Traditionally, buying a new car involves two parties, and they are known as buyers and seller. The deal is between these two parties. However, buyers have the option of including a third party who is the employer. When someone does this, he is getting into the novated leasing process. Though it sounds so simple, it is not that simple. At the same time, it is not rocket science too. Before purchasing a car, many people have this option in mind. It can be useful for different reasons. In the following section, there is a detailed discussion about this type of leasing process.
How Novated Lease Works?
Novated lease is a legally acknowledged term, and it means involving a third party in the process of car purchasing. The buyer should engage the third party, and essentially that third party should be the employer of the buyer. Typically, a novated lease agreement can be for a time length of two or three years. However, the time length can even be longer, and it can be five to six years. When this lease period is over, you can move to purchase a new car after selling it to an interested buyer. Alternatively, you can pay a lump sum amount to close the lease and own the vehicle in your name. This predetermined buy out fee is termed as “Balloon Payment”.
At this point, many people would start comparing novated lease and car loan. Well, both of them are popular methods of buying a new car. A borrower has to repay the loan from their post-tax salary. Here comes the difference between a car loan and a novated lease. You have to pay novated lease premium right before your salary is taxed. In other words, you pay this from the pre-taxed wage. That is why the employer has to be involved in the process. The car seller will collect the premium from the employer before they release your salary. To check premium and to compare your saving with the car loan, you can use novated lease calculator.
Benefits of Novated Lease :
Novated lease is mainly taxed effectively. If you want to keep your monthly income sizable even after paying up your taxes, you should opt for this process of car buying. The premium of the novated lease is paid before the money has been remitted to your account by the employer. For this reason, they deduct the amount from non-taxed salary. In case of a car loan, you must pay the premium from taxed salary. Since the premium is paid after paying taxes, you pay extra charges in the process of paying bank loan premiums. You can save a few extra dollars with novated leasing process.
Drawbacks of Novated Lease :
Novated lease is only for those, who have job security. The person should be an employee of a reputed employer otherwise no car seller would get in the novated lease agreement process with the buyer. In many cases, employers do not agree on such agreements.
Stay tuned with us to get more information about novated lease!
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