So, you’re thinking of getting a new car. Exciting. You’ve given it some thought and decided that you don’t really want to pay it all up front. There are many car finance options available to you, which is why we recommend you go through our list and pick the one which works best for you.
This overload of information might seem a bit overwhelming at first, but discovering all of the available options means you’ll be making an informed and responsible decision.
The different types of car finance available in the market.
Simple and straightforward, these loans are common and easy to understand. A big financial institution lends you money so you can buy the car, provided that you agree to pay off the debt (plus interest) within a period of two to five years.
The loan is often secured against the car itself. Depending on the bank and circumstances, this period may be longer or extendable. So, why opt for a conventional loan?
- Chance of striking a better deal – Because you’ll be dealing directly with the bank or lender, there’s a chance you might be able to negotiate the loan’s payment structure, repayment rate and even interest rate. You might think loans and interest rates offered by banks are fixed and non-negotiable, but that is not always the case. Banks can—and often do—negotiate loans and interest rates with their clients.
- More leeway – Again, if you’re struggling with installments and late payments, your bank might be willing to extend deadlines. Banks value their clientele and will do almost anything to ensure smooth sailing.
- Best interest rates – Like it or not, banks offer the best deals around. Loans are flexible and interest rates are low, which is why the majority of people borrow directly from their bank.
The only drawback to borrowing from a bank is the large amount of paperwork involved. Long calls and queues, endless form-filling, frustration and headaches. Is it worth it? Definitely!
Home Loan Redraw
Redraws come with certain types of loans (such as mortgage loans and personal loans) and allow account-holders to withdraw some of the money that they’ve already paid off. Think of it as a convenient payback facility, organised and managed directly by your bank.
If you make an extra payment on your home loan for example, your bank may allow for that extra balance to be stored and later used as credit to buy a car loan.
Redraws on home loans are a popular way to finance vehicles as the home loan interest rate is generally lower than a car loan.
Another thing to keep in mind is that while a car loan usually doesn’t go beyond seven years, home loans can last up to 25 years or more. Depending on your home loan’s interest and the amounts you redraw, this could end up costing more in interest in the long run.
If you plan on claiming a tax deduction for the vehicle, using a redraw facility can complicate matters, as you have a loan facility funding a number of different assets (some tax deductible, others private).
Personal lease means that you rent the car for a fixed period and are required to make monthly payments as you go. Think of it as a long-term rental. After that fixed period, the finance company may have the right to sell your car or take it back to sell it.
This could be a good choice if you’re planning on using the car a lot, or if you’re the type of person who enjoys change. Towards the end of the fixed period, you may be able to purchase the car at a lower price.
Alternatively, the finance company may contact you to offer a new car to be leased at the same or at a similar price. If you’re using the car for business purposes, you might be entitled to tax deductions.
Hire Purchase (HP)
This is one of the most flexible options out there. It closely resembles the personal lease as described above, but with a major difference: you have to buy the car by making a final payment (known as the balloon payment), no matter what.
Due to its flexibility, this is a popular option among smaller businesses. The total amount due can be divided between the monthly payments and the balloon payment. If you’re just starting up with your business, you might opt for lower monthly payments and a slightly higher ultimate balloon payment.
Whatever the decision, it’s usually possible to redistribute installments, if for example, there’s a sudden increase in cash-flow and you want to increase your monthly payments (effectively reducing or even eliminating the balloon payment altogether).
It should be noted however, that unlike your home loan, early repayments or payout of the loan will generally not reduce the interest payable. Customers will pay GST on the HP charges (interest). If you are registered for GST, you can claim this back from the ATO. If you are not registered for GST this will be an additional cost.
Although you don’t take ownership of the asset until the final repayment is made, for tax purposes you are still able to claim depreciation interest and running costs (assuming you use the car for business purposes and maintain the appropriate records).
If you operate a number of vehicles in your business, then this might be the best option for you. Under this kind of lease, the lessor (e.g. finance company) is assuming the risk for the purchase. This means that at the end of the agreed period, you don’t get to keep your car(s).
This might not be a problem if you’re running a business that has a large number of vehicles in its service that will not be used long-term. There’s no point in buying cars, if you’re not planning to keep them. Buying and then selling will most definitely incur losses as technology advances and new models are released.
If it’s important that you stay up-to-date with technological advances, a short-term lease will help you do just that. At the same time, much like with a personal lease, you’re avoiding hefty up-front costs and charges. You can arrange payments as cash begins to flow. Property acquired through an operating lease is not recorded in your balance sheet, which means that any accumulated debt is treated as an operating expense.
Last but not least, these lease payments are 100% tax-deductible, meaning you’ll be getting maximum tax benefits (unless you’re buying luxury vehicles, in which case you’re out of luck and will have to pay full tax).
A chattel mortgage resembles a traditional home loan in many ways. Your bank uses the car as security for the required payment and you receive ownership of the car right away. Depending on the situation, this can be both good and bad. The loan becomes a liability and the car will appear as an asset on your balance sheet.
The terms of chattel mortgages are usually flexible and the repayment period ranges from two to five years. Interest rates are generally lower than personal or car loans. Repayments can usually be structured around your income through the use of a balloon payment (ie. you can have lower monthly repayments and a higher balloon) – just like with an HP.
Unlike a HP, there is no GST on the interest charged under a Chattel Mortgage – this makes the finance cheaper, especially if you are not registered for GST.
Depending on how much you use the car for business purposes, you might even be able to claim depreciation and interest costs in your tax return.
Yes, this is possible (albeit quite unorthodox). In some cases, it might even be a good idea to buy a car using a credit card. So, when should you consider this not-so-conventional car finance approach?
- You’re buying a car that costs less than $5,000, which means you won’t be able to apply for a loan with most banks.
- You’ve tried applying for a car loan but have so far been unsuccessful.
- You want to combine different payment methods to pay off your loan (e.g. part-payment on a credit card and part-payment from a secondary savings account).
- You’re confident you’ll be able to pay off the debt quickly, taking advantage of low initial interest rates.
- You’ll be accumulating tons of reward points on your credit card. Might not sound like a lot, but it’s still something.
Before you take out a car loan using your credit card, make sure you can afford to repay your debt. With credit cards, things can get out of hand pretty fast. It would also be wise to give your bank a call in advance, so as to make sure your purchase won’t be flagged as fraudulent.
This type of finance is popular for salary packaging. A novated lease is a 3 way agreement between an employer, employee and the funder. The employer agrees to make the loan repayments from the employees salary whilst the employee is employed. If the if the employee ceases employment, the lease can be re-novated with another employer.
The advantages of a novated lease are:
- The employer is generally eligible to claim the GST on the car (and can pass this saving on to the employee).
- The repayments are normally deducted from pre-tax salary – meaning the employee receives the tax saving now as opposed to waiting until the end of the financial year.
- The employee may choose to use the services of a fully maintained novated lease provider, meaning all costs associated with running the vehicle are deducted from the employees pay.
The tax considerations are complex and employees wishing to use a novated lease product should contact their accountant to review the calculations prior to entering into the agreement.
When it comes to car finance options, it all boils down to preference and your own needs as an individual or business owner. With so many options available, it’s hard to say which car finance type is the best. Kennedy Barnden can help you understand the choices available. Weigh your options and look to strike a deal that offers flexibility in structure and payment. Assess your financial situation and set realistic goals. Be aware of the present, but don’t forget to think ahead!