Car loan vs novated lease: which is better?
Compare a car loan and a novated lease: how each works, tax and FBT points, what happens if you change jobs, and who each option tends to suit.
It's one of the first questions people ask when they start car shopping, and the honest answer is that it depends. There's no fixed multiple of your income that applies to everyone. Instead, lenders look at your whole financial picture to decide what you can comfortably afford to repay. Understanding how that works helps you set a realistic budget before you fall in love with a car on the lot.
How lenders work out what you can borrow
Australian lenders have responsible lending obligations, which means they must make reasonable inquiries about your finances and be satisfied the loan is not unsuitable for you. In practice, this comes down to serviceability: whether your income comfortably covers your existing commitments, your living expenses and the new loan repayment, with some buffer left over.
1. Your income
Lenders look at what you earn and how stable it is. Full-time permanent income is usually the most straightforward. Casual, part-time, contract and self-employed income can all be considered, but lenders may want a longer history or more evidence. Some will count overtime, bonuses, commissions or rental income, often only in part.
2. Your living expenses
Lenders will ask about your regular spending: groceries, utilities, transport, insurance, childcare, subscriptions and so on. Many compare what you declare against a benchmark such as the Household Expenditure Measure (HEM) and use whichever figure is higher.
3. Your existing debts
Home loans, personal loans, other car loans, buy now pay later accounts and HECS-HELP debts all reduce how much you have left for a new loan. Credit cards count too, and lenders typically assess them on the limit, not the balance. A $10,000 credit card limit can reduce your borrowing capacity even if you owe nothing on it.
4. Your dependants
The number of people relying on your income affects your assessed living costs.
5. Your credit history
A clean credit history doesn't directly increase your borrowing capacity, but it can widen the range of lenders and products available to you. Past defaults or missed payments can limit options. Our page on bad credit finance explains more if that applies to you.
Factors that affect your repayments
Because your borrowing limit is really about the repayment you can afford, anything that changes the repayment can change the loan amount.
| Factor | Effect | Things to consider |
|---|---|---|
| Longer loan term | Lowers each repayment | You'll usually pay more interest overall |
| Balloon payment | Lowers each repayment | Leaves a lump sum owing at the end |
| Larger deposit | Reduces the amount borrowed | Uses savings you may need elsewhere |
| Secured loan | Often priced lower than unsecured | The car is security and can be repossessed |
| Car age and type | Some lenders restrict older vehicles | Affects whether the loan can be secured |
An illustrative example
Take Priya, who earns a steady full-time salary and wants a car. Here's a simplified look at her situation:
- She has no other loans but holds a credit card with an $8,000 limit
- She rents and shares costs with a housemate
- She has saved a $5,000 deposit
After the lender accounts for her income, rent, living expenses and credit card limit, suppose it works out she can comfortably afford a certain monthly repayment. Depending on the term and the interest rate offered, that might support a loan of around $25,000. Add her $5,000 deposit and she's looking at cars up to about $30,000, including on-road costs.
If Priya reduced her credit card limit to $2,000, her assessed commitments would fall and her borrowing capacity might increase. If she chose a longer term or added a balloon, the repayment on a bigger loan might fit, although she would likely pay more overall.
These figures are illustrative only. Your result will depend on your own circumstances and the lender's assessment.
Don't forget the extra costs
Borrowing capacity isn't the same as a comfortable budget. Allow for:
- Stamp duty and registration, if they aren't included in a drive-away price
- Comprehensive insurance, which some lenders require on secured loans
- Fuel or charging, servicing, tyres and parking
- Loan establishment fees and any ongoing account fees
Just because a lender will lend a certain amount doesn't mean you need to borrow all of it. Leaving room in your budget helps you handle unexpected costs.
How to estimate your own borrowing power
- Work out your take-home income. Use your payslips or recent bank statements.
- List your regular expenses honestly. Go through three months of bank statements.
- Add up your existing debts and card limits. Include buy now pay later accounts.
- Decide on a repayment you're comfortable with. Not the maximum, the comfortable amount.
- Use a calculator. Our car loan calculators show how different loan amounts, terms and balloons affect repayments.
Ways to improve how much you can borrow
- Reduce or close credit card limits you don't use
- Pay off small debts, such as buy now pay later balances
- Save a larger deposit
- Consider applying with a co-borrower, such as a partner, who has their own income
- Choose a newer car that more lenders will accept as security
Get a clearer answer with pre-approval
A calculator gives you a ballpark, but only a lender's assessment gives you a firmer figure. Pre-approval gives you an indication of how much you may be able to borrow before you start negotiating, which can make shopping much easier. Keep in mind that pre-approval is conditional and isn't a final approval.
The Finance Club can connect you with a specialist broker from our partner network who can look at your income, expenses and goals, and explain the car loan or personal loan options that may suit you. When you're ready, start an enquiry.
This article is general information only and does not take into account your objectives, financial situation or needs. Speak to your broker, and your accountant where tax is involved, before making a decision.
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