Will your expenses decrease with renewed leases?

Renewed Lease: A Cheaper Alternative to Traditional Car Loans

If you’re in the market for a new car, you may be considering a renewed lease as a potential financing option. Also known as a car wage sacrifice, a renewed lease is a three-way agreement between you, a finance company, and your employer. It can help you finance the cost of a car and reduce your taxable income. But is a renewed lease truly the more affordable choice in the long run? In this article, we will explore the ins and outs of renewed leases and weigh the potential cost savings against other financing options.

What is a Renewed Lease?

A renewed lease, or novated lease, is a concept that has been around for decades. It involves a three-way agreement between you, your employer, and a finance company. The terms of the lease will depend on your employer, so it is crucial to discuss the details with them.

The primary advantage of a renewed lease is that it can lower your taxable income and potentially reduce the amount of tax you have to pay. This is because lease payments are deducted from your pre-tax wages. Additionally, with a renewed lease, you don’t pay GST on the purchase price of the car, which can save you thousands of dollars.

How Does Novated Leasing Work?

To enter into a renewed lease, you must first check if your employer offers car lease payments using your pre-tax wages. If they agree, you can then enter into a lease agreement with a finance company. Your employer will be responsible for making lease payments on your behalf.

There are two types of renewed leases: fully-maintained and non-maintained. In a fully-maintained renewed lease, all running costs and insurance are calculated and deducted from your pre-tax pay. This option offers convenience as it involves a one-time payment to cover all costs. On the other hand, a non-maintained renewed lease only covers the purchase price of the car, and you must cover all other costs.

The terms of a renewed lease typically range from one to five years. It is important to consider the length of the lease carefully, as you will be committed to making payments for the entire duration. While you may have the option to pay off the lease early, you are still obligated to pay the full amount contracted, including any residual payment at the end.

Are Renewed Leases Cost-Effective?

A renewed lease can be a more affordable alternative to a traditional auto loan, as it lowers your taxable income and provides potential tax benefits. However, it is important to note that buying a car outright will always be the cheapest option.

To gain a better understanding of the potential cost savings, let’s look at some sample case studies provided by Inside Edge Novated Lease:

1. BMW iX1 xDrive30:
– Renewed Lease: Financing amount of $83,258.36, monthly finance payment of $1,402.26, total five-year cost of $101,120.24.
– Car Loan: Financing amount of $89,450, monthly finance payment of $1,822.30, total five-year cost of $134,412.60.
– Mortgage Financing: Financing amount of $89,450, monthly finance payment of $1,760.95, total five-year cost of $130,731.60.

2. MG HS Plus PHEV Excite:
– Renewed Lease: Financing amount of $44,801.85, monthly finance payment of $754.57, total five-year cost of $60,467.44.
– Car Loan: Financing amount of $48,990, monthly finance payment of $998.04, total five-year cost of $84,907.80.
– Mortgage Financing: Financing amount of $48,990, monthly finance payment of $964.43, total five-year cost of $82,891.20.

3. Petrol Toyota Corolla SX Hatch:
– Renewed Lease: Financing amount of $32,139.42, monthly finance payment of $541.31, total five-year cost of $59,498.90.
– Car Loan: Financing amount of $35,117.60, monthly finance payment of $715.42, total five-year cost of $69,717.00.
– Mortgage Financing: Financing amount of $35,117.60, monthly finance payment of $691.34, total five-year cost of $68,272.20.

As we can see from these examples, the renewed lease option generally has a lower total five-year cost compared to car loans and mortgage financing.

What About Electric Cars?

One advantage of buying an electric car on a renewed lease is that certain electric vehicles are exempt from fringe benefit tax (FBT). FBT is a tax on non-monetary benefits provided by employers, such as company cars. Electric cars priced below the luxury car tax threshold for fuel-efficient vehicles are exempt from this tax, resulting in potential tax savings.

Considerations Before Choosing a Novated Lease

Before entering into a salary sacrifice agreement, it is important to seek financial advice. The Australian Tax Office recommends getting professional guidance as these agreements have specific requirements and implications on your taxable income.

When considering the term of your renewed lease, remember that the maximum allowed by the ATO is five years. It is crucial to choose a term that aligns with your long-term plans and financial commitments. Additionally, always ask for two lease terms when requesting a quote to compare the impact on your take-home pay.

What Happens If You Leave Your Job?

A novated lease is tied to the employee, not the employer. If you decide to leave your job, you will have to take ownership of the car and continue making lease payments. At the end of the lease, you have the option to pay off the remaining balance to own the car, renew the lease for an extended term, or sell the car.

Are You Eligible for a Renewed Lease?

To be eligible for a renewed lease, you generally need to hold a full-time or permanent part-time job beyond the probationary period. Your employer must also offer a renewed lease option, and you must be eligible for taxation.

Is a Renewed Lease Right for You?

Ultimately, the decision to opt for a renewed lease depends on your individual circumstances and financial goals. It is essential to carefully consider the payments and potential savings to determine if it aligns with your budget and needs.

When negotiating a renewed lease, ensure that the interest rate is disclosed and take into account any potential reduction in take-home pay. While the interest rate may be higher than standard personal loan rates, the tax benefits and potential cost savings associated with novated leasing may offset this difference.

In conclusion, a renewed lease can be a cost-effective alternative to traditional auto loans. It offers potential tax benefits and lower taxable income. However, it is crucial to compare the total costs and consider your long-term financial goals before making a decision. Seeking professional financial advice can also provide valuable insights tailored to your specific situation.