Is a Novated Lease a Scam?

A novated lease may be a very expensive way to ‘buy’ a car, but they are not scams. However, there are a lot of people who feel like they were conned into paying much more than they bargained for. Novated Leases are an enigma and it’s very common for people to sign on the dotted line without understanding the ‘nuts and bolts’ of the agreement.

Novated leases are a salary-sacrificing arrangement with the main selling point being to reduce tax. On the surface, it seems like a no-brainer as you spend money on car expenses anyway so you might as well make it a tax deduction. The problem is that’s not exactly what you are getting.

First of all, you’re not just paying for a car. Added on top of the value of a car are the brokerage fees, package fees/establishment fees, insurance, registration, fuel, extended warranties, roadside assistance, servicing and maintenance, tyres, and even car washing and detailing. I have seen occasions where clients end up paying double the value of the car in the long run. Not only are you pushed to add things you may not need, but you are paying often exorbitant interest on things you may not use for years.

Secondly, the repayments are not as flexible as other lending options. Most loans have their interest calculated using the balance of the loan. In comparison, a lot of lease clients have found that paying down the loan does not reduce interest or repayments and some clients find when paying out their lease early, they are still charged the full amount of interest. Each lender can have varying terms so it’s important to understand it upfront.

Thirdly, the lease will not change with your circumstances. The average period for a novated lease is 3-5 years. Having a lease in progress can dramatically affect your borrowing power in the future. This will impact plans to purchase a home or refinance your existing one for a better deal.  It’s very important to understand the full repayments that will be taken from your pre and post-taxed income and make sure you can easily afford it, even if you go through a time of lower income. The last 5 years have taught us that your financial circumstances and cost of living can change rapidly. 

Fourthly, a lot of people are under the impression that they’ve ‘bought a car’. You don’t actually own the car. Traditionally, with a lease, you are given the opportunity to purchase the car at the end of the term by paying the balloon payment. I find most people don’t have a savings plan for this large payment leaving them with no option but to trade it in for another lease or take a loan to cover it, resulting in more years of car payments. I see a lot of people trading car after car every 3-5 years who essentially are just renting a car. They never come to own them.

Examples of lease regret:

I recently spoke to someone wanting advice on paying out their lease. Their terms were one of the better ones I have seen. However, they were still packaged $12k worth of extras on top of the car which they didn’t understand and had a lot of difficulty getting the information for. They paid out their lease before the first year and have vowed never to take a lease again.   

News.com has recently published some examples of hard-working Australians on the verge of bankruptcy after being sold the dream of less tax and a new car.  

This type of predatory lending is certainly something to be cautious about. Try not to get swept away with the dream of a new car and the promises of less tax.

Are you struggling with debt?

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