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).