Last issue we looked briefly at where most people go wrong when organising car finance - emotion, research and planning. In this issue we take a closer look at research.
"Research?" you ask. Why of course. It is a fairly simple process - all you really need to understand is a few key financial terms and how they interrelate. Couple this newfound information with a general chat to a bank, a broker and a finance company, and you will be well on your way.
Down to the definitions. Let's briefly look at the five key types of vehicle financing:
- A vehicle lease is where the finance company purchases the vehicle and leases it back to you over the term of the contract. It is a commercial facility (more than 50% of the vehicle's use must be for business) and you make the lease payments from pre-tax income. The Goods and Services Tax (GST) is included in the purchase price but is then claimed by the finance company as an input tax credit. This will reduce the net amount financed by one eleventh, saving you money on your repayments.
- Under a commercial hire purchase (CHP), which is also a commercial facility, you purchase and own the vehicle until the end of the contract, when you can either pay out the balance of the contract or refinance the remaining amount. A CHP will allow you, based on your accountant's advice, to claim the interest charges and depreciation on the vehicle. GST is included in the purchase price and does not apply to the final instalment.
- If you are a sole trader or operate a business with a partnership structure, and you use the cash accounting method for taxation, then a chattel mortgage may be more applicable. This type of facility allows repayments to be structured at different points in the contract. Businesses on cash accounting can also claim back the GST component in one lump sum on their next Business Activity Statement (BAS).
- If you are an employee, then you might consider a novated lease. Effectively, this is a three-way agreement between you, your employer and the finance company. The real benefit is that the repayments are made by your employer on your behalf from your pre-tax income. This means that your employer does not have to carry the asset on their balance sheet. However, you can choose the vehicle and can take it with you if you leave your employer.
- Finally, for those not eligible for a commercial or novated facility, the next best option is a consumer vehicle loan. This type of loan allows for a balloon payment with fixed monthly repayments and terms of up to 5 years. However, more than 50% of the car's use must be personal, and no claims can be made on the GST, depreciation or interest component of the facility.
For further information, have a look at most reputable finance companies' websites. There you will find greater detail on each product type and what will suit your requirements
As we rush headlong into the festive season, from all our staff we would like to wish you a very Merry Christmas, and hope you have a safe and relaxing holiday.
Next Issue: The components of a finance facility.