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Novated Lease Advantages and Disadvantages

Mar 21st 2015 at 1:25 AM

A novated lease is basically a three-way agreement between a leasing company, an employer, and an employee. An employee approaches a motor vehicle leasing company and signs a contract for the lease of his or her chosen vehicle. The employer then undertakes to fulfil all of the obligations of the employee towards the motor vehicle company, deducting from the employee's monthly salary the costs of the lease. Certain agreements are limited to the lease payments while others include maintenance costs as well. This aspect is dependent largely on the contract between the employer and the employee.

Some of the more known advantages of a novated lease are that it allows the employee to include a motor vehicle benefit into his or her salary package and gives the chance for the employee to have a lower taxable salary, as deductions are made by the employer to the pre-tax salary. It is generally financially advantageous to the employee and with the help of a good and competent novated lease calculator, he or she is bound to get an excellent financial deal.

Apart from the financial aspect, novated leases also give employees flexibility in terms of the vehicle they choose. While there is an option at the end of the lease to actually buy the vehicle, the employee may also choose to just end the lease if he or she decides he or she wants another type of motor vehicle or wants a different arrangement. For its agreements that are purely limited to lease payments, the employee is also given the chance to make his or her own decisions regarding car maintenance, servicing and upgrades.

Of course, in spite of its many advantages, there are also disadvantages. Nothing in life can be purely good after all. However, as long as one is aware of exactly what these disadvantages are and try to counter them or at least minimize their detrimental effects, these novated lease disadvantages are easily dealt with.

The first is that while novated leases are generally advantageous financially, in terms of tax benefits, they are not always the best choice. Novated leases are said to be better for persons who belong to a high tax bracket, as its tax benefits increase exponentially with the salary size. This is where the importance of using a good novated lease calculator comes in. Before actually committing to a novated lease, one should make sure that the terms of the novated lease agreement are ones, which can maximize the employee's current financial standing and not unnecessarily bring it down.

Another disadvantage is that novated lease agreements are commonly contracts of adhesion, meaning that they are prepared by only one party, the motor vehicle company. In many cases, they set most of the terms of the contract. While employees are given the chance to give their own input or negotiate, the motor vehicle leasing company still holds a higher advantage. After all, the employee is the one who actually needs the vehicle. The tendency would be for the latter to give in to the former's demands.

So, before signing into an agreement, it is best to read all the terms in the contract. This way, you will never have to say that you don't know this and that. It would also be great to ask as many questions as you can to the leasing company.

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