Case studies
Everyday, we see hard working Australians making costly errors when it comes to purchasing and running their motor vehicle.
These errors are often driven by myths and incomplete, incorrect or outdated information. .
For example, a client buying a $25,000 car over a 3 year term thinks paying cash for their car is best, because they will avoid paying any interest charges. But if they performed a simple calculation, it would reveal that the interest charges they avoided by paying cash for the car, were much lower than the tax and GST savings they missed out on by not using a Novated Lease to buy and run their car.
Case Study
Linda Contacted PFM for assistance purchasing a Mazda CX3 MAXX FWD manual petrol car.
Linda travels only 15,000 kilometres per annum, has a Gross annual salary of $80,000 (excluding superannuation) and would like to change the car for a new one in 3 years time.
Linda is comparing the following 3 options financing options against a Novated Lease to determine which is best for her;
- Paying Cash
- Re Drawing her Home Loan and paying the minimum amount over the remaining 15 years of her loan term
- Re Drawing Home Loan and paying extra payments to pay off the re draw amount over 3 years
Summary of how much cheaper the Novated Lease was, compared to the above 3 options;
| Net saving : Novated Lease compared to paying cash | Novated Lease works out $5,601.88 cheaper |
| Net saving : Novated Lease compared to Re Drawing Home Loan and paying minimal extra for the remaining 15 year term | Novated Lease works out $13,791.88 cheaper |
| Net Saving : Novated Lease compared to Re Drawing Home Loan and paying extra to clear the car re draw over 3 years | Novated Lease works out $7,059.88 cheaper |
Below you'll find a detailed, side by side comparison revealing exactly how these net savings are achieved.
Vehicle Purchase Price
Firstly, let's look at the vehicle purchasing situation;
| RRP price of specified vehicle | $25,290 |
| Fleet Discount obtained by PFM | ($1,795) |
| Less GST credit available to novated lease customers | ($1,827) |
| Amount financed under a novated lease | $21,668.35 |
| Up front saving achieved via Novated Lease | $3,621.65 |
Note : The median Novated Lease vehicle is around $35,000 - $40,000 and the fleet and GST saving in that price range is closer to $6,000 - $10,000 up front.
1. Novated Lease versus : Paying "Cash"
To keep this example simple, we will assume Linda has no debts at all. But if Linda did have any debts (home loan, personal loan or credit cards) it would be sensible to use the cash to pay off those debts, rather than use the cash to pay for the car.
Paying "Cash" |
Novated Lease |
|
Monthly costs |
||
| Monthly finance repayment | $0 | $455.89 |
| Monthly running costs | $345.20 | $345.20 |
| Total monthly finance and running costs | $345.20 | $801.09 |
| Deduct monthly income tax saving | ($0) | ($160.33) |
| Deduct monthly GST saving | ($0) | ($46.58) |
| NET monthly cost (from take home pay) | $345.20 (a) | $594.18 (b) |
Costs over 36 month term |
||
| NET monthly cost x 36 months | $12,427.20 (a x 36) | $21,390.48 (b x 36) |
| Add lease end residual | $0 | $10,724.84 |
| Add cash used up front | $25,290.00 | $0 |
| Total cost of owning and running car 36m | $37,717.20 | $32,115.32 |
| Net benefit from novating over 36 months | $5,601.88 |
Summary : In this scenario, the Novated lease worked out $5,601.88 cheaper.
Linda though paying cash would be better (as did her friends who told her to pay cash) because there are no finance costs, but neither Linda or her well meaning friends understood that the tax savings of a Novated Lease were much bigger than the finance charges.
2. Novated Lease versus : Home Loan re draw, minimum payments
Under this scenario, Linda wants to pay the least amount possible per month on her home loan repayments.
So she is looking at re drawing funds from her home loan to pay for the car.
Like most people, she will just continue to pay the minimum monthly repayment her Bank requests so she'll be paying interest for the car for 15 years. Linda's Bank Manager thinks this is a good idea too, as the Bank will still be earning interest long after the car is sold.
Home Loan Redraw(at 3.66% 15 years remaining) |
Novated Lease |
|
Monthly costs |
||
| Monthly finance repayment | $186 | $455.89 |
| Monthly running costs | $345.20 | $345.20 |
| Total monthly finance and running costs | $531.20 | $801.09 |
| Deduct monthly income tax saving | ($0) | ($160.33) |
| Deduct monthly GST saving | ($0) | ($46.58) |
| NET monthly cost (from take home pay) | $531.20 (a) | $594.18 (b) |
Costs over term |
||
| NET monthly cost x 36 months | $19,123.20 (a x 36) | $21,390.48 (b x 36) |
| Add lease end residual | $0 | $10,724.84 |
| Add monthly finance payment still being paid for the remaining 12 years | $26,784 | $0 |
| Total cost of finance + 36 months running costs | $45,907.20 | $32,115.32 |
| Net benefit from novating | $13,791.88 |
Summary : Linda is pretty happy with her choice, as her Home Loan repayment only increased by $186 and that seems like a good choice, even though she'll be paying that for 15 years.
The Novated lease work out much cheaper. Even though the finance cost per month is higher under the Novated Lease, it will end in just 3 years (versus the home loan that will go on for 15 years).
Linda has incurred huge interest charges by re drawing her home loan and paying it off over 15 years.
Her home loan interest rate was certainly lower, but paying 3.66% over 15 years isn't smarter than paying a novated lease off over 3 years.
Linda's Bank Manager got his bonus that year and bought a nice boat.
3. Novated Lease versus : Home Loan Re Draw paid off in 36 months
Under this scenario, Linda is very savvy and well aware of the pitfalls of re drawing her home loan and paying interest for 15 years even though the car will be gone in 3 years.
She asked her bank to advise how much she'd have to pay extra, to pay off the re draw amount over 3 years to repay the whole principal. The bank Manager wasn't sure as he hadn't ever come across anyone wanting to do this in the past;
Home Loan Redraw(at 3.66% with payments designed to pay off the re draw over 3 years) |
Novated Lease |
|
Monthly costs |
||
| Monthly finance repayment | $743.00 | $455.89 |
| Monthly running costs | $345.20 | $345.20 |
| Total monthly finance and running costs | $1,088.20 | $801.09 |
| Deduct monthly income tax saving | $0 | ($160.33) |
| Deduct monthly GST saving | $0 | ($46.58) |
| NET monthly cost (from take home pay) | $1,088.20 (a) | $594.18 (b) |
Costs over term |
$39,175.20 (a x 36) | $21,390.48 (b x 36) |
| Add lease end residual | $0 | $10,724.84 |
| Total cost of finance + 36 months running costs | $39,175.20 | $32,115.32 |
| Net benefit from novating | $7,059.88 |