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Loans – car finance

The main options to buy a car are: car loan, chattel mortgage, commercial hire purchase, finance lease, novated lease operating lease.

Car Loan

A car loan is where the lender lends the money for the purchase of a car and takes security over the car. There are some advantages to this such as fixed repayments, lower interest rates than unsecured personal loans and the loan term generally matches the depreciating life of the vehicle.

Commercial Hire Purchase

Commercial hire purchase is a finance option where the lender buys the car and hires it to the buyer. This has advantages such as no GST on repayments.

Finance Leasing

Finance leasing is where the lender buys the car and hires it to the buyer. At the end of the agreed period the buyer is generally given the option to purchase the car for the residual amount (balloon). Commercial hire purchase and finance leasing are available where the vehicle is predominately for business purposes.

Operating Leasing

Operating leasing is similar to finance leasing however there are no risks associated with ownership and there are no residual payments.

Novated Leasing

Novated leasing is where an employee agrees to salary sacrificing a set amount out of their package which covers the operating costs of the vehicle. With this option the vehicle can be used for 100% private use and the employee normally has full choice of what car they want to buy.

Be aware of “Negative Equity” – This is a term used when the residual value of the car (the amount agreed as a balloon) is more than what the car is worth towards the end of the term.

Adding The Loan For The Car To Your Current Mortgage

Advantage of this strategy:
It keeps the repayments down. For example if you have a mortgage of $300,000 over 25 years @ 8% your repayments are $2,315 per month. If you increase your loan by $30,000 for a new car then your repayments will increase by only $231 per month. If you take a separate loan for the $30,000 over a 4 year period your repayments will be $730 per month – more than 3 times as much.

Disadvantages of this strategy:

  • You are effectively paying off a car over 25 years, but whilst it is extremely doubtful you will have the car for 25 years you will have the repayments.
  • You are effectively using equity in your home. For example, in the case of the home loan option the bank will require the $30,000 to be secured in the same way your current mortgage is. This may prevent you borrowing to upgrade your current house or buy an investment property.
  • If this strategy is your preferred method what are you going to do when you want to upgrade your next car. If you add this to your home loan you are now paying off 2 cars over 25 years.

Whatever your circumstances are you should talk to us at Invest Blue about the right finance option for your personal and work vehicles.