There are many options available for car loans
Getting finance for a car can be very confusing as there are many types of car finance – personal loans, chattel mortgage, lease or car loans – and which one is appropriate really does come down to your individual circumstances.
There is nothing worse than going shopping for a car that you fall in love with and then have the pressure of a salesman offering you finance that may not be right for you.
You may not read the fine print and could end up with a lemon of a loan.
We can help you understand which option is right for you.
Secured Car Loan
A Secured Car Loan is typically used by individuals to buy a car that is mainly used for personal or private use and does not form part of any salary packaging arrangement.
With a secured car loan, the car is used as the security against the funds borrowed to buy the car and, because of this, the risk of loss to the lender is reduced and a lower interest rate can be offered compared to a standard personal loans.
The features of a Car Loan are:
- Lower interest rates
- Repayments are fixed for the period of the loan
- Flexible terms from 1-7 years
- No deposit, you can finance the total purchase price of the car
- In general, the interest rate on a secured car loan is significantly less than standard personal loans offered by banks
A Chattel Mortgage is an attractive finance option if you use the ‘cash’ method of accounting for the Goods and Services Tax (GST). This is mainly because under this method, the GST component of the purchase price can be claimed back on the next Business Activity Statement rather than claiming the GST over the term of the finance contract.
The amount that is financed under a Chattel Mortgage can be the full purchase price or it can be the purchase price less a deposit or trade-in to reduce the loan amount. This will in turn reduce the repayments.
By choosing a Chattel Mortgage, you become owner of the asset while the lender takes a charge over the asset. As you are the owner of the asset, you can claim a tax deduction for the depreciation as well as the interest component of the repayments.
Other benefits of a Chattel Mortgage include:
- Fixed repayments over terms of 12 to 60 months
- You can structure the repayments with or without a balloon payment
- There is no GST payable on the balloon payment (if any) at the end of the contract
A Finance Lease is slightly different to a Chattel Mortgage.
Under a Finance Lease, the amount financed excludes the GST component of the car’s purchase price which is claimed back by the lender.
This means you are financing the ex GST price, reducing the amount borrowed.
GST is charged on your monthly repayments which can be claimed back on your each Business Activity Statements over the term of the finance contract.
Under a lease agreement, the lessee (you) pays the rental but does not obtain ownership or equity in the vehicle. The lessor (the lender) retains ownership of the vehicle, while the lessee assumes the risk of the residual value.
Under a finance lease, the lessee is responsible for all maintenance and running costs of the vehicle.
Finance lease rentals are subject to GST, as is the residual value of the motor vehicle.
At the end of the lease the lessee has the option of:
- Returning the vehicle to the lessor (and make up any shortfall in the residual)
- Offer to pay out the residual and obtain ownership of the vehicle
- Refinancing the residual for another lease term