Thinking of buying your next 4×4? John Cadogan demystifies the incredible range of finance options available today.
It would be great if there were a ‘one size fits all’ solution to the 4×4-financing issue, but the reality is that the best 4×4 finance solution depends on you and your personal (or business) financial position.
Here are the broad guidelines followed by some specific finance and ownership instruments that span a range of different financial situations.
Broadly, look for the lowest interest rate you can find, across a range of reputable lenders. If you have existing finance with Provider A (say, a home loan) and you can find a better rate with Provider B, that might represent an excellent opportunity to have a discussion with Provider A about wanting to remain with them – if they can beat Provider B’s rate.
Car finance is often arranged at a fixed interest rate for the term of the finance. If you lock the finance in now, with interest rates at historic lows, it’s likely you’ll be insulated from probable rate rises over the term of the agreement.
Read the fine print. The interest rate alone is not everything. Examine early get-out penalties and flexibility generally before signing off on any agreement – after considering your own situation.
Be realistic with balloon payments. (These are lump-sum payments payable at the end of the finance term.) One common trick with ‘balloon’ or ‘residual’ payments is to inflate the balloon to reduce the repayments – often to ‘fit you in’ to a car you can’t really afford. Check a reputable resource for likely resale values of your new vehicle. As a rule of thumb, most vehicles lose about one-third of their value at the three-year mark, and one-half of their value at the five-year mark. Individual vehicles vary, of course, but you’d have to be concerned with residual payments exceeding 65 per cent after three years, or 50 per cent after five. In other words, you want to avoid a finance arrangement that leaves you with a vehicle worth less than the residual at the end of the term.
Novated lease (see www.novatedleasing.com.au) – a great way to utilize your pre-tax income to help you pay for your next 4×4. A novated lease also allows the acquisition of the vehicle GST-free, even if the purchaser is not registered for GST. Suitable for most Australian employees – and the vehicle can be for 100 per cent personal use. Novated leases are a three-way agreement between an employee, an employer and a finance company. The employee agrees to ‘sacrifice’ some pre-tax salary to pay for the vehicle, the employer facilitates this as a payroll deduction, and the financier handles the administration. It’s very simple to arrange, and a great way for employers to reward employees at a negligible cost to the business.
Chattel mortgage – generally suitable for business vehicles, as there are significant tax deductions available. Chattel mortgages are attractive to businesses registered for GST, if the vehicle is used predominately for business. GST input tax credits on the price of the vehicle can be claimed in full in the first BAS following the purchase. The 4×4 is the ‘chattel’ and the mortgage is the security over the vehicle. Terms are generally from 24 to 60 months, and balloon payments are incorporated into the finance structure.
Finance lease – generally suitable for business vehicles (at least 50 per cent business use) with terms from 24 to 60 months, and incorporating balloon amounts. High tax deductibility, and no GST on the purchase (because the financier claims the tax credits direct). Again, the vehicle is the security over the finance.
Commercial hire purchase – generally suitable for business vehicles, again with 24 to 60-month terms and a range of balloon payment options. High tax deductibility. With CHP, the finance company purchases the vehicle and subsequently hires it to you. You claim the GST component incrementally, over the term of the agreement. Significant changes to the GST treatment of CHP agreements were made on 1 July 2012, making CHP significantly less attractive to individuals with a car allowance, and potentially less attractive to businesses. This has meant a decline in the popularity of CHP, commensurate with a rise in the popularity of Chattel Mortgages (which weren’t subject to the same changes in GST treatment).
Car loans & personal loans – generally for people who can’t claim the vehicle as a tax deduction, but they can provide tax deductions for cars used in business. These are just conventional loans, with the main difference being that in a car loan, the car is used as the security over the finance, whereas a personal loan is often unsecured (or secured by other assets, such as real property). Balloon payments are available, and the term of the loan can be up to 10 years. Personal loans are common for old or low value vehicles, but are often relatively expensive. Car loans are generally used by individuals who don’t have the option of salary packaging (novated lease) and are cheaper than personal loans because the finance is secured by the vehicle.
The above information is general information only. As with all finance arrangements consult a qualified advisor and consider carefully your own circumstances before entering into any agreement.
John Cadogan is an Australian Motoring Expert who regularly appears on 7’s Today Tonight as well as a regular on Sydney’s popular talk back radio 2UE. John also writes as the Editor of CarLoans.com.au who provides car finance credit assistance for Australian’s looking for a new vehicle.