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These errors are often driven by myths and incomplete, incorrect or outdated information.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;  

  1. Paying Cash
  2. Re Drawing her Home Loan and paying the minimum amount over the remaining 15 years of her loan term
  3. 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 other 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 to see how much Linda saves buying the car through PFM Fleet as part of a Novated Lease arrangement;

 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, because the tax saving achieved was greater than the interest paid. Therefore it was cheaper than using cash.   

We can see that Linda's take home pay would be about $250 per month lower under the Novated Lease, but, she still has  $25,290 sitting in her savings account as it was not used to buy the car.

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, then she will be paying slightly more per month for the remaining 15 years of the home loan term. Banks love when people do this, as they can then charge interest on that re draw for the remainder of the home loan term, long after the car is gone. 

 

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 : In this scenario, the Novated lease worked out in front because Linda has avoided huge interest charges that would be incurred if she re drew her home loan and paid it off over 15 years. 

Her home loan interest rate was certainly lower, but paying 3.66% over 15 years is never going to be better than paying a lease off over 3 years. 

Bankers love when customers re draw their home loan, in fact they actively encourage people to do this, particularly when refinancing or applying for a new home loan. Bankers like the idea of people increasing their home loans and paying interest for as long as possible, long after the car is gone.  

3. Novated Lease versus : Home Loan Re Draw paid off in 36 months

Under this scenario, Linda is aware of the pitfalls of re drawing her home loan and paying interest for the remaining 15 years of her home loan term. 

She asked her bank to advise how much she'd have to pay extra, to pay off the re draw amount over 3 years. 

 

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

In this scenario, the Novated lease worked out in front because Linda has more take home pay + the tax savings Linda made over the 3 years were greater than the interest she saved by borrowing the money from her loan loan at a lower interest rate.