July 05, 2016
When buying a new car, one of the big decisions you need to make is how to pay for it. If you don’t have the luxury of paying for it outright, it’s a good idea to know your options before heading out shopping.
Whether you are purchasing a car for business or personal use, we’ve outlined your finance and leasing options below, as well as the benefits of each.
Purchasing a car with finance
Car loans are a relatively straightforward way to purchase a car. These are generally fixed-rate loans that you pay off over a period of three or five years, and the car is used as security.
An alternative to a secured car loan is to apply for a personal loan. Given that you won’t have the car as security, you will likely be charged a higher interest rate, but you will have the choice between fixed and variable interest rates. You will also be able to pay the loan off faster and set up a redraw facility.
You might also wish to consider refinancing your home loan to purchase your car, however you should compare the interest repayments on a short-term car loan with the cost of paying off a car over the life of your home loan.
When purchasing a car for business, you will need an equipment loan (often referred to as a chattel mortgage). This is a fixed-rate loan secured by the value of the car. You will not need to pay GST on your loan repayments.
Be wary of 0% car loans
As a general rule of thumb, if a finance deal seems too good to be true, it probably is. If you are offered a car loan with 0% interest or an extremely low interest rate, you need to look at the fine print.
Every lender needs to make a return on a loan, so it’s more than likely that a low finance offer will have hidden costs, no flexibility or higher fees. Another common practice is for car dealers to charge a higher drive-away price to recoup the loss, in which case you should be aware of a reasonable price for that vehicle before agreeing to a deal.
Using dealer finance gives you a lot less bargaining power over the final price as well as the price for any vehicles you wish to trade in. Often you can save more money on the vehicle by negotiating a good deal and then accessing finance externally.
Your options for leasing a car
Car leasing is slightly more complex than finance and is a particularly popular option for businesses and people who want a luxury vehicle.
When leasing a car, you can either upgrade at the end of the contract, or negotiate to purchase the vehicle. When buying a car at the end of a lease, you can try to negotiate a lower price.
Continually renewing a lease is convenient for those who want a new car every few years, although it’s not always the cheapest option when compared with a lot of finance alternatives. The trade off, however, is that you will not need to worry about buying and selling cars every few years and, if you have a luxury car, a lease can be a more affordable alternative to purchasing the vehicle outright.
For businesses, leasing a car may give you some valuable tax deductions, but there are restrictions that you should discuss with your accountant.
When leasing a vehicle, you have three options: a finance lease, a novated lease and a hire purchase.
There are a variety of finance leases available for individuals and businesses. This type of lease is popular as it allows you to access a set monthly repayment. Then, at the end of the lease, you can either buy the vehicle or lease a newer one.
For businesses that provide employees with cars, this is a viable alternative to investing in assets that do depreciate quickly.
A novated lease is a salary packaging arrangement that allows employees to reduce their taxable income. While finance leases are in the employer’s name, this lease is to the employee. Your employer takes the lease repayments out of your pre-tax salary, thus reducing your taxable income.
This arrangement saves an employer from having to provide a company car and allows the employee to choose their preferred vehicle.
You should, however, be wary with this type of lease. If you resign or lose your job and your employer doesn’t take over the lease, you will have to continue making repayments on the car until the lease expires.
This is an arrangement for businesses that want to eventually purchase a car, but aren’t quite in a position to do so. A hire purchase does not usually require a deposit and you are able to lease the equipment until the contract is paid in full. Unlike a finance lease, a hire purchase requires that you eventually buy the vehicle.
Ready for a set of new wheels but want to know more about your car financing and leasing choices? To compare options that will benefit you, call Trevor on 07 3391 5113.