Finance For Motor Vehicles

There are numerous methods by which to finance the purchase of a motor vehicle in addition to the outright purchase of the motor vehicle with cash. These methods include hire purchase, finance lease, operating lease, novated lease, car loan or a line of credit against your home. In many instances these finance mechanisms can be arranged as part of your salary packaging with your employer, through your own business or personally.

In addition, if you purchase a new motor vehicle through a business you are able to claim the GST in your BAS statement. Under each finance method you are generally able to finance 100% of the motor vehicle purchase price, but you must consider that each of these finance methods have their own pro’s and con’s.

There are numerous reasons why you would finance the purchase of a motor vehicle. The number one reason is because you utilise your vehicle for business purposes and are therefore entitled to a tax deduction for the operating costs of the vehicle, including the associated borrowing/interest costs. Therefore any surplus cash available may be applied against those loans where the interest is not tax deductible (ie, on the family home), thereby improving your financial position.

Once you have decided that the most appropriate way to acquire a motor vehicle is by way of finance, you then need to determine the most appropriate type of finance for your individual situation. The following points provide greater detail on each method and the respective advantages and disadvantages.

Hire Purchase

Provides for the financing of the vehicle over a fixed term with a pre-agreed payment plan. Upon the final payment, free title of the vehicle passes to you.

Pro’s

• Allows you to make pre-agreed balloon payments through the hire purchase (generally upfront and at the end).
• Pre-agreed payments and fixed interest rate provide certainty.

Con’s

• The full cost of maintaining the vehicle is your responsibility. Where the vehicle is used for income producing activities, this usage is tax deductible, together with depreciation and the interest component of the lease payment.

Finance Lease

Provides for the financing of the vehicle over a fixed term with the final payment representing a balloon payment (usually 30% of the value). Free title of the vehicle passes to you once the final payment is made.

Pro’s

• Fixed payments and interest rate provide certainty.

Con’s

• The full cost of maintaining the vehicle is your responsibility in the same manner as hire purchase financing.

Operating Lease

Provides for the renting of the vehicle and includes financing of the vehicle over a fixed term. At the end of the lease term you return the vehicle to the financier. Generally, you have the option to buy the vehicle at market value.

Pro’s

• The full lease payment is tax deductible where the overall use of the vehicle is for income producing purposes (no depreciation is deductible).
• As the responsibility for maintenance falls with the financial institution you are not exposed to unexpected high maintenance costs.
• Fixed payments and interest rate provide certainty.

Con’s

• There is no pre-agreed purchase price for the motor vehicle (note this could be advantageous if the value of the vehicle has fallen significantly).

Novated Lease

Under this finance model you lease the vehicle from the financial institution and novate the lease to your employer.

Provides for the financing of the vehicle over a fixed term. The final payment represents a balloon payment (usually 30% of the value). Free title of the vehicle passes to you once the final payment is made

Pro’s

• More flexible to transfer the lease in the event of a change in employment.
• Flexibility to purchase a second hand car (provided purchase is through a motor vehicle dealer).
• Fixed payments and interest rate provide certainty.

Con’s

• Not generally suited to self employed individuals.
• The full cost of maintaining the vehicle is your responsibility in the same manner as hire purchase financing.

Car Loan (Chattel Mortgage)

Under this finance arrangement the vehicle is used as security over the loan. Generally with this type of loan there is no balloon payment at the end of the term.

Pro’s

• Fixed payments and interest rate provide certainty.
• As there is usually no balloon payment you are paying off a greater principal component of the loan each month. This reduces the amount of interest paid (although repayments may be higher due to the additional principal payments).

Con’s

• The full cost of maintaining the vehicle is your responsibility in the same manner as hire purchase financing.

Line of Credit (LOC)

Under this finance arrangement you would generally draw down a line of credit against your home and utilise the money for the purchase of the vehicle.

As you are generally only required to pay interest on this type of loan, you need to be disciplined! Ensure that you pay down the LOC over a short period of time, otherwise the benefit of a low interest rate is lost.

Pro’s

• You are able to make additional repayments at any time.
• Interest rates are generally lower when the line of credit is secured against property.

Con’s

• Variable interest rate – subject to rate changes.
• There are no fixed repayments and accordingly you need to be disciplined and ensure you pay down the LOC over a short period, otherwise the cost of borrowing will be higher.
• The lender will require security over your home, therefore you will need sufficient equity.
• The full cost of maintaining the vehicle is your responsibility in the same manner as hire purchase financing.

There are many options available to you when it comes to financing a car. We recommend that you call the office to discuss what type of finance best suits your personal situation. We welcome the opportunity to help you with this decision.