Financing a Car

Car Loan Details

1. Interest Rates

The interest rate that is intended to be charged on your loan is one of the biggest factors to consider when looking at which lender you will be going with. The interest rate will be expressed as a per annum figure, which is calculated regularly based on the outstanding balance of the loan. Before entering into a finance agreement, it is important to compare different interest rates across a broad range of lenders. This way you can see which lender offers the lowest interest rate.

It is very common for financial institutions (banks) to offer a lower interest rate, in comparison to car dealerships. Car dealerships typically intend on negotiating a cheaper price for the vehicle, only if the car financing is taken out with the dealership itself. In this scenario, the interest rate is usually much higher in comparison to bank rates. This attracts borrowers due to the minimal planning required for taking out the finance, however this option can significantly add to the overall cost of the loan.

2. Other Fees and Charges

There are several other charges that are also bundled in with vehicle financing. These include: establishment fees, borrowing costs, break fees, early payment fees and late payment fees.

3. Loan Duration

The official duration of the loan is determined by the borrower. A longer term loan essentially means the loan will be paid over a longer period. The benefit to this is that repayments are reduced to smaller amounts which can assist the borrower with cash flow. The down side to this is, interest expense becomes higher as the loan is stretched out over a number of years.

4. Car Loan Repayments

Loan repayments are usually made in accordance to the borrower’s preference. Repayments can be made weekly, fortnightly or monthly. It should be noted however, the more frequent repayments are made, the quicker the debt becomes smaller which subsequently leads to a reduction in the total interest paid.

5. Balloon Payment

Another factor to consider is opting in for a balloon payment. A balloon payment is an agreed lump-sum amount to be paid at the end of the loan term. The purpose of a balloon payment is to reduce the amount of repayments made through the loan. This option is up to the discretion of the borrower.

Financing Agreement

Choosing which financing agreement is right for you is all dependant on your individual financial circumstances. Each loan is different and serves for a different purpose, so it is important to consider your options carefully.

Here’s a brief overview of the main types of vehicle finance available:

1. New Car & Used Car Loans

As the name suggests, new car loans are designed specifically for brand new vehicles whereas used car loans are for pre-owned vehicles.

2. Secured & Unsecured

A secured car loan uses an asset (the vehicle intended to be purchased) as security for the loan. An unsecured loan on the other hand is not backed by any asset or collateral, which usually leads to higher interest rates to compensate the lender for a lack of security.

3. Fixed & Variable Interest

Loans with fixed interest rates will retain the same interest rate for the duration of the loan, which leads to repayments being the same amount each time. Having a fixed rate can assist the borrower for budgeting and planning purposes as your loan repayments will not change if interest rates increase or decrease.

The repayment amount on variable loans (as the name suggests) will fluctuate depending on the current interest rate at that point in time. This option makes it a little more different to plan for as your repayments will solely be based on interest rate activity in the market (which is currently extremely volatile).

4. Chattel Mortgage

Chattel mortgages are available for businesses wanting to purchase a vehicle specifically for business purposes. Similar to a secured loan, the lender will provide the funds to be able to purchase the vehicle and the business will take ownership at the time of purchase. The lender takes a “mortgage” over the vehicle as security of the loan. Once the financing has been paid off, the business entity will take its rightful ownership of the vehicle outright.

Next Steps

As you can see, there are a variety of option to choose from when determining what financing option is best for you. Depending on your personal circumstances, financing agreements can be custom built to best serve your needs and help you achieve your goals faster – without breaking the bank.

Are you looking at providing employees with business vehicles for personal use via a fringe benefit? If so then you may be interested in the fringe benefits tax (FBT) savings now available on electric vehicles that Blake covers in his blog here.

To make your asset financing options work for you and your business please make sure you talk with us to gain clear insights and guidance. Our team at BLG Business Advisers are Wollongong Accountants who service right around Australia. There is no cost or commitment involved in an initial chat with us, which leaves you free to decide if we are the right fit for you.

Whatever you decide we wish you and your business every success!

*Please note that the above information is general advice only. We recommend you seek advice from a specialist relevant to your personal situation. This information is correct at the time of publishing and is subject to change*