The Best Way to Buy a Car: Cash, Hire Purchase, or Novated Lease?

One of the most common questions we get asked is: Should I pay cash, opt for a hire purchase, or go with a novated lease? The decision can significantly impact your tax savings, cash flow, and overall financial strategy.

To settle this debate once and for all, we’ve created a clear, easy-to-understand comparison table to help our clients and readers make an informed choice—without wading through pages of text.

Let’s dive in and find out which option works best for you! 

1. Purchasing Outright (Cash Purchase)

Pros: 

✔ Full ownership from day one
✔ No ongoing interest costs or lease fees
✔ No restrictions on vehicle use

✔ Depreciation on the work or business-related percentage, up to the car limit
✔ No impact on credit score

Cons: 

✖ High upfront cost, reducing cash reserves
✖ No flexibility – depreciation affects resale value

Best for:

• Individuals or businesses with strong cash flow
• Those who prefer full ownership and no ongoing payments

2. Hire Purchase (HP)

How it works:

• You pay a deposit and finance the remainder through fixed monthly repayments.
• Ownership transfers to you after the final payment.

Pros: 

✔ Fixed monthly payments make budgeting easier
✔ The car is an asset after full repayment
✔ Potential tax deductions for lease and running expenses if used for business

✔ Depreciation on the work or business-related percentage, up to the car limit

Cons: 

✖ Interest costs make it more expensive than a cash purchase
✖ Vehicle is technically not yours until final payment
✖ A big balloon Payment at the end of the lease term 

Best for:

• Businesses or individuals who want structured payments but eventual ownership
• Those who don’t want to tie up capital

3. Novated Lease (Salary Sacrifice)

How it works:

• Your employer leases the car on your behalf, and payments come out of your pre-tax salary.
• Includes running costs (fuel, insurance, rego, servicing) in a single payment.

Pros: 

✔ Tax-effective – payments reduce taxable income for employees
✔ No GST on the purchase price (you only pay GST on lease payments)
✔ Includes running costs, making budgeting easier
✔ No need for a large upfront payment

✔ The FBT exemption for EVs makes it highly beneficial for employees. 

Cons: 

✖ Must remain with the employer for the lease duration
✖ You don’t own the car unless you buy it at the lease end
✖ Balloon payment may be required at the end of the lease

✖ It may not be beneficial if you lose your job or quit, as you may need to transfer the lease to a hire purchase agreement or pay the remaining amount in cash.

✖ It may not be beneficial if you are purchasing a regular vehicle, and your employer passes on the FBT cost to you.
✖ Not ideal for those who drive very low or high kilometers

Best for:

• Employees with stable jobs who want tax savings
• Those who prefer an all-inclusive car package
• Employees looking to purchase an EV at a lower cost than the market price by leveraging the FBT exemption and GST savings through a novated lease.

4. Bonus Point – Using Home Equity to Purchase a Vehicle

How it works:

This involves borrowing against the equity in your home—essentially increasing your home loan—to finance the car purchase. Since home loan interest rates are generally lower than car loan rates, this option can reduce borrowing costs.

Pros:

✔ Lower interest rates compared to car loans or hire purchase
✔ No restrictions on vehicle type or usage
✔ Can help with cash flow by spreading payments over a longer term

✔ Potential tax deductions for interest and running expenses if used for business

✔ Depreciation on the work or business-related percentage, up to the car limit

Cons:

✖ Increases your overall home loan debt and repayment period
✖ You may end up paying more interest over time due to the extended loan term
✖ No specific tax benefits for employees unless it is used for work 

Best for:

• Homeowners with sufficient equity who want to benefit from lower interest rates
• Those who prefer long-term financing with smaller monthly repayments
• Business owners who can claim deductions if the vehicle is used for business purposes

Comparison of Vehicle Purchase Options:

Best Option for Business Owners (Including Sole Traders & Companies)

Best Option for Employees (PAYG Workers)

Conclusion 

Choosing the right way to purchase a vehicle—whether through cash, hire purchase, or a novated lease—can have a significant impact on your finances. With the added tax benefits for electric vehicles, making an informed decision is more important than ever.

If you’re unsure which option is best for you or want to maximise your tax savings, our team at Investax is here to help. Contact us today to discuss your situation and find the most tax-effective way to finance your next vehicle.

Glossary

Balloon Payment – refers to a large, final lump sum due at the end of a loan or lease term, commonly used in Hire Purchase, Chattel Mortgage and Novated Leases agreements. It allows borrowers to reduce their monthly repayments by deferring a portion of the loan to the end of the agreement. This structure can improve cash flow during the loan period but requires careful planning to manage the final payment.

While a balloon payment makes financing more affordable in the short term, it increases the total interest paid overtime. At the end of the term, the borrower must either pay the lump sum, refinance the amount, or trade in the vehicle. In a hire purchase, paying the balloon amount finalises ownership, whereas in a novated lease, it offers the option to buy the car or return it.