Borrowing and lending terms for absolute beginners

Some of the people who use our services to find a good car loan aren’t old hands at the game of borrowing and lending. For many people, leaving school and getting a job is often what triggers the need for a car you need to get to work, don’t you, especially if that job is in a place or time that just doesn’t work for the other El Cheapo options such as walking, bussing, carpooling or biking. And unless you can get a bit of dough off Mum and Dad, you’re probably going to have to borrow some money so you can buy a car (or a motorbike another worthy option that’s a bit more frugal on petrol and is a good way to get about for those who don’t have to cart a family around) so you can get to work to earn some money which you will need for paying back what you borrowed to get the vehicle.

However, if you’re new to the world of borrowing and loans, some of the terms might be a bit unfamiliar. This glossary might help you start off and might also help you avoid a few traps for the unwary beginner.

Principal: The principal is the amount that you’re borrowing. This is usually the price of the car, but it pays to ask a few questions just in case there are a few extra charges here and there often, there’s an administration or application fee associated with applying for the loan (the employees of lending companies have to eat…).

Compound interest: Compound interest is not just something you have to calculate in maths class. In case you were asleep during that class and just went through the motions, compound interest works like this. Just say that you borrow $1000 at an interest rate of 10% per annum (per annum = per year). The interest calculated the first time round will be $100, which is 10% of $1000. The next time that the interest is calculated, it will be 10% of ($1000 + $100 = $1100), which is $110. This assumes, of course, that you haven’t made any repayments. Generally when the interest at Time B is calculated, it will be 10% of principal + interest calculated at Time A any repayments. It doesn’t take a maths whizz to work out that the amount you have to pay back keeps growing and growing, so the more repayments you make and the quicker you pay back your loan, the less you will pay in the long run.

Bailiff: This is something you want to avoid. If you don’t manage to make your repayments, the inevitable will happen. Remember how annoyed you got when someone borrowed your favourite CD but never gave it back? Well, this is how the loan companies get when you don’t pay them back the money you borrowed to buy that car. And they will send someone to get that vehicle off you, as it was paid for with their money, after all. This person is the bailiff. The car will probably be sold by them and this money will go towards what you owe them. You still might have to keep making payments, too, and your credit history (like a report card on what you’re like when it comes to paying back loans) will have a black mark against it, meaning it will be harder for you to borrow money a second time again. DON’T GO THERE! (If you have had problems in the past, don’t despair and feel like you’re condemned to riding the bus for the rest of your life talk to us, as we might be able to find something that will work for you.)

Of course, these are just a few of the terms that you need to know when you’re taking out a loan for a vehicle of any description. More in the next post!

Top Tips To Remember When You Apply For A Car Loan

1. Be realistic when you choose your vehicle. While you might be able to get a loan for that very nippy brand new little red sports car you’ve always dreamed of, if you are buying first car or a family car, it’s best to be realistic and rein in your dreams. A little red convertible is not very practical as a family vehicle, and if this is your first car (and you’re on your first job), you’d probably be better off with something small, economical and probably second-hand. However, if you’re hunting for a second car for fun, then you can indulge your dreams a little.
2. The more you can pay upfront, the less you have to borrow and the less interest you will have to pay. Deals when you only have to pay $1 deposit or even no deposit look very attractive, but you will end up paying more in the long run. Saving up a little before you buy a car is wise for this reason and for another reason: if you have to wait a bit, you are less likely to be impulsive and get the wrong vehicle for your needs on a whim.
3. Plan your budget: before you sign on the dotted line for a car loan, make sure that you will be able to meet the monthly repayments. For many people, this may be the first time they actually set a budget. Don’t forget to leave a cushion just in case an emergency happens, and also make room in your budget for a little mad money.
4. Larger payments over a shorter period or smaller payments over a longer period? A shorter term for the loan means that you pay less interest, but your budget will be committed more heavily with less room to move. However, lower payments over a longer term may be more easily fitted into an existing budget, especially if you’re forced into buying a new car (which could mean new second hand) because your family wheels died dramatically with no hope of repair and you’re going to have to get to work somehow.
5. Ask if you are able to make additional payments on top of your regular repayments so you can pay your loan off more quickly. Some finance companies allow you to do this without any penalty; others have an early repayment fee. If the company that offers the best deal does charge an early payment fee, do the maths is the fee lower than the interest you would have otherwise paid? If being able to make additional repayments without incurring a penalty is important to you, let us know so we can find you a finance company and/or deal that permits this BEFORE you sign anything.
6. Don’t just buy the first car you see that fits your requirements. Shop around, do your research and do your homework. Consider all aspects of your purchase thoroughly, including fuel type and engine size, as well as the number of seats and the size of the car. Also think about what happens when repairs become necessary: how easy is it to get parts?

Finance Specials

There could well be a few of you out there that don’t realise that Renault, that great French brand that has never quite made it here, are the owners of a very large slice of Nissan Motor Company.

So we see at the moment both Nissan and Renault marketing some very aggressive finance rates.

With Renault, you can get a 2.9% Interest Rate on the Megane, the new Latitude Sedan and the Fluence Sedan and a 3.9% Interest Rate on the commercial range, namely the Kangoo, Trafic and Master vans.

With Nissan, they are offering a 1.9% Interest Rate on the new Micra.

On top of these they are offering free servicing and a 5 year warranty on some models which all seems quite compelling.

However, as with all of these special offers there is small print, which you must read. Both are restricted to 36 month terms and it is interesting that the comparison rate referred to in the advertising relates to a 60 month contract for $30,000, when the Micra costs half of this amount! So, go figure!

As with all of these deals, whilst on the face of it they may seem attractive, it is always best to try and compare apples with apples. You may find that the rate is only available for the car if you pay the full ticket price for the car. Whereas you may be able to negotiate a discount and then finance the vehicle at normal rates and end up better off.

There is no doubt that for some people, these are well worth considering but we would recommend that you do your homework first and don’t get drawn in by some slick salesperson’s spiel.

Changes to FBT rules

Back in May, there were some changes to the way that FBT is calculated on Company vehicles. This has lead to a much simpler way of calculating the tax, but in the interim I have been asked many times how this impacts existing contracts, so below I will try and explain in plain English.

One thing is clear, there is no longer a benefit for those travelling large numbers of kilometres per annum because there is now one flat rate of 20% across the board.

HOW THE OLD STATUTORY FORMULA METHOD WORKS

Under the old statutory formula method, the taxable value of car fringe benefits is based on the cost of the car multiplied by the relevant statutory percentage. The percentage depends on the number of kilometres the car has travelled, taking into consideration the number of days in the year that you provided car fringe benefits.

Where the last commitment in relation to a car has been entered into before 7.30pm AEST on 10 May 2011 the old statutory rates will continue to apply, as outlined in table 1.

However, if a pre-existing commitment is altered, it may be considered a new commitment that is subject to the new arrangements.

Table 1

Total kilometres travelled during the FBT year (1 April 31 March) Old statutory rate
Less than 15,000 0.26
15,000 to 24,999 0.20
25,000 to 40,000 0.11
Over 40,000 0.07

HOW THE NEW STATUTORY FORMULA METHOD WORKS

The new flat statutory rate of 20% applies regardless of the distance travelled.

The new flat rate applies to all car fringe benefits after 7.30pm AEST on 10 May 2011, except where there is a pre-existing commitment in place to provide a car.

All pre-existing commitments will remain under the old statutory rates unless there is a change that would amount to a new commitment.

Statutory rate

Statutory rate
From 10 May 2011 From 1 April 2012 From 1 April 2013 From 1 April 2014
Less than 15,000 0.20 0.20 0.20 0.20
5,000 to 25,000 0.20 0.20 0.20 0.20
25,000 to 40,000 0.14 0.17 0.20 0.20
Over 40,000 0.10 0.13 0.17 0.20

So there you have it, plain and simple up until April 2014, but if you have any other questions relating to this, make sure you talk to the people at FinCar.

Add new comment

Employee Contribution Method

Interest Rates

Tuesday, 10 May 2011 08:06

The Employee Contribution Method (ECM) is an evolution of the Novated Lease product that was initially introduced as a method of payment for Executives and high income earners to save money (taxes generally) regardless of their job description.

The original Novated Lease was established using the Statutory Fraction Method, more commonly known as the FBT method for those people who fell into the highest marginal tax bracket.

However, since July 30 2008, the top marginal tax rate rose to $180,000 from $150,000 which reduced the glamour of this product to many people.

So as not to disadvantage these people from this fundamental shift in tax rates the (ECM) was implemented to maximise the benefit from vehicle packaging for PAYE tax payers under $180,000 (after packaging).

The ECM is a more tax effective arrangement for those under the top tax margin simply because the FBT method uses a formula that is based on the capital value of the vehicle, the statutory fraction and highest marginal rate; E.g. Capital Value X Statutory Fraction X 45% X 2.0647 (easy hey!!not)

Basically, if you are under the top marginal rate of tax and you want to package your car you can contribute to the value of the vehicle pre-tax and the running cost post tax; saving you the difference on the margin.

For every dollar the employee contributes to the running costs of the vehicle they reduce their FBT liability of the vehicle by the same amount. So you are substituting the FBT costs for standard tax.

As a rule of thumb, you will save (on spending) approximately 10% of the value of the car each year. It may not seem too much, but if you purchase a $30,000 you will be about $3,000 per year better off than with the Standard Novation agreement. That is definitely better in your pocket than the ATOs!

Ask the people at FinCar for more information on ECM when you call.

The right Residual Value or Balloon Payment for you

When you have made the decision to either take out a lease, be it novated or otherwise, or a commercial hire purchase you are inevitably faced with the decision about the size of this end payment and what impact it has on you now and in the future.

The impact is an obvious one. The higher the residual (or balloon), the lower your monthly payments will be and the lower the residual (or balloon), the higher the monthly payment will be. Simple! You would think

So, where do you set this figure?

Firstly there are some minimum guidelines set out by the ATO, which are:

12 months

65.50%

24 months

56.25%

36 months

47.00%

48 months

37.50%

60 months

28.25%

Secondly, and most importantly ask yourself honestly how many kilometers you will be driving each year. Forget about how many of them will be business kilometres for your FBT calculation, you need to know how many kilometres will the car have travelled at the end of the lease, when the residual (balloon) will be due. This will have a direct impact on the end value of the car; the lower the km increases the balloon, the higher km will decrease it.

The average, if this figure actually exists, is somewhere between 15,000 and 20,000 km per annum for a working person who uses their vehicle for business and pleasure. Approximately 60,000 – 80,000 at the end of a 4 year lease/CHP.

Ideally the value of the car will be equal to the residual and then you can go on your merry way and start the process all over again with your new car.

The good news is that if you have kept the kilometers down and looked after your car, then there is a chance that your value will be more then the residual and you will come out with a profit perhaps a deposit on the next vehicle to keep the cost down even more. But sadly for far too many people, they end up in the worst case scenario, where the value if the car is much less than residual and they have to come up with the balance before they can move on to the next car and often this amounts to thousands of dollars.

I have seen this happen in many, many cases. Even worse is that people manage to get the financier to fund this shortfall in the new car. All that does is defer the obvious pain for, say, another four years and usually the amount is then even greater.

Not so long ago, it was a practice by unscrupulous Dealers, Brokers and Lenders to convince people to take out 5 year loans, with 50% residuals, particularly with high end prestige vehicles. They are not alone in this conspiracy, many car buyer are too focused on the immediate purchase rush and prestige of owning a new car with only a monthly budget in mind – that they ask for the worst case scenario.

There are still some people are still paying off the balances! There is not a car on the market that is worth 50% of its value after 5 years, particularly in the Prestige market!

Far better is to be sensible and rational and set as low a residual as possible which will then give you a chance to sleep easy during the course of the loan. It is an ever changing depreciating asset and a useful transportation tool. You can’t curl up to a car at night.

The simple and painful adage is, If you can’t afford the combination of a sensible residual and the associated monthly payment, then you cannot afford the car you are aspiring to. Buy something cheaper!

Do your homework, check what cars are selling for with those kms on them remembering that you must compare apple with apples. The right kilometers, style, model and engine size car (and not expensive accessories) and base your thought/figures around that.