The problem with novated leases
Here's the biggest problem you’re likely to run into with your employer's recommended novated lease provider
The three-way novated lease agreement
Novated leases: Just for the back story here, a novated lease is a three way agreement. It’s a pretty important kind of deal though the financier does the heavy lifting here. They can procure a vehicle GST free and technically, at least, lease it to you so you get to acquire the vehicle GST free. And because your employer can sign off on this and make the deductions before you pay the tax on your salary, it increases your buying power.
In practise, it’s a salary sacrifice kind of way of acquiring a new car. This sounds like a match made in heaven - a great deal - but there are some pitfalls, and I see one particular pitfall all the time.
In your mad rush to do some deal right now, I would hate for you to be like the lemming over the cliff, landing onto a big fat spike amid the rocks because you failed to see this hazard.
The No. 1 Hazard
The hazard is: your employer often does a deal with one financier. They lock one financier in and that financier becomes their novated lease provider of choice.
It’s the financier you must use to take advantage of this deal.
Obviously, employers love to do this because it simplifies things and they love novated leases anyway because it’s a big fat carrot that they can dangle in front of you, and it doesn’t cost them a brass razoo.
They’re not kicking the tin for anything. All of the savings, all of the benefits to you, are structurally built into the novated leasing deal. So that’s great for your employer.
What you’ve got to do is make sure it’s great for you. And here’s how this falls over.
When an employer locks in a novated lease provider, that provider gets lazy, or at least they acknowledge that they no longer have to compete with other potential financiers. This means simply that they don’t bother to sharpen their pencils and offer you the best deal that they could.
See also Novated Leasing and FBT >>
Be your own advocate
You have to be the best advocate for your own self interest. It’s really quite difficult to do this in some circumstances because, obviously, you’re not match fit at doing this kind of thing.
That locked in provider is doing it all day long. It’s what they do. It’s their core business. Yes you will get the car GST free because the financier procures it that way and they get to claim the GST so they get it back - they pass this saving onto you.
What they often don’t pass onto you, because they get fat and lazy, is the massive fleet discount that they also enjoy as a result of buying so many damn cars. Unless you are getting a GST saving and another big fat saving commensurate with that fleet discount, then you are not getting the best discount you could.
I don’t know exactly how you put a number on that fleet discount, but you certainly can quantify the GST and unless it’s the drive away price minus the GST, minus another amount representative of a fleet discount, then you are getting ripped off. It’s that simple.
The other thing that a 'locked in' financier often does, is they pump up the interest rate. If they don’t pump it up, they certainly do not discount it because they’re not in this mad rush to compete with all other financiers in that space.
Because they’re in a one-horse race, they’re offering you this high rate. They can dangle the GST free carrot and the pre-tax payment carrot in front of you. Often, that might be enough to get you across the line.
I’d suggest if you want to be that advocate who makes sure you get the right deal, then what you must do when you’re dealing with a locked in provider, is to go and see your accountant with the following two deals:
- Get the deal from that novated lease provider
- Go out and get the sharpest conventional car finance deal that you can find.
Let them do their mad accountancy voodoo and come back with what is exactly the sharpest deal after tax.
That’s really what you need your accountant for: to factor in the after-tax implications. The income tax, the fringe benefits tax ... how much it’s all going to cost you at the end of the day.
De-mystify that and compare it to the sharpest conventional car finance deal that you can arrive at.
Skip the bank
Don’t go to the bank for that finance either because banks are notorious rip off merchants. They’re so good at it when it comes to car finance. It’s like, the cash rate here in Shitsville is 1.5% or something, and the bank will have no hesitation in offering you a car loan at 10% or 12%.
It’s like, really? Do you think I came down in the last shower?
If you’ve got asset backing, a good employment history and a good credit history, you should be getting a car finance rate much lower than that. That locked in financier for the novated lease, they should be able to detail all of those aspects of the deal as well. Interest rate, all of that stuff, all of the fees and charges.
If you are not getting a full picture, that is a massive red flag that you are about to be ripped off.
You must take enough time to get your ducks in a row. Do not get railroaded into jumping into this locked in deal now, with a novated lease without first doing the due diligence.
Unless you do just that, you are certain to get ripped off.
It might seem like a great deal upfront, but do not be fooled. Just because your employer has selected a particular provider to get into bed with, it doesn’t mean you have to get a bit-part in this three-way, because if you’re not careful, it could be ugly.
See also Novated Lease on Wikipedia >>