Novated leases are an effective way of salary packaging vehicles and saving Fringe Benefits Tax (FBT). But understanding their formulas is vitally important.
Statewide advises employees to compare novated lease quotes using total costs rather than only interest rates to ensure they find the optimal lease deal that fits their current and future circumstances. Learn about how to calculate novated lease interest rate.
Interest Rates
Novated leasing differs from car loans by covering vehicle financing costs and operational expenses. Repayments are taken directly out of your salary so as not to disrupt your balance sheet and aren’t secured against other assets like traditional loans.
Employers using novated leases allow employees to deduct running costs such as fuel, maintenance, registration and insurance from pre-tax income – helping to lower overall car ownership and operating costs. When considering quotes for novated leases, they should keep some key considerations in mind.
First and foremost, all novated lease quotes should be evaluated based on a “net cost of ownership” instead of simply looking at differences in interest rates. This assessment considers all associated expenses such as early termination costs, residual value disclosure fees and GST liabilities, and potential lost returns that would have been generated had those funds been invested elsewhere.
Money Factors
Money factors are an integral component of lease financing, determining the interest of monthly car lease payments. They depend on a borrower’s credit score; higher scores result in lower money factors, and vice versa. Learn about how to calculate novated lease interest rate.
Note that, unlike APR, which is expressed as a percentage, money factors typically take the form of decimals and can create confusion as some consumers may misinterpret numbers such as “0.0025” as low-interest rates. In preventing any misperceptions from developing further, consumers are recommended to inquire directly about the money factor rather than the interest rate and then convert this factor to APR themselves.
Money factors will vary based on each borrower’s credit and market conditions; an appropriate rate is around 6%. By negotiating the money factor, aligning your car lease agreement with current market rates may be better, saving you significant finance charges.
Payment Periods
Novated leases provide employees with an effective way to purchase new or pre-owned cars while covering running costs in one payment without incurring interest payments like traditional car loans do. Instead, lease payments are deducted directly from an employee’s pre-tax salary – making novated leasing an attractive way for employees looking to reduce taxes while simultaneously accessing a new vehicle.
However, when selecting a novated lease, there are a few key considerations to remember. When comparing quotes for total costs, it is essential to calculate early termination fees, residual value calculations, GST disclosure requirements, and compare interest rates before choosing.
The lease term also plays a part in your monthly payment, especially if your income is expected to decline during its course. Furthermore, be mindful that novated leases are secured loans using your vehicle as a security asset.
Residual Value
Residual value can be confusing to those unfamiliar with lease financing. To better understand its effects on novated leasing arrangements and their relationship to factors like the Money Factor. Learn about how to calculate novated lease interest rate.
A residual value is the estimated worth of an asset at its end of life or lease term, calculated based on market values, seasonality, product life cycles, and condition when sold or transferred to someone else. Its estimation can depend on variables like market values, seasonality and product life cycles, and the condition of the vehicle when sold/transferred from its current owner or lessee.
A novated lease is a specialist vehicle finance product that allows you to purchase a car with running costs, including insurance, included in the repayments your employer takes out of your pre-tax salary each month. With a novated lease, your vehicle can also be fully maintained with reimbursable expenses like fuel, servicing, registration, tyres and roadside assistance.