Managing The Budget Over Christmas

Christmas is a-coming, and it’s one of those things that you have to factor in when you’re working with a budget… and you should be working with a budget if you are considering taking out a loan for a car, bike or boat (yes, even if you are buying said car, boat or bike as a Christmas present!).

Often, when people first calculate a budget to see what sort of weekly payments can be managed for your loan repayment, they can overlook events like Christmas and birthdays, which do require a little extra expenditure. And then that time of year comes around and the pressure can start coming on. It can be tempting to overspend and possibly max out your credit cards in order to have the perfect Christmas.

However, if you cut through the hype and are smart, then you can avoid blowing your budget over this time of year and facing the choice between defaulting on a loan repayment  with all the nasty hassle that comes with this  or eating baked beans for a fortnight. (If it gets to that level, choose the baked beans. They’re good for you as well as being ultra-cheap, and it’s easier to repair the social damage caused by blowing off than the credit damage caused by blowing your credit).

First of all, remember that Christmas doesn’t have to be perfect as defined by advertisers and movies. You don’t need a huge turkey or ham for Christmas dinner, plus all the heavy food of a Northern Hemisphere Christmas. In Australia, we’re lucky enough to be able to have Christmas in the veggie growing season, so make the most of cheap seasonal veggies or even home grown veggies and built your Christmas dinner around that, with the meat being a sideshow.

And presents don’t have to be the biggest, best, flashest and most fashionable. It’s a clich, but it really is the thought that counts. Try home-made treats and gifts if you’re good with your hands (sweets, jam, biscuits, cake, photo frames, etc…) or vouchers offering your services (washing cars, mowing lawns, babysitting, weeding, cleaning) that can be redeemed throughout the year. Or set a maximum limit and see what you can find for under a certain price  it’s amazing what you can find if you use your imagination.

Other tips to help you fit Christmas into your budget are:

  • Join a Christmas hamper scheme or voucher scheme through your local supermarket  this does trim down the food budget.
  • Buy presents bit by bit through the year rather than in one big hit. This spreads the cost out, allowing you to fit present shopping around your repayments. October and November can be good times to start. (Oops  bit late for that one now!)
  • Buy presents for families as a group rather than individuals. This is especially good if you have masses of relatives.
  • Make your own Christmas cards  after all, you can get enough pictures of Christmas-related stuff on the catalogues that pour through the letterbox to provide plenty of collage material.
  • Make a pact with the members of your family that the presents will be bought in the New Year/Boxing Day sales when all the excess stock in shops gets sold off cheap. Don’t go mad, though  again, set a maximum limit and stick to it. Use cash and leave the credit card at home if you’re likely to give into temptation.

How To Avoid Shylock

Shylock, for those of you who aren’t familiar with Shakespeare’s play The Merchant of Venice, was a moneylender who charges one of the main characters (Antonio, the merchant of the title) in the drama one of the most outrageous penalties for defaulting on a loan: the terms of the loan which was voluntarily signed and agreed to by Antonio  allowed Shylock to cut a pound of flesh off Antonio… without anaesthetics, which hadn’t been invented when Shakespeare was writing, unless you count very strong alcohol or opium. And you can guess what happens: Antonio defaults on the loan when he gets the news that one of his trading ships has been wrecked at sea, and Shylock hauls him into court with a knife ready to do the business, and it takes some very cunning legal work by Portia, the heroine of the play who disguises herself as a man so she can act as a lawyer, to get Antonio off the hook.

Shylock was the Renaissance version of a loan-shark: someone who charges a very high rate of interest so people with bad credit ratings can take out a loan. Loan sharks  although you won’t hear them advertising themselves this way  are now more common and more acceptable to society than they used to be (only just). In Shakespeare’s day and before that, the practice of charging very high interest rates was known as usury and it was considered to be among the most atrocious of moral crimes. Dante, who wrote before Shakespeare, in his classic Inferno, put usurers (we’d call them loan sharks) in the seventh circle of Hell at the same moral level as murderers and perverts.

And if you’ve ever talked to anyone who has taken out a loan with a loan shark, you’ll understand why society in days gone by cast them as villains. Some people who have failed to read the fine print and/or have felt so desperate that they’ve taken out a loan from one of these unscrupulous lenders would agree completely  and are likely to consider hacking off half a kilo of muscle to be a better situation than watching their family suffer in an attempt to pay the loan off.

You should always be suspicious about people or companies who offer loans on very easy terms. It is highly likely that there will be exorbitant hidden charges and/or penalties. These people are often considered by people who haven’t got a stellar credit history. How can you avoid Shylocks but still get the money you need to buy a set of wheels (so you can get to your job so you can earn the money to pay off the loan and still have something left over to live on)? Is there a way?

The first thing to do is to look at your credit history carefully. Sometimes, the printouts can be wrong or out of date. A debt may be in dispute or you may have already paid it off, and this isn’t shown on the bit of paper. If you can sort this out and clarify what’s going on, then you may be able to clear your name on the credit front.

The next thing you can try doing if you do have outstanding debts or unpaid bills that are damaging your credit rating is to do what you can to pay them off. This may mean that you have to trim your lifestyle back a bit  cut that credit card up if you find that you can’t help yourself running up big bills with it!

If the problem is well and truly in the past  perhaps the bad rating is a legacy of being young and stupid many years ago  then having the paperwork, such as bank statements and budgets can be used to show lenders that you have learned how to manage your money properly and you are unlikely to default on a loan again. Another possibility is to save up and have a large deposit handy, which not only means that you’re borrowing less but also shows the lender that you’re able to save money.

And, most obvious of all, try applying to a different lender. If you’ve always gone to the same lending organisation and they know that you have a tendency to get yourself into problems, then a new lender might be more favourable towards you, especially if you take some of the other steps listed above. Talk to us and we’ll help you find a new lender that suits your situation  and we’ll help you with the fine print so you don’t end up paying a pound of flesh.

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!

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.

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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.