What are the Risks Associated with a Novated Lease?

You probably already have an idea at this point as to what a novated lease offers. It is an ideal alternative to a typical risks of novated leasecar loan, with your employer included in the parties involved in buying a new car. While you may have examined all the advantages and benefits, it is no secret that there also are possible downsides. In this post, let us tackle the risks of novated lease. The point is not to discourage you but give you a better understanding of your options, in a way helping you decide if the benefits outweigh the risks.

  1. Even though the purchase of the vehicle involves your employer, it still is your car, which means it is your liability. It is not like a company car leased to you in a way that you can hand it over if you decide to resign and change employers. It may be true that the novated lease agreement compels the employer to pay for the car on your behalf, it still is your liability if you decide to leave the employer. The vehicle goes with you, as well as all the financial obligations that come with it.
  2. There’s a potential end of lease residual shortfall risk. Considering that the car becomes your liability, the same thing goes for the end of lease settlement. Australian law provides that a novated lease comes with it an end of lease residual. It refers to the amount you may have to pay and settle the contract. The residual, on the other hand, refers to the percentage of the capital value of the car. Put in mind that it won’t matter what the make or model of the car is; the rate is always consistent with the term. There is a possibility that the market value of the vehicle is not sufficient to cover the payout; and in that case, it will be your responsibility to pay for the shortfall.

  1. There is a thing called “mid-lease” One of the risks of novated leaseis that while there is no upfront cost for you to cover, the lender has the right to recover all the fees and their similar interests. It means that if you decide to terminate a lease early, there is a chance that for a higher payout than you initially expect. Hence, it is imperative that you focus on studying the term of your lease. Like for instance, if you plan on having a new car in less than four years, then it is not a right decision to take a 5-year lease term.

Finally, there always is the risk that you could lose your job before the end of the lease. In this case, the repayments for the lease are your responsibility. Well, to be fair, the same thing applies to all types of loan.

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