Owning a Car at the End of a Novated Lease: Your Options and Next Steps Explained
Introduction
A novated lease offers an attractive way to finance a vehicle while enjoying tax benefits and employer-managed payments. However, when the lease term ends, lessees often face critical decisions regarding owning a car at the end of a novated lease. Understanding your options ensures you make the best financial choice, whether it’s purchasing the vehicle outright, refinancing, or returning it.
In this guide, we will explore your post-lease options, their advantages and drawbacks, and the necessary steps to take. With careful planning, you can maximize the financial and practical benefits of your novated lease.
What Happens at the End of a Novated Lease?
A novated lease is a salary packaging arrangement where lease payments are deducted from pre-tax earnings, reducing taxable income. When the lease concludes, you typically have the following choices:
- Pay the Residual Value and Own the Car
- Refinance the Residual Value for an Extended Lease
- Trade-In the Car for a New Lease Agreement
- Return the Vehicle to the Leasing Company
Each of these options comes with specific financial and logistical considerations. Below, we examine each in detail to help you decide the best course of action.
Option 1: Paying the Residual Value and Owning the Car
Understanding Residual Value
The residual value is the pre-determined lump sum payment required to own the vehicle at the lease’s end. This amount is set at the lease’s inception and typically ranges between 20-40% of the car’s original price, depending on the lease duration.
Pros
- Full Ownership: Once paid, the vehicle is entirely yours with no further financial obligations.
- Potential Savings: If the market value exceeds the residual amount, you acquire the car at a discount.
- No Ongoing Lease Payments: Eliminates the need for continuous lease payments.
Cons
- Large Upfront Cost: The residual amount may require financing or a lump sum payment.
- Depreciation: The car continues to lose value over time, affecting resale potential.
Best for:
- Individuals who want to keep their vehicle long-term.
- Those who can afford the residual value without financial strain.
Option 2: Refinancing the Residual Value for an Extended Lease
If you’re not ready to pay the residual value outright, refinancing is an alternative. This involves taking out a new loan or leasing arrangement to cover the remaining cost.
Pros
- Lower Immediate Financial Burden: Avoids a significant lump sum payment.
- Continued Tax Benefits: Salary packaging can remain in place.
- Retain Your Familiar Vehicle: No need to search for a new car.
Cons
- Additional Interest Costs: Extending the lease or financing adds to the total cost.
- Car Depreciation Continues: The vehicle may lose value faster than the refinanced payments reduce the balance.
Best for:
- Drivers who love their car but need flexible payment terms.
- Those who still want the tax benefits of a novated lease.
Option 3: Trading in the Car for a New Lease
Many leasing companies offer trade-in programs where you can exchange your current car for a new lease.
Pros
- Upgrade to a Newer Model: Enjoy the latest technology and fuel efficiency.
- Avoid Residual Value Payments: The trade-in offsets the residual amount.
- Continuing Tax Benefits: A new lease maintains salary packaging advantages.
Cons
- Continuous Lease Payments: You remain in a leasing cycle indefinitely.
- Mileage and Wear Considerations: Your trade-in value depends on the car’s condition.
Best for:
- Employees who prefer driving a new car every few years.
- Those who want to continue benefiting from salary packaging.
Option 4: Returning the Vehicle to the Leasing Company
In some cases, returning the vehicle and walking away is a viable option. However, this depends on the leasing agreement terms and whether your employer allows it.
Pros
- No Further Financial Commitment: You’re free from residual value obligations.
- Flexibility: Allows you to explore new financing or leasing options.
Cons
- Potential Additional Costs: Excess mileage or damage fees may apply.
- No Asset Ownership: You walk away with nothing in return.
Best for:
- Those who want to avoid additional financial responsibility.
- Drivers looking to switch to alternative transport options.
Key Considerations Before Making a Decision
When deciding on owning a car at the end of a novated lease, consider the following factors:
Financial Position
Assess your financial capacity to pay the residual amount outright or finance a new lease.
Market Value of the Vehicle
Compare the residual value to the car’s current market price. Ownership might be a great deal if it’s worth more than the payout amount.
Ongoing Costs
Consider insurance, maintenance, and depreciation if you plan to keep the car.
Personal Needs and Preferences
Evaluate whether keeping the same car aligns with your lifestyle and long-term goals.
Conclusion
After a novated lease, you face a critical financial decision: whether to own the car, refinance, trade-in, or return it. Each choice has distinct benefits and potential drawbacks, depending on your financial situation, lifestyle, and future plans.
Before deciding, weigh all the factors carefully and consult a financial advisor if necessary. By strategically planning your next steps, you can make the most cost-effective and beneficial decision regarding owning a car at the end of a novated lease.