What Finance May Be Available
WHAT LOANS MAY BE SUITABLE FOR YOU
Don’t be overwhelmed when choosing a car loan, follow our simple guide and choose the best loan for you.
Buying a vehicle is a significant financial purchase. For many people it is the largest financial purchase in their lives. It is important not to get it wrong and it is important not to lock into a bad loan contract because it seemed easy at the time and you didn’t seek the right advice because you were in a rush to take the car home. By using expert advice, being patient and by planning you will save thousands!
Unsecured Personal Loan – These loans are available for any legal personal purpose. As there is no security the banks tend to limit the amount available and generally charge a much higher interest rates and fees. However, these loans often provide more flexibility to pay for older used cars or privately purchased cars. As the car purchased is not security to the loan you also have much more flexibility in dealing with the car. For example if you sell the car or it is written off in an accident you are no required to payout the loan. Also if you were to default on the loan the lender cannot “repossess” the car you purchased.
Secured Car Loan – This option requires an asset to secure the loan. Generally the car you purchase is the security used. As the lender has some comfort the loan will be repaid if they were to repossess the security, the interest rate offered is usually much lower. For this same reason “finance approval” tends to be easier. However, there are restrictions on how you can deal with the security and if you default the lender will repossess the car to help payout the loan. You will also be liable to pay any shortfall after sale.
Supplementary Home Loan – If you are patient, good at planning ahead and have sufficient equity in your home loan, then this may well be the lowest cost way to finance the purchase. These need to be planned in advance as it can often take 3-4 weeks before the loan is approved and the loan money available. There are pitfalls and this option needs to be well planned and well executed. Your interest rate will be quite low and at home loan rates, but you will use up home loan equity and further place your real estate or home at risk if you default. It is also important to make sure the loan term is appropriate for the asset you purchase. Motor vehicles are medium term assets that depreciate so keep the loan term to no more than 7 years.
Home Loan Redraw – If your home loan balance or lower than the loan limit, then you may have home loan redraw available. This usually occurs where you have paid extra payments on your home loan each month and you are now in credit. Many banks will allow you to redraw the amount in credit. This redraw does not usually require a new finance application or loan approval process. The interest rate may seem great upfront, but this often turns out to be one of the most expensive finance option. A very common mistake when using redraw is to allow payment over the balance of home loan term. Very often the loan is still being paid off well after the car has gone. The longer the loan payment term the higher the interest paid.
Line Of Credit – This is also very similar to the two options above. If you are financially disciplined they are very flexible and low cost loan, but more often than not people manage these like a credit card trap and only ever pay the interest and never reduce the principal debt. Plus once again the family home is at risk in the event of a default.
Novated Lease – This is a structured car lease where you agree with your employer that you will sacrifice an agreed amount of your annual salary and they will pay the instalments on the car lease. There may be some tax benefit due to you sacrificing part of your annual income. However, there are also potential downsides. Firstly, it is a lease so you will give up your right to any protection under National Consumer Credit Protection (NCCP). Secondly, it is a lease so you will have a Residual Value. You do not own the car, you lease or rent it from the leasing company for the term of contract. You should also consider that if you part with your employer you may be stuck with an expensive car lease and no benefit of the salary sacrifice and tax incentives. Be sure to seek evidence of the lease interest rate as it is not disclosed on the contract.
Lo-Doc or Self Dec Loans – These loans are only available to business or ABN holders using a Chattel Mortgage, Lease, or HP. Usually you must have been registered in business for at least one year and you will also need to meet other qualifying criteria. For example, with most lenders you may need to be a home buyer or be able contribute a large deposit – often 20% or more.
Chattel Mortgage – These loans are only available to business and ABN holders where the vehicle purchased is predominantly used for commercial or business purposes. The vehicle or asset purchased is used as security. There is no NCCP protection. The interest rate offered to business and ABN holders is often lower than that available to personal borrowers. However, the fees and cost, particularly if the loan is paid out early can be quite high. Be sure to seek evidence on the interest rate as the interest rate is not disclosed on the contract documents.
Hire Purchase – Very few HP contracts are used today. Like Chattel Mortgages they are only available to business clients. The decision between financing under a Chattel Mortgage or a HP should be discussed with your accountant or a qualified financial advisor.
Finance Lease – This is a business or commercial finance product that enables the lessee to have the use of a car or commercial vehicle and the benefits of ownership, while the financier or lessor retains actual ownership of the vehicle. The lender may include the option for full or partial maintenance. A finance lease will have a Residual Value payable at the end of term. The decision to use a finance lease should be discussed with your accountant or a qualified financial advisor.
Operating Lease – This is a business or commercial lease arrangement where the agreement is to finance a car or asset for less than its useful life. The lessee pays a monthly rent to use the asset or car and can return the car or equipment to the lessor at the end of the lease without further obligation. The lessor may also include full or partial maintenance options. Again, before entering into this type of contract you should seek the advice of your accountant or a qualified financial advisor.
Please call us any time for advice and discussion – we are here to help you!
Contact: Alan 0424 185 442 or Gayle 0411 494 800