Cash vs Car Loan vs Novated Lease — How to Buy a Car (2025-26)
Three ways to fund a car in Australia. Each has very different tax outcomes, total cost, and suitability based on your income type and tax bracket.
Updated 2025-26 FY
Quick Answer
- PAYG earner + buying EV under $91,387 LCT: Novated lease wins by $15k-$25k vs cash. EV FBT exemption is a massive advantage.
- PAYG earner + non-EV: Run the maths — novated still often beats cash on $40k+ cars for $90k+ earners, but margin is smaller (~$3k-$8k).
- Sole trader / ABN: Cash if affordable, car loan if needed. Novated lease usually unavailable. Claim business-use portion via logbook.
- Low income or budget pressure: Buy cheaper used car for cash. Avoid borrowing for depreciating assets.
Side-by-Side
| Feature | Cash | Car Loan | Novated Lease |
|---|---|---|---|
| Upfront cost | Full price ($30k-$80k) | Deposit only ($0-$10k) | Zero |
| Effective interest | 0% (opportunity cost only) | 6.5-12% (secured) | Bundled at competitive rates |
| Tax effective? | No (paid from after-tax income) | No (after-tax repayments) | Yes — pre-tax salary deductions |
| GST credit on car | No (private) | No (private) | Yes ($4,545 max under LCT) |
| EV FBT exemption? | Not applicable | Not applicable | Yes — saves $5k-$15k/yr if under LCT |
| Ownership | Yours immediately | Yours (bank has security) | Lease company owns; you can buy out residual |
| End of term | Keep forever | Loan repaid, you own outright | Pay residual to keep, refinance, or trade in |
| Bundled running costs | Pay separately, after-tax | Pay separately, after-tax | Bundled at pre-tax + GST credits |
| Best income level | Any (if affordable) | Any | Higher PAYG salaries ($90k+) where tax savings shine |
| PAYG employee? | Optional | Optional | Required |
| Sole trader/ABN? | Yes | Yes | Generally no (must be PAYG) |
| Total 5-year cost (EV $60k) | $60,000 + $25,000 running + opportunity cost on $60k investment | $72,000 (interest) + $25,000 running, after-tax | $45,000-$55,000 pre-tax equivalent (EV FBT exempt) |
Worked Example: $50,000 Electric Vehicle
Scenario: Mike earns $120,000 PAYG, wants to buy a $50,000 EV (Tesla Model 3 RWD, BYD Atto 3, etc.). Compare 5-year total cost across all three approaches.
Cash
- Purchase: $50,000 (after-tax)
- Need $50k pre-tax × (1-marginal): ~$73,000 gross earnings
- Running costs 5yr: $20,000 after-tax
- Total pre-tax cost: ~$93,000
Car Loan (7%)
- Repayments 5yr: $59,400 (incl. interest)
- Pre-tax cost equiv: $87,000
- Running costs 5yr: $20,000 after-tax
- Total pre-tax cost: ~$107,000
Novated Lease (EV-exempt)
- Pre-tax deduction: $12,500/yr × 5 = $62,500
- Residual at end: $13,750 (27.5%)
- Running costs INCLUDED in pre-tax
- Total pre-tax cost: ~$76,000
- Saves ~$17,000 vs cash, $31k vs loan
EV FBT exemption is the secret sauce — saves $5k-$10k/yr in FBT that would normally apply to non-EVs. From 1 April 2025, PHEVs lose the exemption; pure EVs remain exempt indefinitely.
When Each Wins
Pay Cash When
- You can afford it without depleting emergency fund or mortgage offset
- You're sole trader/ABN — novated unavailable, loan adds 7%+ cost
- You're buying a low-cost used car ($10k-$25k)
- You want full ownership simplicity, no payment commitments
- You earn under $45k (low marginal rate makes novated savings small)
Use a Car Loan When
- You don't have cash and aren't PAYG (so novated isn't an option)
- You need a vehicle urgently for income generation (rideshare, trade)
- Your cash is better invested elsewhere at higher after-tax return than the loan rate
- Dealer is offering 0-3% financing tied to better discount than cash alternative
Use a Novated Lease When
- You're PAYG employed with stable income
- Your marginal tax rate is 30%+ (savings grow with rate)
- You're buying a new car or near-new (max benefit)
- You're buying an EV/PHEV under LCT threshold — FBT exempt = huge advantage
- You'll keep the car for 3-5 years
- You expect to stay with same/similar employer (lease portability matters)
Common Mistakes
- Novated lease on a non-EV worth less than $30k. The setup overhead doesn't pay back at small lease values. Stick to cars $30k+.
- Dealer finance at advertised 0% but inflated car price. Always negotiate cash price separately, then compare to bank loan.
- Comparing monthly novated vs cash on a like-for-like basis. Novated monthly looks high, but it's PRE-TAX (cash monthly is post-tax). Apples vs oranges. Compare total annual income reduction or 5-year pre-tax equivalent.
- Not checking residual value carefully. ATO sets minimum residuals (28-46.875%) — but lease companies often inflate them. A high residual makes monthly payments look low but creates a big balloon problem.
Related
Novated Lease Calculator
Pre/post-tax split, FBT exemption
Car Loan Calculator
Monthly payments, balloon
TCO Calculator
5-year total cost of ownership
EV Savings
EV vs petrol cost comparison
Disclaimer: General information only. Novated lease savings vary by salary, car price, and FBT treatment. Always get a quote from a lease provider and compare against your specific tax position.