In this day and age with elevated inflation leading to a greater focus on prices, it is wise to sit back and revisit the basics.
With interest rates also rising, this holds true for motor vehicle financing as well. When we decide that we need a new vehicle, we also have to decide how to pay for it. If you’re not familiar with the most basic financing terms, this can be confusing. Without further ado, here are the most important finance terms you should know.
Car Lease
Also known as a finance lease, this 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 secured loan. This residual should be similar to the value of the car at that time.
Be aware when it comes to choosing a high residual. This may have the effect of lowering the monthly payments, but it could lead to a situation where the end payout is significantly more than the value of the car. That means you’ll have to come up with the difference! It is far better to have a lower residual and higher payments, and if you can’t afford the higher payments, look at a more affordable car.
In terms of tax deductions, your claim is generally for the monthly payments.
Novated Lease
This is a method of salary packaging a car. Under this arrangement, 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.
One of the key benefits of a novated lease is that this leasing option allows for finance mobility for the owner, as well as control over the maintenance and fuel purchasing.
Personal Loan
Perhaps the most well known form of personal finance, a financier lends the customer unsecured funds to purchase a car for a set period of time. The loan will come with either fixed or variable rates.
This product is best for those looking to finance a vehicle that would align with the normal lending criteria of financiers (e.g. used vehicles, small value vehicles, and private use vehicles).
Chattel Mortgage
The name might be confusing to some, but 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 to buy the vehicle.
The financier takes a mortgage over the vehicle as security for the loan. They will do this by registering a ‘Fixed and Floating Charge’ with the ASIC. When the contract is complete, the charge is removed, and you then have clear title to the vehicle.
Individuals and businesses that are registered for GST can claim the GST in their BAS, and there is no GST applied to each monthly payment.
Commercial Hire Purchase
Not as well known as some of the other terms in this article, a commercial hire purchase (CHP) is a 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 is paid – including all interest and/or residual – 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.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.