Choosing the right novated vehicle

Buying cars can be an emotionally driven exercise for many people. Brand loyalty and self-image are areas you shouldn’t meddle in, but, if your employee’s heart isn’t set on a tricked-out Mercedes Benz AMG or BMW M–series, there are a number of ways you can help them maximise the benefits of their novated lease.

Here are some practical points you can share as an HR professional with your employees looking to take up a novated lease…

Purchase price

We all want to score a good deal when buying a car, more so when it’s brand new. Even though it might feel like you’re playing with house money when purchasing on a novated lease, it’s important to negotiate just as hard as you would if using your own savings.

As the lessee, you’re the one responsible for meeting the residual/balloon payment at the end of the lease, so if you paid overs for the car when driving out of the showroom, you could end up owing more than the car is worth at the end of the agreement, which is definitely something to avoid.

Likewise, when it comes to purchase price, does the car you want to lease attract, or exceed, the Australian Tax Office’s Luxury Car Tax (LCT) rate thresholds? If so, it may reduce the GST savings benefits. At the time of writing, LCT applies when the purchase price of the car hits $66,331.

With the shift towards more energy-efficient and hybrid powered vehicles in Australia (and around the world), if a new car’s fuel consumption rate is less than seven litres per 100 kilometres, the LCT threshold doesn’t kick in until the purchase price reaches $75,526. So, while you may have your eye on that sporty import, or homegrown V8 beast, your purchasing dollar could actually go further by understanding how LCT is calculated, and checking out if there isn’t a more fuel-efficient option in the category of car you’re contemplating.

Many manufacturers – including BMW, Mercedes Benz, Toyota, Volvo, Hyundai and Ford, to name just a few – have a range of hybrid or fully electric powertrain options available for Australian buyers that are as powerful and comfortable to drive as their combustion engine counterparts.

While it’s convenient having a leasing company at your disposal to do the hard-yards, you still need to make sure you know if you’re getting a discount on the purchase price from your leasing provider. Again, the final price of the car could have some adverse impacts on its resale value when weighed up against the size of your residual/final payment at the end of the lease.

Running costs

The purchase price of a novated lease vehicle is just the start. A car’s running costs are often the biggest cost component when it comes to driving a car for three or four years. But, sometimes, that’s the last thing on a buyer’s mind. Doing your homework in this area is really important when it comes to minimising the cost of your lease.

Some cars in the same category use more fuel than others, and some draw higher insurance premiums. Some makes of car have more or less warranty coverage than others, and servicing costs also differ across manufacturers and makes of vehicle.

All of these factors can have a huge impact on the costs of running that car for the lease term and, perhaps more importantly, directly affect the salary deductions required to get behind the wheel and hit the road.

When deciding on the make and model of your lease vehicle, try to choose the most fuel-efficient option in its category. Also, look for the option that comes with the best warranty coverage and guaranteed scheduled service costs. Much of this information is available in the dealer’s brochures or via the manufacturer’s website.

Remember that all of your running costs are included in a novated lease. It might look tricky if this is your first experience with a lease but it’s really easy after you’ve made the right upfront choice.

Safety

To state the obvious, safety features can be lifesaving. But, as well as protecting you, your family and friends, safety features can save you money. Features such as telematics, reversing cameras, automated emergency braking, lane-change assist, airbags and body sensors are just some of the accessories available in new vehicles to help you avoid everything from fatal accidents to annoying bumper scrapes.

When it comes to safety features, always look for ABS brakes, driver and passenger airbags, and front and rear sensors as a minimum standard. Choose a make or model that comes with leading safety features included as standard. Benchmark the safety features against competing manufacturer base models, not their top-of-the-range offering.

Accessories

You’ll be pleased to know that choosing accessories counts as one of the fun parts of a novated lease. While some of the latest accessories for new cars can be somewhat extravagant, it’s important not to go overboard in this area because it can cause you problems down the track as far as resale value is concerned. As with running costs, some research goes a long way.

Some makes and models have everything like air-conditioning, power windows and automatic transmission included as standard, while others (not many these days, to be fair) still consider them as extras and will fit them at an additional cost. Looking for value in this area will definitely save you money.

It might pay to start by doing a basic mental exercise of what you’ll need, as opposed to what you want. For example, if you’re a tradie and you’re purchasing a commercial ute, you’re definitely going to need a range of accessories fitted due to the nature of your work.

If you’re purchasing a car more for personal use, do you need a sunroof or do you just want a sunroof? If your driving is mostly limited to built-up areas with lots of traffic lights and general congestion, do you need cruise control or do you do a lot of long-distance driving and it would work in your favour to have as many creature comforts as your budget permits?

Remember that some accessories might be great to have on your car but they can come at a cost – a sunk cost (i.e. the extra $2,000 spent on alloy rims will not come back when you want to sell the car at the end of the lease).

Resale value

A novated lease payment will include a finance amount that should cover the depreciation of the car during the lease term – a residual or balloon payment. Ideally, the value of the car will be worth the same, or more than, what is owed at the end. With this in mind, it’s important to choose a make and model with a strong resale value history.

Supply and demand can also impact resale expectations. If there are strong sales and high volumes of a make and model sold (e.g. Holden Commodores, Toyota Corollas and Ford Falcons), it’s likely there will also be a large amount of those cars in the used car market in three or four years. Consequently, this may soften your resale value.

Look for the residual value on the lease quote, then check independently to see if it matches industry forecasts for that particular make and model. If you have any concerns, you can always ask your lease provider to adjust your residual value to manage risk exposure – or simply choose a different car.

And, whatever you do, make sure you always obtain independent advice, which takes into account your specific financial circumstances, before entering in to a lease agreement.

Start a conversation with SG Fleet today.

Driving Insights