Unless you’ve got a huge pile of cash burning a hole in your pocket, buying a new car normally means you need a bit of help with the financing.
Not sure where to start? There are six main car finance options in Australia, although you may see some slight variations on a theme with some lenders. These can be broken down as:
- Car leases
- Novated car leases
- Unsecured loans
- Secured loans
- Chattel mortgages
- Commercial hire purchase
Each car finance deal has its pros and cons and some may be more suited to a certain type of borrower, but in most cases applying for car financing can help you with your vehicle needs more quickly.
If you’re not sure which is the best car finance option for you, read on to get a summary of each one.
What is a car lease?
With a car lease, the lender has full ownership of the vehicle and you pay to use the car over a set term, with interest included. At the end, you have the option to take on another lease, buy the vehicle or walk away entirely.
What are the pros and cons of car leasing?
Car leasing is a great short-term option for an individual or business who wants access to a vehicle without the outlay of buying outright.
Leasing a car rather than buying one is generally more expensive, but depending on your needs and personal situation this may be a trade-off you’re willing to make.
Once your lease is up, you can walk away from the car and take a lease on a newer model, essentially upgrading without the hassle of buying and selling.
Who is car leasing best suited for?
Car leasing is often used by businesses who want the use of a vehicle for a short period but don’t want the financial obligations of making the full purchases.
What is a novated lease?
A novated lease is an agreement between an employee, an employer and a lender. The employee pays for the lease on pre-tax earnings
At the end of the lease there’s a residual value fee – essentially the remaining value of the vehicle that needs to be paid off in a lump sum. The size of this fee usually corresponds to the length of the lease – the longer you have the lease, generally the less will be left to pay for the vehicle.
What are the pros and cons of novated leasing?
Is a novated lease worth it? There are plenty of novated lease pros and cons to think about when looking at finance options.
Perhaps the biggest potential problem is that because the agreement involves your employer. If you leave your job for any reason then the burden of the loan falls on you and your payments will no longer be pre-tax. It may be possible to switch the agreement to the new employer, but they may not always be willing to do this.
On the other hand, there is a major benefit to a novated lease, too. In Australia, there’s a federal law that means hybrid and electric vehicles are exempt from fringe benefits tax with a novated lease. This brings down the cost of an EV considerably.
Although there’s a link to your work, a vehicle bought with a novated lease can be used for any purpose. If you want, you can buy a car that’s only used for personal reasons.
Who’s novated leasing best suited for?
Novated leasing is generally best suited for someone in stable employment who wants a new car, especially if they want to buy an electric vehicle of some sort.
What is an unsecured loan?
An unsecured loan is one where you don’t offer up any collateral for the loan. For the borrower, this means there’s no risk of losing the asset they’re buying, but you’ll be charged a higher rate of interest because of the higher risk.
What are the pros and cons of unsecured loans?
Unlike with secured loans, the asset you’re buying won’t be claimed by the borrower.
Because there’s less paperwork with this type of loan, they’re generally approved more quickly.
However, because there’s no security asset, lenders typically charge higher rates of interest.
If you default on an unsecured loan, the lender may take you to court where you could be ordered to sell an asset or have your income garnished until the repayments are complete.
Who is an unsecured loan best suited for?
An unsecured loan is often chosen by people who want a quick turnaround on an application or people who want to buy an older vehicle.
What is a secured loan?
With a secured loan, the borrower puts up an asset against the loan, often the item they’re using the loan to buy. Should they default on their payments, the lender can take possession of the loan and sell it off to cover the cost of the loan.
What are the pros and cons of secured loans?
Because the lender has the added security of the asset included in the loan, they tend to offer lower rates for secured loans than unsecured loans.
The secured asset can work against the lender. If you default on the loan, no matter how close you are to paying it off, the lender can legally take ownership of the asset.
If you’re planning to use a vehicle as your asset for a secured loan, most lenders will only allow a relatively new vehicle to be used. This doesn’t always have to be a new car, but it can’t be older than 20 years at the end of the loan. Many people use the car they’re buying as the secured asset, which limits purchase options.
With a secured loan, you normally need to have a car lined up for purchase as you’ll have to give the details of the vehicle ready when you make your application.
Who is a secured loan best suited for?
Individuals who are buying a new(ish) car, generally for personal use.
What is a chattel mortgage?
Possibly the most popular of our car finance options, with a chattel mortgage, a business takes ownership of a vehicle or piece of equipment (the ‘chattel’) at the beginning of the loan and the lender uses the purchase as security against the financing.
Depending on how the vehicle’s used, the business can get benefits in their tax return beyond what they could get with a standard car loan.
Some businesses will choose to include a balloon payment with a chattel mortgage to reduce their repayments and increase their cash flow.
What are the pros and cons of chattel mortgages?
For a business, taking out a chattel mortgage with a fixed interest rate means they can confidently forecast expenditure for the duration of the loan.
Because the business owns the asset immediately, they can normally get tax deductions due to depreciation of the asset.
As with any loan, the increased outgoings can cause financial stress, but this can be negated if the asset increases the business’s income.
Because this loan is secured, it should come with a lower interest rate than an unsecured loan.
If the business defaults on the loan, the lender can take ownership of the vehicle.
Who is a chattel mortgage best suited for?
A chattel mortgage is a line of financing open to businesses, usually one that’ll use the vehicle to make income for the business. To qualify for this type of loan, the vehicle being bought has to be used for business purposes more often than for personal ones.
They’re often taken out to buy utes, trailers and food trucks, but they’re available for almost any type of business vehicle.
What is a commercial hire purchase?
Commercial hire purchases work slightly differently to chattel mortgages. With a hire purchase, the lender retains ownership of the new vehicle and essentially charges the borrower to hire the vehicle. At the end of the term, the borrower can pay off the residual value and own the vehicle themselves. This value is set at the start of the process and can be reduced by putting down a deposit.
What are the pros and cons of commercial hire purchases?
Because the vehicle is being used as security, the interest rates will be lower than with an unsecured loan but, again, if you default on payments the lender has the right to claim ownership.
Like with chattel mortgages, there can be GST and tax benefits for borrowers but it’s important to discuss these with your accountant to see how they apply to you.
Who is a commercial hire purchase best suited for?
Vehicles bought through a commercial hire purchase arrangement need to be used primarily for business purposes.
Car finance options for you
Want some help working out which car finance option is best for you? Give our team a call on 1300 28 57 67 to see how these might work with your personal situation.
