This sub-thread is probably a bit OT, perhaps, but if you'll indulge (mods pls move if appropriate).
Agreed - mods, please move.
Also, before I reply to your post, please note that I wouldn't consider myself an expert in novated leasing by any manner of means - I've worked at a car finance broker / novated leasing provider for a
long time, but I work in IT, not finance. I've picked up quite a lot over the years but it's all "indirect experience", so to speak.
I agree, one doesn't seem to see this much. Probably it has to do with ownership and many people wanting to keep a car longer than a operating lease would suggest is a good idea. However, if you really do want to change your car every 3-5 years ... I'm wondering if it might be a decent option? So long as its primarily business use (90%+) it seems to me this type of lease could be a strong contender against a novated lease.
I think it probably has more to do with cost than with people wanting to keep cars beyond the end of the lease - AFAIK most operating leases still offer you the option to buy the car at the end of it.
Re the cost, an operating lease has several elements to it that can (and normally do) make it more expensive than other types of finance.
Firstly, all of the running/maintenance costs are included in an operating lease, and the cost of said maintenance (as paid by the lessee as part of their monthly payments) is set by the operating lease provider
in advance. The lessee doesn't carry any of the "risk" on maintenance costs under an operating lease - the leasing company must maintain the car in return for the fixed monthly repayments, regardless of what the actual maintenance costs turn out to be. Hence, the maintenance cost (as paid by the lessor) is often higher than the actual maintenance costs, as the leasing company needs to include a margin of safety and will "predict" these costs on the high side when calculating the cost of the lease. There can also be an element of mark-up / margin-add involved.
On the other hand, a fully-maintained novated lease works a bit differently - the maintenance/running costs are still included in the monthly repayments on the lease, but they're not a "fixed" or "guaranteed" amount. Instead, they're a pre-payment by the lessee to cover the
estimated running costs, but at the end of the day the lessee will pay whatever the
actual running costs are, not what they were predicted to be. This means that if the vehicle costs less to run than initially predicted the lessee will receive some cash back at the end of each year / the end of the lease (plus, potentially, an additional FBT bill), and if it costs more to run than predicted the lessee will be asked to stump up the extra cash. This means there's no "risk" on the running costs for the lease provider, and hence no need for them to charge a premium or safety margin. Likewise, the lessee is normally in control of where the maintenance, etc, if performed, and hence how much they pay for it.
The second element is to do with end of lease / residual values. Under most (all? I'm not 100% sure) operating leases, when the lease ends you simply hand the car back to the leasing company and the lease is over, regardless of what the car is worth vs any residual on the lease (there technically isn't a residual on an operating lease, although a quasi-residual is factored into the cost calculations). This means the leasing company needs to factor some level of "residual risk" into their pricing - they need to cover themselves to ensure they don't lose thousands of dollars at the end of the lease when disposing of the car if it turns out to be worth less than predicted.
On the other hand, under a fully-maintained novated lease the residual risk lies with the lessee - you owe a certain residual value at the end of the lease, and if you don't want to keep the car and the money you get from selling it isn't sufficient to cover the residual then you, the lessee, need to cover the difference. No residual risk for the leasing company means they don't need to charge extra to cover this risk.
Hopefully the above all makes sense... at the end of the day you can think of an operating lease as being similar to an insurance policy on the cost of owning and running a car - you gain the absolute certainty that owning / running the car will only cost a fixed amount for a certain period of time, but on the flip-side you pay a premium for this certainty.
Bingo on this one! Absolutely. For my first novated lease, I felt like I got a good deal but not a great one. It _did_ work out cheaper than me financing via other means, but I really struggled to work out the base finance rate and the broker/financier was very guarded.
It
is possible to de-construct, but very hard
. If you want to try and figure it out the key things you need are:
- the total amount of money you're borrowing - including any ancillaries like insurance product premiums, not just the cost of the car. Ideally you'd want a breakdown of each component of this amount too (as it's not uncommon for a bunch of insurances you may not want to be thrown in). Make sure what you're told matches the finance documents you end up signing too, to ensure it doesn't get "fiddled" somewhere along the way.
- the residual value of the loan
in dollars (not percent) - again, make sure it's the total residual of the loan, not just the residual of the car component, and check this figure matches the finance documents.
- the term of the loan.
- the monthly repayment of the
finance component of the lease only - i.e. the monthly payment going to the actual finance company, excluding any running costs and tax benefits.
With these four components you should be able to back-track to the interest rate - or at least very close to it (you won't be able to easily take into account things like deferred payments at the beginning of the lease, but these don't make a big difference).
Oh, and if you are dealing with a broker / leasing company / financier who won't tell you what the
customer rate (
not the base rate) of the lease is, I'd simply move on. Bit hard if your employer forces you to use a single novated leasing provider though :-/
Right again for my scenario. This is rubbish and I won't fall for it again.
Aye. Remember, though, that an exclusive arrangement doesn't preclude you bargaining / getting a better deal, it just makes it harder. You can't say "I've got a better quote on my novated lease from another company and I'm going to go with them unless you lower your quote", but you can check your quote with another provider and make the exclusive provider justify why theirs is more expensive. Likewise, if you can convince them that you're willing to go with another finance option from another company (e.g. a standard secured car loan) on principle then they should be willing to become more competitive... like all businesses, novated lease providers would rather make some money than no money.
I can certainly see how novating could work out cheaper than standard personal/car loan financing. However, I'm looking at my options for a vehicle changeover in about 6 months and I can't really understand how operating or novated leasing can really be cheaper than an outright purchase if the funding source is money in the bank. In fact, redrawing on a home loan sounds like under many circumstances it would provide cheaper funding than lease sourced finance.
Firstly, in terms of raw financing cost, you are correct that drawing down on a home loan is almost always cheaper -
as long as you have the discipline to regularly repay the money into your home loan over the same timeframe you would have paid back a car loan (or similar). If you don't do this then you end up costing yourself more, as even though the interest rate is lower the longer "loan term" rapidly outweighs this.
Secondly, I think we're talking a little across purposes. You sound like you have quite a large percentage of business use, yes? How much? If it's high enough then a novated lease may well
not be the best option for you. At a
very high level, fully-maintained novated leasing is essentially a finance product that is tax advantageous
for borrowers who would otherwise not be able to claim a tax deduction (or not be able to claim very much) on their vehicle. i.e. it's ideal for "regular" PAYG employees, and is normally significantly cheaper for them than other options.
If you have a large percentage of business use and therefore are able to claim large "standard" tax deductions for your vehicle then the comparative benefit rapidly erodes. It's impossible for me to say what will be better for you as it all comes down to specifics of your situation - what percentage of your car usage is deductible, what sort of car you're buying (and how much it costs), how many KMs you drive per annum, etc, etc. You would need to get some quotes for both a novated lease and other options, try to rough-up the tax deductions you'd be able to claim with the "other options", and compare the net post-tax cost of each.
If you want any specific advice then I'm happy to help where I can - PM me. (I hope this isn't taken as advertising on the forum - just trying to help out a follow member. It sounds like Moopere's employer has an exclusivity arrangement with one novated leasing provider so my business wouldn't be able to assist him anyway. Mods, if you disagree then please remove this last paragraph).
