Thinking of a new car? When you’re buying a car it is easy to get caught up in the moment and just go with the finance option put in front of you. But.. did you know we have access to over 20 lenders which range from major banks to broker only lenders? With this many lenders comes so many solutions and competitive deals. Speak to us first before you go to the car yard or even car sales. We can definitely put you in a position to drive a hard bargain!
What types of vehicle asset finance are there?
The types of vehicle finance can be categorised at a high level by business or personal use.
For business / ABN holders there are four types – which one you decide to go with can be dictated by the tax implications of each.
The four types of business vehicle finance are:
- Chattel Mortgage
- Commercial Hire Purchase
- Finance Lease and
- Operating Lease.
For personal use, there are two facility types and these can be distinguished by whether you prefer to own the car or lease the car:
- Secured car loan or
- Novated lease
What is a chattel mortgage?
A chattel is an item with wheels such as a car, motorcycle, truck, trailer or caravan.
A mortgage is an interest registered on the chattel by the lender. In the event of default, the lender has a right to repossess the chattel and recover the unpaid loan funds from the sale proceeds. This is the lender’s security for providing the funds to purchase the chattel in the first place.
Therefore a chattel mortgage is a loan to purchase a moving asset with a registered security interest until the loan is paid off.
What is a commercial hire purchase?
A commercial hire purchase may also be known as an Offer to Hire. The lender purchases the vehicle and you hire it from them. At the end of the hire term often with a final lump sum payment known as the residual value, ownership of the car transfers to you with a clear title.
It’s similar to a chattel mortgage except you own the car at the end of the contract instead of at the beginning.
What is a finance lease?
A finance lease is similar to a commercial hire purchase with the exception that there is only an option to take ownership at the end rather than it being automatically transferred after the last repayment.
Therefore the repayment is viewed as a rental rather than a principal and interest amount.
What is an operating lease?
An operating lease is where the asset is rented for a set term and returned with no option for ownership.
The repayment is a rental but unlike a finance lease it also covers agreed maintenance and administration costs. For example, if the operating lease was for a car it could include scheduled servicing within specific mileage each year.
If you do not want to assume residual value risk and prefer to have all expenses wrapped into a single forecastable amount, this can be a great product for you.
What types of personal vehicle finance are there?
There are two types of personal vehicle finance:
Secured Consumer Loan – The lender funds the purchase and you own the vehicle from the start. Depending on the lender and sale type, the funds are either paid directly to the dealer, current owner or you. The lender secures the loan by registering an interest over the car which is recorded in the Personal Property Security Register (PPSR).
Novated lease – A novated lease is a 3 way agreement between you, your employer and the lessor. The lease component is referring to the fact that your employer is leasing a car from the lessor i.e. car title is not in your name. “Novated” refers to you being responsible for the employer’s lease obligations by making repayments as direct deductions from your pre-tax income.
How does a novated lease work?
When setting up the novated lease there is a residual value / balloon payment determined. This is a lump sum repayment due at the end of the term and allows you to own the vehicle outright.
Alternatively you can give the car back, not make the balloon payment and opt for a new car.
What are the advantages and disadvantages of a novated lease?
The benefit of a novated lease is you can reduce your taxable income and consequently tax payable. However this can reduce your borrowing capacity for future credit facilities like a home loan. The reduction is often more than the total repayments or equivalent cash purchase price. As finance experts we can forecast the potential scenarios to help you make an informed decision that doesn’t jeopardize your long term goals.
Should you change your employers at any time, the lease comes with you and payments become yours to manage directly or continue to be deducted pre tax from your new pay.
Therefore with this product during the lease term you don’t actually own the car, rather you are paying down the portion you own IF you decide to make the residual value / balloon payment.
This can be a great product if you are looking for a hassle free solution to getting a new car every few years without needing to buy and sell. You can even have the lease repayments include the upfront and ongoing costs of registration, insurance, servicing, maintenance and repairs as required.
What happens if I default on a secured consumer car loan?
In the event of default, the lender’s registered interest gives them the right to: repossess the asset and/or have the first claim on the proceeds of sale. Once you have paid off the loan the registered interest is removed and this is what is known as clear title.
Can I sell my car during the term of a secured consumer car loan?
During the term of the loan if you want to sell the car, prospective buyers can search a register and identify there is a registered lender interest. This needs to be removed prior to the signing of registration papers and key handover by paying out the lender.
If it is a dealership trade-in they are very accustomed to paying out the lender directly. Although it is common practice, you may find private sale buyers are not comfortable with that. In that case, you would need to pay out the lender first which may involve using: savings, credit card, equity from home or an unsecured loan.
With the last 3 it is important to consider the associated establishment, interest and discharge costs as these may outweigh the trade-in value at a dealership or finding a buyer who is comfortable with paying out the lender.
What kind of vehicle can I finance?
A passenger car, luxury car, super car, classic car, import car, caravan, motorcycle, truck or prime mover.
Depending on the kind of vehicle there are limits on age, balloon and a certified inspection required if it is private sale.
Each lender will have its own appetite for the kind of vehicle they understand so If it has wheels, chances are we can get you the finance for it!
Do I need to put a deposit?
Generally no if one or more of the below apply:
- Your business has been in operation for more than 2 years
- You are a homeowner
- You have good credit history
How much can I borrow?
Generally you can borrow a loan amount which is equal to a loan to value (LTV) ratio of 150%.
The dollar amount is limited by whether you are a first time borrower or not. For most lenders first time borrowers cannot exceed $30,000 to $50,000. After that if other eligibility criteria are met, there is no real limit.
It is important to note the value of the car in this calculation is actually a value in a price guide called RedBook or Glasses. Often for second hand cars there are market factors that can result in a higher purchase price than what these price guides book the car at.
On top of the purchase price if the LTV stacks up you can also finance on road costs and insurance.
This is where a lender with a higher LTV can be very useful.
Should I buy the vehicle in my personal or business name?
This depends on the purpose of the asset.
The purpose is defined by the dominant percentage of use, for example if it is 51% business use, then it is business purpose and should be purchased with a chattel mortgage, commercial hire purchase, finance lease or operating lease.
There are varying tax implications and impacts on borrowing capacity for future credit facilities.
With so many choices and considerations, we understand it is difficult to know where to start.
So that you can focus on the car buying, get in touch with us first and a dedicated vehicle finance specialist will guide you through the process.
If I buy in my personal name how does this affect my future personal borrowing capacity?
It depends on the size of the repayments which can vary as vehicle finance terms generally range from 12 – 84 months.
The longer the term the more time you have to pay off the loan and the smaller the repayments will be. This has less impact on your future personal borrowing capacity and vice versa.
We are experienced with serviceability testing so we can simulate the scenarios to help you get it right the first time.
If I buy in a business name what tax implications does this have?
There are four tax implications when you purchase in a business name:
- GST
- Depreciation tax expense
- Interest tax expense
- Whole repayment expense
The distinguishing feature for what tax implications apply is who holds ownership and any intention to transfer ownership later.
For a chattel mortgage your business holds ownership from day one but with a registered interest by the lender. Generally, this means you can tax deduct interest and depreciation plus claim the GST on the purchase price as an input tax credit off your next BAS.
On the other hand for a commercial hire purchase the lender holds ownership from day one which means the repayment is defined by the ATO as a service subject to GST. If your agreement is entered into from 1 July 2012 the whole repayment, including the principal component is subject to GST.
In other words, for a chattel mortgage and commercial hire purchase of the same amount, the commercial hire purchase would have higher repayments. Having said this, with commercial hire purchases, because of the intention to own the vehicle at the end of the term, GST on the repayment can be progressively expensed over the term in addition to the interest and depreciation.
With a finance lease, the ownership of the vehicle is intended to be held by the lessor with no guarantee of a purchase option at the end. For an operating lease it is the same except the lessor covers all maintenance during the term and definitely takes back the vehicle at the end. Only for an operating lease can the whole repayment can be expensed but not depreciation.
Furthermore for a finance lease the GST on the repayment and residual value can be claimed as an input tax credit, GST on the purchase price is not applicable as there is no potential ownership until the end of the lease term.
Given the numerous tax implications with each of these facilities and the different ways they may apply, we’ve summarised them in a matrix below. We always recommend an introduction to your accountant so we can work together to shortlist options backed with professional tax advice.
| Chattel Mortgage | Commercial Hire Purchase | Finance Lease | Operating Lease | |
|---|---|---|---|---|
| GST | Y | Y | N | N |
| Depreciation | Y | Y | Y | N |
| Interest | Y | Y | Y | N |
| Whole Repayment | N | N | Y | Y |
Are there requirements as to how long I need to have an ABN or be registered for GST for?
To access the widest range of lenders a 24 month ABN registration is preferred.
There are lenders who even consider 1 day ABN so don’t be shy with asking whether there is a lender that can help you!
What supporting documents do I need to provide?
All lenders will require:
- Certified Driver license OR Passport and Medicare card
- Rates notice for property / properties owned
- Statement of Assets & Liabilities
Then there are three classes of income verification you can provide:
- Full documentation
- Semi low documentation
- Low documentation
Full documentation involves:
- Last 2 Years Company / Trust Tax Returns & Financial Reports
- Last 2 Years Individual Tax Returns & Notice of Assessments
- Last 12 months ATO Integrated Client Account and Integrated Tax Account
Semi low documentation:
- Latest BAS statement
- Last 12 months ATO Integrated Client Account and Integrated Tax Account
Low documentation:
- Self or accountant certified income
- Or affordability statement
Please note this list is client dependent and will be tailored to your unique scenario.
How long does the process take?
Due to the varying degree of documents to analyse, timeframes from when all required documents are received to approval are:
- Full documentation – 2 to 5 days to approval
- Semi low documentation – 1 to 3 days
- Low documentation – 1 to 2 days
We encourage you to get in touch as early as possible. We have the inhouse expertise to give you an accurate view of what the outcome would be, without even needing to apply (or marking your credit file).
How much will it cost?
As a guide in the current market we are seeing rates for
- Business facilities between 6 – 10% pa
- Consumer facilities are determined on a rate for risk profile but we are seeing rates between 6 – 12%
Final rates will depend on vehicle type, loan amount, term and age of vehicle at end of loan term.
Other fees would be:
- Lender establishment fee $350 – $450
- PPSR fee – $10
- Monthly admin fee – $5
As there can be significant analysis, enquiry and negotiation involved our fees do vary but we will let you know before beginning work what the maximum would be. The fees can be added to the loan so they are not an out of pocket expense.
Can you get me a better rate than the dealer?
A dealer is not a finance/credit expert like we are, nor do they have access to the selection of lenders like we have.
Typically a dealer will provide a quote from 1 – 2 lenders with 1 being their own.
We have access to over 20 lenders and this means it is very likely we can get you a better deal.
Keep in mind that rate is not the biggest driver of cost. The ability to make extra repayments or payout early can make a significant difference to what you actually pay overall.
To give you certainty and focus on car shopping we can get you a pre approval first. Then when you find the car it is no fuss price negotiation and quick delivery!
Can you meet a shorter turnaround time? What if I need the funds urgently, can you help?
We have built relationships and made direct contacts within each lender so we can make escalation requests that are taken seriously.
Even more valuable is our experience with the process mechanics unique to each lender. For example a lender who makes same day settlement payment via real time gross settlement versus one who doesn’t can be a difference of 2 business days.
Where time is of the essence we will prioritise that.
It is even possible to test drive a car in the morning and have it delivered to your door later that evening!