Car Loan vs Lease: Which Is Better in Australia?

A car loan lets you own the vehicle outright once the loan is repaid, while a lease means you pay to use the car for a set period and either return it or pay a residual to keep it. For most Australians buying a personal vehicle, a car loan is the simpler and often cheaper option. A novated lease can save money through pre-tax salary sacrifice, but only if you are in a high enough tax bracket and understand the residual payment at the end.

Why this comparison matters more in 2026

The FBT exemption for electric vehicles has made novated leasing significantly more attractive for EV buyers since 2022. In 2026, around 10% of new cars sold in Australia are electric, and the FBT exemption can save $6,000 to $12,000 per year on a novated lease for an eligible EV. But for petrol and diesel vehicles, the calculus is different. Understanding the total cost of each option, not just the monthly payment, is essential before committing.

Car loan vs lease: the key differences

Total cost comparison: $40,000 car over 5 years

Here is what the same $40,000 car costs under each structure over five years, for an employee earning $85,000 per year.

The numbers tell a clear story. For a petrol car, a car loan and novated lease end up costing roughly the same once you factor in the FBT liability. The novated lease's tax saving is largely cancelled out by FBT and the residual payment.

For an EV, the FBT exemption changes everything. The novated lease saves roughly $16,000 over five years compared to a car loan, because you get the pre-tax benefit without the FBT cost.

Why the tax bracket matters

The pre-tax salary sacrifice benefit scales with your marginal tax rate. At $85,000 (32.5% bracket), you save about 32.5 cents on every dollar of lease payment. At $120,000 (37% bracket), you save 37 cents. Below $45,000 (19% bracket), the saving is too small to offset the residual payment and the complexity. As a general rule, novated leasing only makes financial sense at the 32.5% bracket and above.

The residual value trap

The residual payment is the single biggest difference between a car loan and a lease, and the part most people underestimate.

The ATO sets minimum residual values for novated leases based on the lease term. These are not negotiable.

At the end of a five-year lease on a $40,000 car, you owe $11,252 as a lump sum. Your options at that point: pay the residual and own the car, refinance the residual into a new loan, or start a new lease on a different car and trade in the old one (hoping its market value covers the residual).

The risk: if the car has depreciated below the residual value, you are paying more than the car is worth to keep it. A $40,000 petrol car after five years of average driving might be worth $15,000 to $18,000. The residual of $11,252 is manageable. But if the car has done high kilometres or the model has depreciated faster than average, you could be paying $11,252 for a car worth $10,000.

With a car loan, there is no residual. When the loan is fully repaid, you own the car outright with no further payments.

The EV advantage: FBT exemption explained

Since 1 July 2022, battery electric vehicles and hydrogen fuel cell vehicles are exempt from Fringe Benefits Tax when provided through a novated lease. Plug-in hybrids lost their exemption from 1 April 2025.

To qualify, the vehicle must be a full BEV or hydrogen fuel cell, priced below the luxury car tax threshold of $91,387 for 2026/27, and first held and used on or after 1 July 2022.

The FBT saving is calculated as 20% of the vehicle's base value multiplied by the 47% FBT rate. On a $40,000 EV, that is $3,760 per year, or $18,800 over a five-year lease. Combined with the income tax saving from salary sacrifice and the lower running costs of an EV (electricity vs petrol), the total saving can reach $15,000 to $20,000 over the lease term compared to a car loan on the same vehicle.

This is why novated leasing has become the default way to buy an EV in Australia for employees. The tax saving is substantial and genuine, provided you are in the 32.5% bracket or above.

When to choose a car loan

A car loan is the better option in most personal-use situations. Choose a car loan when you want to own the car from day one with no residual payment at the end, when you are buying a used car (most novated leases require new or near-new vehicles), when you are self-employed or your employer does not offer salary sacrifice, when your income is below the 32.5% tax bracket (under $45,000), or when you want the flexibility to sell the car at any time.

If you are a first-time buyer, a car loan is almost always the right starting point. A novated lease adds complexity that is not worth it unless the tax saving is substantial.

When to choose a novated lease

A novated lease makes sense when you are an employee earning $85,000 or more, your employer offers salary sacrifice for vehicles, and you are buying a new car that you plan to keep for three to five years.

It is especially compelling when you are buying an EV and qualify for the FBT exemption. The combination of pre-tax payments, no FBT, GST savings, and lower running costs can make an EV on a novated lease cheaper than a petrol car on a car loan.

Which is better by situation

How to decide

Start with three questions. First, are you an employee whose employer offers salary sacrifice? If no, the answer is a car loan. Second, is the car a new battery electric vehicle? If yes, a novated lease is almost certainly cheaper. Third, is your taxable income above $85,000? If no, the tax saving from a novated lease is unlikely to justify the complexity and residual payment.

If you answered yes to all three, get a novated lease quote and compare the total cost (including the residual) to a secured car loan quote. The right answer is whichever costs less over the full term, not whichever has the lower monthly payment.

This article is general information only and is not financial advice.