Leslie Massey
Car leasing in Australia is a popular alternative to taking out a loan or buying a car. It involves renting a vehicle for a set period, usually between two to five years. During this time, you pay to rent the car, and at the end of the term, you can either hand it back or purchase it. There are several types of car leases in Australia, including finance leases, operating leases, and novated leases. A novated lease is a three-way agreement between an individual employee, their employer, and a finance company or dealer, where the employee's pre-tax salary is used to pay for the lease. This option can also include the car's running costs, such as fuel, registration, maintenance, and insurance.
| Characteristics | Values |
|---|---|
| Lease duration | Standard lease terms are two to five years |
| Lease types | Novated lease, finance lease, operating lease |
| Novated lease | Three-way agreement between employee, employer, and financier; no GST on the purchase price; running costs included |
| Finance lease | Also known as non-maintained leasing; lessee pays for on-road costs; can buy the car at the end of the lease |
| Operating lease | On-road costs bundled into lease payments; no option to buy at the end of the lease |
| Usage | Can be used for private, non-business purposes |
| Payment | Regular payments are cheaper than car loan repayments |
| Upgrade | Option to upgrade to the latest model at the end of the lease |
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What You'll Learn
Novated lease agreements
The main benefit of a novated lease is the potential for tax savings. Employees do not pay fringe benefit tax (FBT), and employers can claim GST on running costs as a credit, resulting in savings for the employee. Additionally, employees do not pay GST on the purchase price of the car or its running costs, which include fuel, registration, servicing, maintenance, insurance, and tyres. This can result in significant savings.
Novated leases can be fully maintained, where all vehicle running costs are included in the regular payment, or self-managed, where the employee is responsible for these costs in return for lower regular payments. It is important to note that the novation is cancelled if the employee leaves the employer, and the rights and obligations revert to the employee.
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Finance lease
A car lease is a form of car finance that allows business owners, employees, contractors, or the self-employed to use a vehicle and enjoy the benefits of ownership, while a finance company retains ownership of the vehicle. This means that the borrower rents the chosen vehicle from the finance company for a fixed monthly payment.
A finance lease is usually taken out for a business vehicle, and it should be used for business purposes at least 50% of the time so that payments can be claimed as tax deductions. At the end of the lease, the lessee is obligated to either purchase the car by paying the residual value or lease the car again.
A finance lease can be a good option for those who want to get a new car without taking out a car loan. It is similar to an operating lease, but it usually has a longer term and the lessee must buy or renew the vehicle at the end of the lease. This means that the lessee will need to pay the residual value of the vehicle at the end of the lease, which can be a large cost. However, a finance lease can be more cost-effective than an operating lease as the regular payments are likely to be cheaper than regular car loan repayments.
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Operating lease
An operating lease is similar to a finance lease but with some key differences. Operating leases usually have a shorter term, and there is no obligation to buy or renew the lease at the end of the contract. The car is simply returned to the finance company or dealer. This type of lease is ideal for those who want a hassle-free way to use a vehicle without worrying about its disposal at the end of the lease.
For businesses, an operating lease can be beneficial as it frees up cash flow and maximises tax savings. It also removes the risk associated with owning depreciating vehicle assets. With a fully maintained operating lease, businesses can consolidate most running and maintenance costs into one monthly payment, with flexible terms typically ranging from 3 to 5 years.
In Australia, a novated lease is another popular option, where the lease is part of a three-way salary-sacrificing arrangement between employers, employees, and a finance company or dealer. This can be a cost-effective way to acquire and run a car, as you don't pay GST on the purchase price, and you can include running costs such as fuel, registration, maintenance, and insurance in the agreement.
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Secured car loan
A secured car loan is a type of personal loan with a fixed term and often a fixed rate, where the car you buy acts as a guarantee. In other words, your car is the security for the loan. This is the most common way to finance a car in Australia and generally works out cheaper for the borrower compared to an unsecured loan. This is because there's less risk for the lender. If you can’t repay a secured car loan, your lender has the right to reclaim and sell the car to recoup its money.
Most car finance you’ll see advertised is for a secured car loan, but it’s not always the case. For example, some major lenders in Australia only offer unsecured car finance. Secured car loans work similarly to other finance options, but there are some key differences to understand.
The lowest minimum interest rate for a secured car loan in July 2025 was 3.69%. The average across all minimum secured car loan rates is 7.78%. In comparison, the lowest minimum interest rate for an unsecured car loan in July 2025 was 4.5%. The average across all minimum unsecured car loan rates is 8.37%. Secured car loans can come with either fixed or variable interest rates and it's important to select the interest rate that best meets your needs.
There’s no minimum credit score that applies to all secured car loans. Each lender will have its own credit rules. But a consistent theme is that you will generally be charged a higher interest rate if you have a lower credit score. The average credit score for auto loan requests is 818.
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Leasing vs buying
Leasing a car in Australia involves renting a vehicle for a set period, usually between two and five years. At the end of the lease, you can usually hand the car back to the dealer or finance provider. There are several types of car leases in Australia, including finance leases, operating leases, and novated leases. A novated lease is a three-way agreement between you, your employer, and a finance company or dealer, where your lease payments are made from your pre-tax salary.
When deciding between leasing and buying a car, there are several factors to consider. Leasing a car can offer lower upfront costs and the ability to drive a newer car without the long-term commitment of ownership. Lease agreements may also include bundled servicing packages, reducing unexpected maintenance expenses. However, leasing typically comes with mileage limits and may not offer the same level of flexibility as owning a car.
On the other hand, buying a car provides complete ownership and long-term financial security. Once the loan is paid off, there are no further payments, and the vehicle's value belongs to the owner. Buying a car eliminates mileage limits and provides the freedom to do with the vehicle as you please. However, buying a car may come with higher upfront costs and the potential for unexpected maintenance expenses.
It's important to consider your individual situation when deciding between leasing and buying. If you value flexibility and convenience and are comfortable with mileage limits, leasing may be a good option. If you prefer long-term financial security and the freedom that comes with ownership, buying may be a better choice. Additionally, your financial situation and tax bracket can play a significant role in your decision, as leasing can offer tax advantages for those in higher tax brackets.
Ultimately, both leasing and buying have their advantages and disadvantages, and the best choice depends on your specific needs and preferences. It's essential to carefully consider your options and run the numbers to make the smartest decision for your lifestyle and financial situation.
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Frequently asked questions
A car lease is a finance product that allows you to use a car without owning it. Instead, the financier buys the vehicle and leases it to you for a set term, usually between two to five years. During this time, you pay to rent the car.
There are three main types of car leases in Australia: finance lease, operating lease, and novated lease. A finance lease enables you to look after all the vehicle's on-road costs yourself. With an operating lease, you simply hand the car back to the finance company at the end of the term. A novated lease is a three-way salary-sacrificing arrangement between you, your employer, and the financier.
In a novated lease, your employer agrees to make your lease payments from your pre-tax salary. This reduces your taxable income, and you also don't have to pay the GST on the purchase price of the car. You can include all the running costs of the car, such as fuel, registration, maintenance, and insurance, in your regular payment.
Leasing a car offers flexibility and convenience. You don't need to pay the full price of the vehicle upfront, and you can easily upgrade your vehicle at the end of the lease term. Leasing also provides cost savings, as you don't need to pay a deposit, and your regular payments may be cheaper than car loan repayments.
With a car lease, you don't own the vehicle, and you may have to lease the entire car without the option of a deposit. Additionally, leasing may not be cost-effective if you don't need a car or if you plan to keep the car for an extended period.
