Types of Car Loans and Choosing the Right One

The reality for a most of us is that we will need to borrow money if we want to buy that next car. But finding the right type of car loan can be a daunting process. With so many options out there it is difficult to know which is the best for us. So we’ve made it easy for you and laid out all the options on the table for you.

Standard loan (from a bank or credit union)

With a standard car loan, the bank or credit union will lend you the money to buy the vehicle. It can be secured or unsecured, this affects how much interest you’ll be paying so you’ll have to do your research here. The unsecured loan will have a higher interest rate and this can vary depending on whether you choose a fixed or variable option, whereas a secured loan will normally have a lower rate (depending on the security offered) and again, this is subject to your choice of whether you take a fixed or variable option. This type of car loan will usually require car insurance. This is a suitable option for individuals wishing to purchase a new car and don’t use their car much for business purposes.
Standard loan

Pros:
  • You can choose to include on road costs in the borrowed amount
  • Flexible contract terms
  • Agreed monthly payments – you decide what you can afford and how long you want to take to pay off the loan
Cons:
  • Interest rates can be higher

Commercial Hire Purchase

Commercial Hire Purchase

The financier buys the car and hires it out to you over a set period of time. You have use of the vehicle for this period but you do not own it. At the end of the specified contract term, when you have paid off the vehicle and associated interest fees, you gain ownership of the car. This option is best suited to a business who account for GST.

Pros:
  • Flexible contract terms
  • Fixed interest rate
  • Tax deduction available if the car is used for business purposes
  • If you’re registered for GST, you can claim the GST in the vehicle price, fees and interest
  • Lower interest rates because finance is secured against the car
  • You own the car once you’ve made all the repayments
Cons:
  • You don’t own the car until you’ve made all repayments
  • It may be more expensive option than a personal loan

Chattel Mortgage

Chattel Mortgage

This has been the most popular type of car finance since the introduction of GST as the owner/business is able to claim back the whole amount of GST payable in the next BAS quarter, which clearly assists a businesses cash flow. You can finance the total purchase price or make an upfront deposit or even use a trade-in. Chattel Mortgage suits companies, partnerships and sole traders who use the cash method of accounting, allowing them to claim the GST in the car’s price upfront.

Pros:
  • You own the car
  • Flexible contract terms
  • Fixed repayments
  • Able to claim the whole amount of GST back in the next BAS quarter
  • Repayments exempt from GST
  • Depreciation and interest are tax deductible
  • Lower interest rates because finance is secured against the car
Cons:
  • Payments are not fully tax deductible, unlike a lease

Financial Lease

Financial Lease

The financier purchases the vehicle on your behalf and then you lease the vehicle back from the financier and pay a fixed monthly lease rental. At the end of the lease you can choose to pay a residual value in one final instalment and take ownership of the car, trade it in or re-finance the residual and continue the lease. This option is suitable for companies, partnerships, sole traders and individuals where the vehicle is used for income producing purposes.

Pros:
  • Flexible contract terms
  • Fixed interest rate
  • Fixed monthly lease rentals
  • You can pay a residual on the lease which would lower monthly payments
  • Tax deductions available
  • Lease and finance are secured against the vehicle which means lower interest rates
Cons:
  • You don’t own the vehicle
  • Some leased cars may already have a few kilometres and worn conditions. These conditions may lead to unforeseen maintenance costs
  • You’ll have to pay GST on the residual value if you decide to purchase at the end of the lease
  • This requires signing a contract which will be difficult to cancel if circumstances change – you can’t simply sell the car like you could if you owned it

Novated Lease

Novated Lease

This is a three-way arrangement whereby your wage is reduced in exchange for an equal value of vehicle benefits. You lease car from the financier while your employer pays them through a novated deed on your wage. All of the operating costs including registration, servicing and insurance are at your expense. This is a suitable option for any employee as long as their employer offers salary packaging as an option. It is particularly useful to those earning a high income as it reduces your pre-tax income.

Pros:
  • You can buy the car at the end of the lease
  • You don’t have to be using the car for business purposes
  • Reduces tax – salary sacrifice with pre-tax income
  • Employer can reap the benefits as well – it is a simple way of boosting a remuneration package
Cons:
  • If you lose your job, you still have full responsibility over paying the lease
  • Falling car values can leave you out of pocket by the end of the lease

Operating Lease

Operating Lease

The financier buys the car and rents it out to you. You don’t have the risk associated with ownership and at the end of the term you have the option to buy the car, continue renting it or change to another newer car.

Pros:
  • Fixed repayments
  • None of the risks associated with ownership
  • Rent is tax deductible
Cons:
  • You don’t own the car
  • You’ll have to pay GST on the residual value if you decide to purchase at the end of the lease
  • This requires signing a contract which will be difficult to cancel if circumstances change – you can’t simply sell the car like you could if you owned it.

Mortgage Redraw

Mortgage Redraw

This involves redrawing or refinancing your existing mortgage to cover the purchase of the car. This is suitable for home-owners ahead in their mortgage repayments.

You may also choose to set up a secondary loan facility against your home (subject to suitable equity held) so you have a clear purpose of the funds and not muddling this with your actual mortgage.

Pros:
  • Readily available
  • Interest rates are far lower
  • Payment terms are more flexible and can be extended over longer terms to minimise cash flow
Cons:
  • Your short-term debt could turn into a long-term debt if you don’t increase your mortgage repayments – the longer you take to pay off the amount you borrowed for your car, the more interest you’ll pay on it.

Dealer Finance

Dealer Finance

You and a dealer enter into a contract where you buy the car and agree on repayments over a certain period of time. The dealer typically sells the contract to a bank, finance company or credit union that services the account and collects your payments. This is ideal for individuals who are after a quick and easy hand-over at the dealership.

Pros:
  • No or low interest (generally for the first three years)
  • New car warranty
Cons:
  • Limited choice – restricted to certain models
  • Cannot negotiate on the price of the car
  • Shorter car loan terms which means you need to be able to afford larger repayments

Factory Finance

Factory Finance

Sometimes the car company will offer this option whereby the company themselves offer the financing rather than the particular car yard. This is ideal for individuals who are after a good deal for a new car rather than those interested in specific models

Pros:
  • Interest rates are generally low
  • Insurance included
  • Payments are usually low
Cons:
  • Because repayments are low, you will either have to pay a lump sum at the end of the car loan term or give the car back
  • Limited in choice – cheap deals are often only for certain models

While this is a great place to start in understanding what car loan is best for you, every individual is different and sometimes expert advice goes a long way. Organise a consultation with the team at Intuitive Finance and you’ll be sure to find the type of car loan that will get you well on the way to owning that next car.

You might also enjoy reading about new car finance and How to avoid being taken for a ride.

 

Intuitive Finance – the smart choice

The world of banking and finance can be a pretty daunting one for both novice and sophisticated investors and since our establishment in 2002 we’ve focused on providing outstanding service and business standards. This approach was vindicated when we were recently named Victoria’s favourite mortgage broker at the 2015 Investors Choice Awards. For expert advice on lenders mortgage insurance, contact Intuitive Finance.

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The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.

Andrew Mirams

Andrew Mirams

Andrew Mirams is the Managing Director of Intuitive Finance and is a highly qualified mortgage advisor who holds dual diplomas in Financial Planning (Financial Services) and Banking and Finance (Mortgage Broking). Andrew’s expertise covers all aspects of lending for a diverse range of applications – from first home buyer loans or property upgrader loans, property investor loans, expatriates and loans for self-employed. With almost 30 years of experience, Andrew has been acknowledged by the mortgage industry as one of its best performers with multiple awards including regularly featuring in both the top 100 mortgage brokers list and Top 50 Elite business writers. Andrew was voted Victoria's favourite Mortgage Broker at the 2015 Investors Choice Awards, and won again for the same category at the 2017 Better Business Awards. The team at Intuitive Finance has also figured prominently by winning the 2016 "Best Independent Office (<5 brokers)" and "Best customer Service" Awards, and more recently at the 2017 MFAA National Awards, they also took out the "Best Customer Service" Award, a recognition which speaks for itself! Visit Intuitive Finance for more information.
Andrew Mirams

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