September 18, 2015
Next to a home, a car is one of the biggest purchases many people make.
If you are shopping around for a new car, your likely to be thinking about make, model and colour than the best way to finance the deal when the time comes to purchase. The danger is that in making the wrong choice, you could end up paying a supercharged price for a mid-range car.
When it comes to the financing, people just want to get it done rather than spend time weighing the alternatives. A lot of the emotion and energy seems to go into, Which car will I buy? What options will I have on it?
"They say not to get emotionally attached when buying a home, because that's when you make mistakes. I think the same applies when it comes to a car."
Let's look at the pros and cons of the five main financing options in more detail.
Car loans can be secured or unsecured. With a secured loan, the lender has rights over an asset should the borrower stop making repayments. That's why interest rates on secured car loans tend to be a bit lower than on unsecured personal loans - because, as a last resort, the lender can repossess the car. In turn, loans for new cars tend to have lower rates than loans for used cars, because lenders consider a used car a riskier asset than a new one.
Pros Simple to understand, straightforward when budgeting.
Cons Interest rates range as high as 16.4 per cent.
On the face of it, the cheapest form of finance is your mortgage, with record low interest rates. These days, most home loans come with an offset or redraw facility that allows you to make extra repayments while still having access to the money if you need it.
How easy is this? Redraw $30,000, pay cash for the car (maybe even negotiating a discount), then drive off into the sunset.
But there's a catch. While car loans have one- to seven-year terms, your mortgage may have 20 years left to run. And the longer you owe money on your car, the more it costs you.
Pros Readily available; interest rates at record lows.
Cons The trap is you could turn short-term debt into long-term debt.
Dealer finance is a tricky area. People talk about pressure from on-site business managers to sign up for easy finance so you can "drive away today" - and there's a perception this sort of finance is expensive.
A suggestion to gain the upper hand in negotiations is to visit a dealership later in the month, when the sales and finance managers are running out of time to hit their targets. "I'd be going in there at 3pm on a Saturday at the end of the month,". "If it's the end of the month, this sale might make their bonus for them - and at 3pm they just want to go home."
Pros Convenience — it's a one-stop shop.
Cons Usually more expensive than a loan.
Car manufacturers also offer finance and lease deals. Many dealers have a special rate of just 1, 2.0 or even 0% on certain models. In most instances the purchase price is not negotiable, in effect, your pay a larger amount in finance. A 'no interest' car loan might seem like a great deal, but the truth is the car price may be loaded so you could be paying more upfront than if you were buying without dealer finance.
It is important to analyse such deals carefully.
Pros You get a new car with low monthly repayments; the manufacturer moves surplus stock.
Cons You may have a lump sum to pay at the end and models are restricted.
The most popular way of packaging a car is through a novated lease, which is a three-way contract involving the employer, employee and lease company.
As part of a salary package, the employee leases a car and transfers (novates) the rights and obligations to their employer, who makes the lease payments.
The employer then deducts the lease payments (and perhaps running costs) from the employee's pre-tax salary, thus lowering their taxable income.
However, the flip side is the employee becomes subject to fringe benefits tax for the car arrangement. The trick is to make sure the FBT doesn't outweigh the income-tax savings. This will depend on your marginal tax rate and how many kilometres you drive - the FBT rate falls as the kilometres you drive rise.
The other important factor in leasing is residual value - the value the leasing company estimates the car will be worth at the end of the term.
If the car turns out to be worth less than this, you have to meet the gap, and if you decide to buy the car outright at the end of the lease, you'll pay GST on this residual.
For that reason it pays to structure the lease to have as low a residual as possible, Negotiating a residual that's 20 per cent of the price after four years, rather than 50 per cent.
This is a complicated area, so get independent, personalised advice from an accountant or planner.
Pros Tax savings; access to a better-quality car.
Cons Falling car values can leave you out of pocket at the end of the lease.
Whether it’s your first car, an upgrade to the family car or a new work vehicle, talk to us today about finding the car loan that’s right for you.
It could save you time and money, so you can concentrate on finding the car you need.
Call Robert on 0415 920 585, to discuss your car finance needs.