When it comes to time to putting a new car in your driveway, there are a lot of financing options available. We take a look at the four basic methods for funding your next vehicle.
Personal or car loan
The loan is probably the simplest financial product to understand: a financial institution lends you a big wad of cash and you use it to buy something. Depending on your circumstances and preferences, a personal loan can be either secured or unsecured.
Secured loans are tied to the product that you’re buying, and if you fall behind with your payments, your bank can take that item away from you. Lenders usually offer lower interest rates and are willing to lend more when they’re lending money with some form of security.
Unsecured loans, in Australia, require a lot less paperwork and are much easier to get, but the downside is that lenders will charge higher interest rates. Many institutions also typically lend smaller amounts when the loan is unsecured, so you can probably forget about buying an island, less alone a luxury car.
There many places that offer car secure loans, including banks, other financial institutions, dealers and manufacturers. Generally car loans are available for new vehicle, as well as used cars under seven years old. As we’ve mentioned in earlier articles, don’t just go for the product with the lowest interest rate or greatest convenience.
Things to consider include the fees that are payable upfront and on an on-going basis, how large the balloon payment is at the end, and if there are any penalties for paying off the loan early. Crunch the numbers and work out what’s best for you.
With many modern home mortgages, if you make extra repayments towards your loan, you’re able to redraw these funds out at a later stage to pay for anything you like, even a car. This can be quite handy, as there’s little to no paperwork to be done, and home loan rates usually undercut personal and car loan rates by a sizeable margin.
Do keep in mind, though, that typical home mortgage lasts for between 20 to 25 years, while a personal or car loan doesn’t usually go beyond seven years. So, if you don’t aggressively pay down the amount you redrew to purchase the car, using this method could end up costing more in interest than taking out a car loan.
It sounds silly, but there are some situations where using a credit card to buy a car makes sense. For example, you might only need to borrow a small amount of cash that’s under the minimum borrowing amount for your preferred lender or the vehicle you want isn’t new enough to qualify for a secured car loan.
This typically buying a car this way is only truly practical if you have, or can get, a low interest credit card.
Leases and other type of financing
Up until now we’ve dealt exclusively with the different types of loans available, but there are number of lease products available too. Loans and leases differ in one very critical way. With a loan, someone lends you a wad of money, you buy a car with said money, and then you slowly pay that money back.
In the case of a lease, the financial institution actually purchases and owns the car on your behalf, and you pay a monthly fee to use. At the end of the lease period, you have the option of buying the car for an agreed price.
If you’re a contractor, sole proprietor or own a business, and are planning to use the car primarily for business, a lease, a hire purchase agreement or a chattel mortgage may be preferable, as there are GST and other tax benefits that you might be able to take advantage of.
For private buyers, by far the most popular type of leasing scheme in the Australia is the novated lease. In a novated lease, your employer, through a third party, purchases the car on your behalf and leases you the vehicle. Your lease payments are then deducted from your pre-income tax pay.
Due to the nature of the Australian tax system, a novated lease can help you to minimise your tax and have a shiny new car in the driveway, but it’s complex topic and one we’ll go into much detail about in the future.
Regardless of how you choose to finance your next vehicle, Richard Kew, director Platinum Direct Finance, advises that "make sure that you have plenty of financial breathing space, make sure that your monthly payments at beyond your limits or even at your limit".