11 Reasons You Need a Mortgage Broker
A new or used car is a fairly significant purchase. A 2016 Ford Falcon XR8 will cost you around $55k with a smaller 2014 Ford Focus Titanium worth around $32k. The older the car, the cheaper it will be, but even so, most people can’t afford to pay cash for a new vehicle.
There were more than 18 million registered vehicles in Australia in 2015, and car ownership is on the rise. Consumer debt is also rising, so it is worth investigating the most cost-effective means of purchase if you want to invest in a new vehicle. Whilst paying cash is always the cheapest way to purchase a new or used car since it won’t cost you any interest, for most people, this is not a viable option. Below, we are going to explore the different options available for anyone in the market for a new car.
Unsecured Loans and Secured Personal Loans
Car loans are causing a surge in consumer borrowing. Low-interest rates mean that borrowing money to buy a car is a cheap way of financing the purchase. The RBA Base rate is currently 1.5%. The markets are forecasting interest rate hikes in 2018, but for now, they remain static.
Unsecured personal loans are the most common method of financing a car purchase. As long as you have a reasonable credit score, you should have no problem securing a personal loan from your lender. It is customary to apply for a personal loan from your own bank, but there is no shortage of products available elsewhere, so it is wise to shop around.
Reputable lenders treat you as a valuable customer. Your loan application will be reviewed by a real person as opposed to a computer algorithm and your personal circumstances examined to make sure you can afford the repayments. Reputable lenders also provide insurance on the loans, so you are protected in the event your circumstances change.
Secured loans are tied to the vehicle, which provides security for the lender. If you default on the loan payments, the lender will recover the car to settle your debt, although if your debt is worth more than the value of the car, you will still be liable for the difference. Once you have repaid the loan in full, the lender removes their interest in the vehicle and ownership is passed to you.
The advantage of a secured personal loan is that repayments are lower. Lenders can afford to charge lower interest rates on a secured personal loan, as their risk is lower. However, the interest rate charged will always reflect your personal circumstances, your credit history, and whether you have a previous history with the lender, so don’t assume you will automatically qualify for the headline rate on offer.
Car Loan
Car loans are another popular way of funding the purchase of a new car. Most car dealerships offer financial products to their customers. The lender sells loans underwritten by a financial services provider, so when you take out a car loan to buy a new vehicle, the dealership earns commission for signing you up for a car loan product. For this reason, most car salesmen are under great pressure to persuade customers to buy cars on finance. It’s a lucrative industry, but a car loan may suit you if the terms and conditions are favourable.
As with personal loans, interest rates vary on car loans. Some dealers offer 0% finance deals, but you may have to make a large balloon payment at the end of the loan term for ownership of the vehicle to pass to you. Low repayment offers almost always involve a balloon payment, so it is wise to be cautious when examining a finance package. Do not be swayed by seductively low repayments. Find out what the terms of the finance package are and make sure you can afford it.
In many cases, the finance provider retains a financial interest in the vehicle until the loan is repaid in full, so if the car is badly damaged, stolen or written off, you could end up being saddled with a loan for a car you no longer have.
Chattel Loan
Chattel loans are business loan products. Many businesses purchase vehicles for directors and employees and a chattel loan is one way to fund the purchase. The vehicle belongs to the business from day one, but the finance company retains an interest in the car until the loan is repaid. There is likely to be a balloon payment at the end of the loan term, whereby the business can repay the loan in full, upgrade to a newer vehicle, or hand the vehicle back.
Interest is payable on a chattel loan, but this is tax deductible as long as the vehicle is retained for business use only. The business also needs to be registered for GST (the GST component of the loan can be reclaimed as an input tax credit following the acquisition).
It is worth talking to your accountant before taking out a chattel loan to finance the purchase of a vehicle for your business. He or she will be able to advise you on whether this is right for your business.
Hire Purchase Agreement
There are two types of Hire Purchase agreement: personal and commercial. HP agreements are more common in the commercial sector where a business needs the use of a vehicle and most large corporations use Commercial Hire Purchase arrangements to fund their vehicle fleets.
How it works is relatively simple. The business takes out an HP agreement and effectively ‘hires’ the vehicle over an agreed term. Until the cost of the vehicle is repaid in full, the title of the car remains with the finance company. The vehicle can be handed back at the end of the term and replaced with a new one, with the payments continuing in perpetuity.
This type of finance product is very flexible, but it is no longer so popular following far-reaching changes to GST. The GST treatment on Commercial HP Agreements was changed following the Federal budget in 2010. Businesses can no longer claim the GST back upfront, but they can still claim it back progressively over the lifetime of the loan. This will affect cash flow for many smaller businesses, which is an important consideration.
Novated Lease
A novated lease is a popular way for ordinary Australians to own a car. A novated lease is a three-way agreement between you, the finance company, and your employer, who buys the vehicle and deducts the loan payments from your pre-tax salary. This saves you tax and because the company manages the loan, you don’t have to worry about a thing. Novated leases allow anyone to buy a car GST-free, even though they are not GST registered.
Novated leases are justifiably popular and a great way to own a car and make considerable tax savings. If you would like to purchase a car, speak to your employer to find out whether they operate a novate lease vehicle purchase scheme.
Whatever your personal circumstances, there is always a way to fund a car purchase. however, this is potentially a big financial commitment, so don’t rush into signing a loan agreement without considering your personal finances very carefully. If you default on loan repayments, you could have your vehicle repossessed and end up with a black mark on your credit file.
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