at least one car, and more than two-thirds of Australians commute to work by car, making it the most common mode of transportation for employees across the country.
When it comes to acquiring a new vehicle, Australians have several financing options: personal loans, car loans, tapping into home equity, or paying cash. However, one option that many employees overlook is the novated lease – a potentially tax-effective way to finance a vehicle through salary packaging arrangements with your employer.
According to the National Automotive Leasing and Salary Packaging Association (NALSPA), there are currently over 180,000 novated leases administered for Australian employees, representing a total asset value of approximately $7.64 billion. This substantial figure demonstrates the significant role novated leasing plays in the Australian automotive and employment landscape.
This comprehensive guide explains everything you need to know about novated leases in Australia, including how they work, the tax implications, different types available, eligibility requirements, and whether this financing method might be right for your circumstances.
A car loan is a personal loan specifically designed to finance the purchase of a vehicle, whether new or used. You borrow a lump sum to purchase the vehicle, then repay the principal amount plus interest over an agreed term, typically 3-7 years.
Loan Amount: The sum borrowed to purchase the vehicle, typically ranging from $5,000 to $150,000 depending on the vehicle cost and your financial circumstances.
Interest Rate: The cost of borrowing, expressed as an annual percentage rate (APR). Rates vary based on whether the loan is secured or unsecured, your credit history, the vehicle age, and market conditions.
Loan Term: The duration over which you repay the loan, commonly:
Repayments: Regular payments (typically monthly, fortnightly, or weekly) covering both principal and interest. Each payment reduces the outstanding balance until the loan is fully repaid.
Car loans come in two fundamental types based on whether security (collateral) is involved.
In a secured car loan, the vehicle itself serves as collateral for the loan.
How It Works:
Typical Features:
Advantages:
Disadvantages:
Best For:
Unsecured car loans don’t require collateral but rely on your creditworthiness.
How It Works:
Typical Features:
Advantages:
Disadvantages:
Best For:
Beyond the secured/unsecured distinction, various car finance products serve different purposes and circumstances.
Traditional car loans offered by banks, credit unions, and other lenders for purchasing vehicles.
Key Features:
Requirements:
Best For:
A three-party arrangement involving employee, employer, and leasing company, detailed in our dedicated Novated Lease Guide.
How It Works:
Key Benefits:
Considerations:
Designed for individuals or businesses acquiring vehicles for business purposes.
How It Works:
Key Features:
Best For:
A business finance product where the lender owns the vehicle throughout the lease term.
How It Works:
Key Features:
Best For:
Similar to finance lease but with the lender bearing residual value risk.
How It Works:
Key Features:
Advantages:
Best For:
A business finance product where the borrower takes ownership immediately but the lender holds a mortgage over the vehicle.
How It Works:
Key Features:
Best For:
Understanding the factors lenders consider helps you prepare effectively and potentially secure better terms.
Interest rates represent your primary borrowing cost and vary based on numerous factors.
Factors Affecting Your Rate:
Loan Type:
Your Credit Score:
Vehicle Age and Condition:
Loan Term:
Market Conditions:
Comparison Rates: Australian lenders must display comparison rates that include most fees and charges alongside the advertised interest rate, providing a more accurate picture of total borrowing costs.
Beyond interest, various fees contribute to total borrowing costs.
Common Fees:
Establishment Fee: Upfront charge for setting up the loan, typically $200-$900.
Monthly Account-Keeping Fee: Ongoing administration charge, typically $5-$15 monthly.
Early Repayment Fee: Penalty for paying off the loan before term ends (particularly fixed-rate loans), potentially $200-$1,000 or more.
Late Payment Fee: Charge for missed or late payments, typically $15-$35 per occurrence.
Discharge Fee: Administrative charge when loan is finalised, typically $100-$400.
Variation Fee: Charge for changing loan terms, typically $100-$300.
Important: Compare total costs including all fees, not just interest rates. The comparison rate helps with this assessment.
Understanding what you can afford is crucial before committing to a loan.
Calculation Factors:
Example: $30,000 loan at 8% p.a. over 5 years:
Affordability Assessment: Before applying, honestly assess:
Your credit score significantly affects approval likelihood and interest rates offered.
Credit Score Ranges:
What Affects Your Score:
Checking Your Score: You can request free credit reports annually from:
Improving Your Score:
A balloon payment is a larger lump sum due at the loan’s end, reducing regular repayments but increasing total interest costs.
How It Works:
Example: $50,000 loan at 5% p.a. over 5 years with 25% ($12,500) balloon payment:
Advantages:
Disadvantages:
Who Benefits:
Balloon vs Residual:
The duration over which you repay affects both monthly payments and total costs.
Term Options:
Impact Example: $30,000 loan at 8% p.a.:
Considerations:
Understanding the application process and requirements helps you prepare effectively.
Australian lenders use a points-based system for identity verification.
Primary ID (70 points each):
Secondary ID (40 points each):
Tertiary ID (25 points each):
Requirement: Provide documents totalling at least 100 points from different issuers.
Lenders verify your residential status and address.
Australian Citizens/Permanent Residents:
Visa Holders: Some visa types qualify for car loans:
Considerations for Visa Holders:
Comprehensive documentation demonstrating income and financial position.
Employed Individuals:
Self-Employed/Business Owners:
Additional Financial Information:
Details about the vehicle you’re purchasing and its insurance.
Vehicle Information:
Insurance Requirements: Most lenders require comprehensive insurance for secured loans:
Lenders use various methods to assess your borrowing capacity.
Most lenders use HEM to determine affordable borrowing amounts.
How HEM Works: Divides household expenses into categories:
Calculation: HEM = Median expenditure on essentials + 25% of optional expenses
Factors Considered:
Updates: HEM is regularly updated based on Australian Bureau of Statistics (ABS) spending data.
Henderson Poverty Index (HPI): Some lenders use HPI, which assesses minimum income required for basic standard of living.
Lender-Specific Formulae: Some lenders develop proprietary assessment methods considering:
General Guidelines:
Serviceability: Your income after existing commitments must comfortably cover:
Deposit requirements vary based on lender policies and your circumstances.
Typical Deposit:
Benefits of Larger Deposits:
Some lenders offer 100% finance (no deposit required) for:
Considerations:
Pre-approval provides conditional lending approval before selecting a specific vehicle.
Process:
Clarifies Budget: Knowing your maximum borrowing amount narrows vehicle search and prevents wasting time on unaffordable options.
Negotiating Power: Pre-approval positions you as a “cash buyer,” potentially strengthening your negotiating position with dealers.
Confidence: Shopping knowing finance is arranged reduces stress and uncertainty.
Faster Settlement: Final approval quicker as your financial position already assessed.
Limited Lender Options: Commits you to specific lender, potentially missing better deals elsewhere.
Credit Enquiry: Pre-approval requires credit check, creating enquiry on your credit file visible to other lenders. Multiple enquiries in short period can signal credit stress.
Time Pressure: Validity period (often 30-90 days) pressures you to find and purchase vehicle quickly.
Not Guaranteed: Pre-approval is conditional; final approval still required once specific vehicle identified and may be declined if circumstances change.
Research First:
Timing: Only seek pre-approval when actively shopping; don’t waste validity period.
Compare: Consider whether pre-approval benefits outweigh reduced lender choice.
Understanding the differences helps you choose the appropriate product.
Purpose:
Security:
Interest Rates:
Terms:
Restrictions:
Choose Car Loan When:
Choose Personal Loan When:
Understanding how multiple loans interact affects your financial planning.
Can You Get a Car Loan With an Existing Personal Loan? Yes, but with considerations:
Impact on Approval:
Consequences:
High Credit Utilisation: Multiple loans increase credit utilisation, potentially:
Increased Default Risk: More commitments mean:
Credit File Impact: Defaults and repossessions remain on credit file for 5-7 years, severely affecting future borrowing.
Can You Have Two Car Loans Simultaneously? Yes, but it’s challenging:
Requirements:
Considerations:
Additional considerations for certain vehicle purchases.
The Australian Taxation Office (ATO) applies LCT to vehicles exceeding specified thresholds.
Current Thresholds (2024-25): Check current ATO website for latest figures as thresholds adjust annually.
LCT Rate: 33% of value above threshold
Example: Vehicle priced at $80,000, threshold $70,000:
Who Pays:
Impact on Car Loans: If financing a luxury vehicle, loan amount must cover purchase price including LCT.
Can You Buy From Another State? Yes, but with additional complexity:
Considerations:
Process:
Strategies to minimise borrowing costs and manage repayments effectively.
Actions:
Impact: Better credit score qualifies you for:
Benefits:
Example: $40,000 vehicle purchase at 8% p.a. over 5 years:
Impact: Shorter terms mean:
Example: $30,000 loan at 8% p.a.:
Balance: Choose the shortest term you can comfortably afford without straining your budget.
How It Works: Pay more than the required minimum:
Check Terms: Confirm your loan allows additional repayments without penalties. Some fixed-rate loans restrict this or charge fees.
Example: $30,000 loan at 8% p.a., 5-year term, required payment $608/month:
Strategy: Pay fortnightly or weekly instead of monthly:
Example: $30,000 loan at 8% p.a., 5-year term:
When It Makes Sense:
When to Avoid:
When to Consider Refinancing:
Considerations:
Understanding options if you encounter repayment challenges.
Act Early: Don’t wait until missing multiple payments; contact your lender as soon as you anticipate difficulty.
Possible Solutions:
Lender Perspective: Repossession is costly and time-consuming for lenders; they prefer avoiding it when possible. Explaining your circumstances honestly helps them identify alternatives.
Under Australian law, lenders must have processes for assisting borrowers in genuine hardship.
Your Rights:
When to Apply:
If your situation is severe and alternative arrangements won’t work:
Considerations:
Process:
If your lender isn’t helping appropriately:
National Debt Helpline: Free financial counselling service: 1800 007 007
Australian Financial Complaints Authority (AFCA): Lodge complaint if lender isn’t treating you fairly
Community Legal Centres: Free legal advice about your rights and options
Understanding insurance requirements and costs associated with financed vehicles.
For Secured Loans: Lenders typically require comprehensive insurance:
Cost Factors: According to the Australian Automobile Association’s Transport Affordability Index, average comprehensive insurance costs approximately $1,300-$1,700 annually depending on location.
Variations:
Higher Premiums for Financed Vehicles: Some insurers charge more for financed vehicles because:
Not Universal: Not all insurers price differently based on finance status; compare multiple insurers.
Potential Savings: Some insurers reduce premiums once loan is paid:
Actions:
Strategies:
Understanding typical timeframes helps you plan effectively.
Traditional Lenders (Banks):
Online/Alternative Lenders:
Faster Processing:
Slower Processing:
Strategies:
Evaluating loan quality involves assessing multiple factors beyond just interest rates.
Compare rates from multiple lenders:
Assess all fees:
Valuable features:
Quality lenders provide:
Match term to your needs:
Warning Signs:
Australian Securities and Investments Commission (ASIC): Regulates lending practices and consumer protections.
National Consumer Credit Protection Act: Provides framework for responsible lending.
Your Rights:
