Finance Terms to Remember

In this day and age of the internet and moving market prices on everything from milk to homes it is sometimes wise to sit back and revisit the basics. This is true in the motor vehicle financing area as well. When we decide that we need a new vehicle we also have to decide how to pay for it. This can be confusing if you dont know what each of the basic financing terms mean to you and your situation.

A CAR LEASE (or FINANCE LEASE) is a commercial finance product which enables you to have use of a vehicle and all the tax and personal advantages of ownership, while the financier actually retains the ownership of the vehicle.

The entire price of the vehicle is leased in this situation. Generally there is a residual value payable at the end of the term which has the effect of reducing the monthly payments when compared to a secure loan. This residual should be similar to the value of the car at that time. Be aware of falling for too high a residual. This may have the effect of lowering the monthly payments, but there is nothing worse than having a payout of say $20,000 when the value of the car is $12,000 because you will have to come up with the $8000 difference! Far better to have a lower residual and higher payments and if you cannot afford it, buy a cheaper car!

In terms of tax deductions, your claim is generally for the monthly payments

A COMMERCIAL HIRE PURCHASE (CHP) is a commercial finance product where you hire the vehicle from the financier for a fixed monthly repayment over a set period of time. At the end of the term when the total price of the vehicle (which includes all interest and/or residual (called a balloon payment in this type of finance)) is paid you take ownership of the vehicle.

A deposit can be used in a CHP to reduce the payments or final payouts.

In terms of tax deductions, your claim is generally for the interest paid and the depreciation per annum.

A CHATTEL MORTGAGE is a commercial finance product where the customer takes ownership of the vehicle (chattel) at the time of the purchase after the Financier advances funds to you for the purchase.

The financier takes a mortgage over the vehicle as security for the loan, by registering a Fixed and Floating Charge with the ASIC. When the contract is complete the charge is removed and you have clear title to the vehicle.

People/companies who are registered for GST can claim the GST in their BAS and there is no GST applied to each monthly payment.

A NOVATED LEASE is a method of salary packaging a car, which an employee leases a car which the employer agrees to pay the monthly payments in pre-tax dollars while they are employed with the company.

This leasing option allows for finance mobility for the owner and control over the maintenance and fuel purchasing.

A PERSONAL LOAN is simply that personal finance product where the financier lends the customer unsecured funds to purchase a car for a set period of time with either fixed or variable rates.

This product is best for those looking to finance a vehicle out of the normal lending criteria’s (used vehicles, small value vehicles and private use vehicles).

Put your finances in place first

The New Year always seems to be a good place for great ideas, but many of us fall to the way side too quickly and easily as we discover that the idea was solid, but the intention was not.May we suggest a new plan of attack.

1. Make that list and keep it for a while.

2. Then stage two is to see what you have actually done and cross it out. The rest well, generally you won’t do no matter how hard you mentally kick yourself.

3. Take that list and make another one-but this time of places, institutions, friends, companies that can do it for you!!!

4. Recognise that it is almost March. If you really wanted to make a difference in 2011 then it is almost too late, so get on with it!

Passing on some responsibility for things you really have no idea about can be very liberating. Things such as mortgage reductions, superannuation, life insurance and motor vehicles with salary sacrifice. Most of us need professional help in these areas as we have paid the price too often by listening to friends.

This is especially so nowadays in the highly regulated world in which we live. The rules have changed for just about every category and are continuing to change on a daily basis.

In the world of Motoring there is a lot of interest in turning to Brokers both for the car purchase and the financing, for the ease and peace of mind that comes with handing over the reins of something you really couldn’t care to face on a day-to-day basis. These people are experts and are buying and financing hundreds of cars every month, not once every 3 or 4 years like most of us and they are aware of the pitfalls and the requirements of individual lenders. They are also up to date with the latest new car model releases and where to get the best deals.

Let’s face it; there are far better things to do with our lives than visiting multiple car dealers on the weekend and then ringing round to get the best finance deal.

Surely it makes more sense to get your finances in place first. Tell your broker what your maximum budget is. This is usually determined by what you can afford per month. Then advise how many kilometres you expect (honestly) to travel each year and how many will be business related. How long would you like to keep your car? Bearing in mind that the best resale value is to be had when the car is still under new car warranty and without high kilometres.

Why are these questions so important? Simply because nobody wants to own a car in a couple or three years time that is worth much less than the finance payout at the time. Let your broker provide you with the best mix of term and residual/balloon payment based on your answers to these questions.

Once you determined monthly affordability, kilometres travelled per annum couple with the relevant residual, then this will equate back to a maximum amount financed and consequently the maximum price of the car you can reasonably afford. Then get the finance approved for this amount. Simple really!

Believe me, there is nothing worse than wanting to own a BMW when your monthly budget only stretches to a Holden.

This also stops you being talked up by a car salesman and ensures no buyers remorse after the purchase you cant afford!

Low Credit Ratings and Financing- The Pitfalls

The combination of the economic downturn in the past few years and the propensity of Australians to hold a lot of credit card debts have left many good individuals with bad/low credit ratings. Having poor credit is something you can live with generally by paying cash. Then there are the big ticket items that at some point need to be purchased. For most people, the purchase of a family car or work vehicle will require you to obtain a loan. This can be an issue, well it is an issue. The banks have certainly made it nearly impossible for you to borrow money at any point when you have bad debt -don’t dismay there are financial institutions out there that will provide a good quality service to you albeit at a price.

In the current economic climate automotive loans to those people with bad debt can actually be easily obtained; even more so than in the past. Car dealers have also been affected by the economic slowdown along with everyone else, and they are more willing to offer deals on finance, even to those with poor credit.

The treacherous part of borrowing money when you have poor credit is that the conditions of offer can make the transaction not at all beneficial to you. Here are some things you may encounter when searching for finance with a poor credit history:

High Interest Rates Without a doubt you must be aware that you will pay a higher interest rate than someone with good a credit history. The rates can vary dramatically, so stay vigilant and research financing before you are prepared to purchase. This way you can have peace of mind that your interest rate is the best available for the time.

Loan approval fees Some lenders have taken to making money off people without really providing a service. They will charge you a fee just to submit the application for the loan and refuse it, and keep your payment. These are very disreputable practices and you should refuse any advice to apply if there are initial fees for application. Most companies permit you to apply for free, and then charge a fee to process the documents if you wish to proceed. Remember to make sure the interest rate is appropriate, not sky high. If the standard interest rate for good credit is 9%, then you would expect to pay between 10.5% and 12% – not 21%.

Strange loan terms You must be aware that you need to take the time to read the documentation. You may not understand it all. Don’t be afraid to highlight and ask questions and expect a truthful articulate answer. If the dealer or finance company um and uh then refuse the loan. It may be at their interest rate, but it is still your purchase. Check for terms regarding missed payments; you may not be allowed to miss even 1 payment before repossession. And many times the error could be at their end with the bank not removing the funds from your account to theirs on a certain day. Through no fault of your own you could be carless and in even more bad debt.

In saying this, most lenders are trustworthy individually or institutions as they are governed by some very strict codes of practice themselves. When shopping for a car loan shop around to make sure you get what you pay for and purchase finance that works for you. Talk to the people at Fincar first. They are there to help you.

Toyota 2.9% Finance Offer

Toyota has released a new finance scheme to move some over stocked vehicles into the market, named- Toyota Advantage. The plan is to offer just 2.9% interest to approved buyers over a four year period using of course, Toyota Finance. It is only available on the Entry level Yaris YR, Prius, Corolla Ascent and Camry Hybrid models bought before January 31, 2011.

This is excellent news for those in need of a finance bargain. You can still negotiate a deal on the vehicle and receive the Finance package if you are approved. The reason is that Toyota is giving you the customer the bonus they would have normally given the dealer for selling the vehicle and is definitely an added incentive to tempt customers into their hybrid offerings for the first time.

David Buttner, Senior Executive Director of Sales and Marketing, Toyota Australia has recently be quoted saying, We are determined to continue offering customers excellent value with these cars, whether by adding features, repositioning prices or through other competitive offers such as finance.

You may choose from a straight 4 year term or add a balloon payment to it which would lower the monthly repayments even further.

This is a great deal with no loopholes but it is only available for the vehicles mentioned. All that said, it may not suit your individual needs and it may be more cost effective to get the car you actually want rather than those on offer. So if you are a private buyer or have and ABN and your own business ask Fincar to compare the deal with other vehicles you have in mind.

ATO Looking at FBT on Salary Packaging

Our office received a call from the Australian Financial Review for comment on the ATO looking into non compliance of FBT reporting.

Our office is seeing no decline in employees looking to take advantage of Salary Packaging a motor vehicle under a Fully Maintained Novated Lease agreement.

The reality is that the average PAYG Tax Payer is more informed today than they were, even 5 years ago. They understand that if they earn less than $180,000 per year, that, in many cases, they can make a genuine tax saving, if they set up their Novated Lease Agrement using the “Employee Contibution Method”. This method removes the need to pay FBT, by paying some of the costs from “Post Tax Income”. Not only do they save money, but it also romoves the onus on the employer to return FBT.

The ATO in our opinion is only looking at the reduction in FBT returns, as they believe that they are not receiving the correct revenue.

The most likely answer however is that there is a lack of education of employers. The employer, as he has not FBT liability, is not submitting an FBT return. The reality is, he should be.

As Roger Timms from Taxpayers Australia said, “it would be a quantum leap to conclude that a decline in returns was solely due to non-compliance”.

Phillip Gruppelaar