It’s time for a new car and having made the decision to buy, the next question is often not what car, but how you are going to pay for it?
Financing a car can be a minefield to the uninitiated, especially when the salesperson starts bandying about terms like hire purchase, novated leases, residuals and balloons.
Despite the confusing nature of the jargon, most finance products on offer are fairly simple and with a little understanding you can make sure you are getting the best deal for your situation.
There was a time not so long ago when the options for getting a new car were to either buy it yourself or hope that you were given a company car as part of your job. But today the choice is wide open with car finance options ranging from traditional bank loans to novated leases, all aimed at getting you behind the wheel.
In determining what finance product is best for you, you first have to decide whether you should buy or lease. The essential difference here is that if you buy a car, you own it and it is yours to do with as you please.
Leasing a car
Leasing a car means you are only paying for the use of the car and at the end of the lease term, officially, you have to hand it back or take out another lease. The legalities get a bit murky here and in practice, it is possible to buy the car at the end of the lease period under certain types of leasing packages, but we’ll go into that later.
There are no hard and fast rules as to whether leasing or buying is best for you – it’s a topic that should be discussed with an accountant. Having said that, if you use your car for business as well as private purposes, or your employer is willing to include a car as part of your salary package, a car lease is well worth looking at. There can be significant tax advantages, especially for cars in the prestige and luxury sectors.
Although leasing has taken off in the private sector to a large degree in the US and Europe, we still have an ownership culture and while the numbers of private or semi-private lease deals are growing, the vast majority of people in Australia still buy their cars and own them.
Types of purchase finance
Hire Purchase (Consumer Loan)
The most common finance product sold is still the traditional hire purchase or personal loan.
The period of the loan is determined, the interest rate set according to the risk, the value of the loan and market conditions and the monthly repayments are set to pay out the full amount by the end of the term. Terms usually vary between one and five years.
A variation on the hire purchase product known as the balloon payment option is also slowly growing in popularity.
By setting a larger balloon payment for the end of the term which can vary according to individual circumstances, you can reduce your monthly payments to better balance the budget.
At the end of the term, you can either pay out the full amount in one hit or refinance the balloon amount and continue paying off the car in monthly installments.
The growth of car leasing in Australia has, up until recently, been as a result of the number of large businesses running big fleets of cars, who long ago realised there was little point in owning a continually depreciating asset.
They figured why have the hassle of having to maintain and dispose of cars and light commercials which were often turned over in relatively short periods when you could simply pay for the use of the vehicle and leave everything else to the lease company.
Some of the traditional finance companies only have a small interest in leasing so probably the best place to investigate leasing is through specialists like Aussie Car Loans. Because of the volume of business done by Aussie Car Loans, a wider range of products are available and its easy to tailor them specifically for your needs.
Car leases fall into two categories as either a finance lease or operating lease and vary in the way they treat ownership, disposal and residual risk on the vehicle.
Finance Lease
Finance leases are becoming increasingly popular because of the ability to novate the lease.
As a lease, no deposit or trade-ins are made and the monthly payments are worked out by Aussie Car Loans based on the term of the lease, interest on the finance charge and the residual value of the car at the end of the term.
However, you are the one who takes the risk on the residual and if at the end of the term the market says the car is not quite worth what was expected three years earlier, then the responsibility to make up the difference to finalise the contract is yours.
Although under the definition of a lease you gain no equity in the vehicle, it is common practise under finance leases to make an offer for the vehicle at the end of the term and pay out or refinance the residual to take ownership.
Novated leases are becoming a very popular way of including a car as part of your salary package to help reduce your taxable income.
You take out a standard finance lease on a vehicle of your choice. You then arrange for the lease payments to be paid by your employer through a novation agreement which remains valid as long as you stay with the company.
The lease payments, running costs and fringe benefits tax (any car supplied to an employee for their private use is subject to FBT calculated on a sliding scale depending on the value of the vehicle and annual kilometres travelled) are then taken out of your pre-tax salary.
If you resign or the words forced redundancy start being bandied about in the canteen, then the responsibility for the vehicle and the subsequent lease payments reverts to you.
At the end of the lease, the choice is there to turn over the vehicle into a new lease, trade it in on a new car on a novated lease or even purchase the vehicle.
According to Joe Martinovic, Aussie Car Loans Managing Director, the main benefits for novated leases lie in the flexibility for employers not having to provide company cars and for employees to decide on the car of their choice.
“The majority of people that do fall into the realm of having a vehicle packaged generally have some component of their salary in the highest tax bracket. The car component comes out of pre-tax so it reduces their taxable income and in many cases for those people it will drop them back into a lower tax bracket. It can make a lot of sense” , he said.
*The interest rate of 4.60% is available to approved applicants financing a motor vehicle on a secured consumer fixed rate loan over 60 months. The comparison rate of 5.39% is based on a 5 year secured fixed rate loan of $30,000. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Applications for finance are subject to normal credit assessment. Conditions, fees & charges apply. Authorised Credit Representative (# 475944) of Advantage Aussie Pty Ltd (Australian Credit Licence # 390233)
If you’re still not sure whether a lease is the right choice for you, contact our helpful team for more information and discuss your specific situation.
Financing a car can be a minefield to the uninitiated, especially when the salesperson starts bandying about terms like hire purchase, novated leases, residuals and balloons.
There are no hard and fast rules as to whether leasing or buying is best for you – it’s a topic that should be discussed with an accountant. Having said that, if you use your car for business as well as private purposes, or your employer is willing to include a car as part of your salary package, a car lease is well worth looking at. There can be significant tax advantages, especially for cars in the prestige and luxury sectors.
They figured why have the hassle of having to maintain and dispose of cars and light commercials which were often turned over in relatively short periods when you could simply pay for the use of the vehicle and leave everything else to the lease company.