Please read the following and get some insight on all the jargon and
then make the choice
OR have Gerry handle all
the arrangements for you, simple! Select from below or read on:
LEASE OR BUY? Your choice is expansive
with finance products that range from the traditional bank loan
to novated leases, all aimed at getting you behind the wheel.
Firstly decide whether you should buy or lease
The essential difference here is that if you:
- BUY a car, you own it and it is all yours!
- LEASING a car means that you are only paying for the use of
the car and at the end of the lease term, officially, you have
to hand it back or take out another lease. The legalities get
a bit murky here and in practice, it is possible to buy the car
at the end of the lease period under certain types of leasing
packages but we will go into that later.
There are no hard and fast rules as to whether leasing or buying
suits people better and it is a topic that should be discussed with
an accountant.
IF however you use your car for business and private purposes or
your employer is willing to include a car as part of your salary
package, then leasing is well worth looking at. THERE CAN BE SIGNIFICANT
TAX ADVANTAGES ESPECIALLY FOR CARS IN THE PRESTIGE AND LUXURY SECTORS.
Leasing also offers the benefits of being able to drive a new car
more often and can be more convenient with all costs aside from
fuel able to be tied into the one monthly payment. But there are
restrictions with annual travel limits, and harsh penalties for
breaking a lease or not ensuring the car is well maintained.
WHERE TO SHOP FOR PURCHASE FINANCE 
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Having decided to buy a car, unless you have just hit the Lotto
jackpot, it will probably require borrowing money. And the choice
basically comes down to three sources; the bank, credit union or
a finance company.
Banks/Credit Unions
Banks come in a range of colours and all offer personal loans for
cars with competition generally keeping interest rates among the
majors at fairly competitive levels.
Applying for a loan is a simple affair with payments based on the
interest rate, amount borrowed and term of the loan. With credit
checks and time to make sure you are telling the truth about your
financial situation, approvals usually take a few days. Because
the bank is lending you money based on your ability to pay it back,
almost regardless of how you choose to spend it, it may also require
some sort of security. This might be in the form of an owned asset
such as a house or by requiring a guarantor who will sign a contract
to say if you default on the loan, they will cover the repayments.
The interest rates are generally slightly lower than those offered
by the finance companies, but aside from variations in the term,
bank loans are rather inflexible with interest rates set at a pre-determined
level according to market conditions.
Credit Unions are generally associated with specific workplaces,
industries or trade unions and as such provide financial services
for their members. As a result, they are often able to offer loans
at slightly lower interest rates than the banks but also tend to
have stricter conditions like requiring you to have a deposit or
trade-in.
If you are getting a loan from either a bank or credit union, it
is best to sort out how much you can borrow before you go shopping
for a car to save wasting time test driving your dream wheels only
to find out you can't borrow enough money.
Finance companies
If you are after finance with a bit more flexibility, then you
should probably investigate the way the vast majority of us get
vehicle finance and that is through specialised finance companies.
These basically fall into two categories; those associated with
the banks, like Esanda which is 100% owned by the ANZ Bank or those
tied in with carmakers such as Ford Credit or GMAC.
Interest rates vary little between the two types but those associated
with the carmakers, called vendor finance companies, probably have
a slightly wider range of products because they are solely focussed
on automotive finance.
Either way they both claim a far greater flexibility than the banks
and are able to tailor finance packages and interest rates to individual
circumstances. The finance is also usually arranged at the dealer
at the same time as you buy the car and approvals can often be made
within a couple of hours.
TYPES OF PURCHASE FINANCE TOP
Hire Purchase
The most common product sold by finance companies is still the
traditional hire purchase or consumer loan as they are sometimes
called.
The period of the loan is determined, the interest rate set according
to the risk, the value of the loan and market conditions and the
monthly repayments are set to pay out the full amount by the end
of the term. Terms usually vary between one and five years.
A variation on the hire purchase product known as the balloon payment
option is also slowly growing in popularity.
By setting a larger balloon payment for the end of the term which
can vary according to individual circumstances, you can reduce your
monthly payments to better balance the budget. However setting a
high residual value is fraught with danger, especially if
you do higher than average kilometres or decide to sell or trade-in
you car before the lease period is up. It is advisable not to do
this and not to take a contract out for 5 years if you intend to
change the car in 3 or 4 years time.
At the end of the term, you can either pay out the full amount
in one hit or refinance the balloon amount and continue paying off
the car in monthly instalments.
Guaranteed Buyback Finance
In addition to both the standard hire purchase and balloon type
hire purchase arrangements, many of the automotive finance companies,
particularly those associated with the car makers, are also offering
consumer leases and products that offer a guaranteed buyback value
for the car at the end of the term. This figure is the generally
the cars wholesale value or probably even lower, as nobody can predict
a true value 2 3,4 or 5 years hence.
These products basically work like a balloon type hire purchase
agreement with the guaranteed buyback figure determined by the loan
term and prevailing used car values set at the start of the contract
and doubling as the balloon payout figure. The buyback figure is
often called the residual and is basically what the car will be
worth after the loan term.
At the end of the term, the customer can hand back the vehicle
and walk away with no further obligation (subject to some conditions),
payout the balloon figure and keep the car, refinance the balloon
amount or trade-in on a new car.
The benefits of this type of flexible arrangement is being able
to reduce the monthly payments through the balloon payment and knowing
you have a guaranteed buyer at a guaranteed price at the end of
the term if you decide not to keep the car. This arrangement
tends to favour the financier, not the buyer.
WHERE TO SHOP FOR LEASE FINANCE
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The growth of leasing here has, up until recently, been as a result
of the number of large businesses running big fleets of cars, who
long ago realised there was little point in owning a continually
depreciating asset. They figured why have the hassle of having to
maintain and dispose of cars and light commercials which were often
turned over in relatively short periods when you could simply pay
for the use of the vehicle and leave everything else to the lease
company.
Car leases are usually offered by finance companies, both the traditional
and vendor types or specialist leasing firms. Some of the traditional
finance companies only have a small interest in leasing so probably
the best place to investigate leasing is through either a vendor
finance company or specialist firm. Because of the volume of business
done by the leasing firms and vendor finance companies, they tend
to have a wider range of products and are able to tailor them specifically
for your needs.
Most carmakers now have either their own in-house finance companies
or sell branded finance and lease products underwritten by existing
finance companies.
You can also arrange finance and lease packages through mainstream
finance organizations.
The Volvo vendor finance company claims that because their parent
companies build the cars they are financing, there is a greater
knowledge of the product to help set realistic residuals and tailor
products to suit specific vehicles.
They also want to ensure brand loyalty when it comes to car changeover
time so they are more likely to offer a more competitive deal because
they want both your finance business and automotive business.
However, when it comes to signing on the dotted line whether with
a vendor or non-vendor finance company the real difference in lease
costs will depend on the type of finance arrangement and your individual
circumstances rather than the service provider.
TYPES OF LEASE FINANCE
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Lease products fall into two categories as either a finance lease
or operating lease and vary in the way they treat ownership, disposal
and residual risk on the vehicle.
Finance Lease
Finance leases are becoming increasingly popular because of the
ability to novate the lease.
As a lease, no deposit or trade-ins are made and the monthly payments
are worked out by the finance company based on the term of the lease,
interest on the finance charge and the residual value of the car
at the end of the term.
However, you are the one who takes the risk on the residual and
if at the end of the term the market says the car is not quite worth
what was expected three years earlier, then the responsibility to
make up the difference to finalise the contract is yours.
Although under the definition of a lease you gain no equity in
the vehicle, it is common practise under finance leases to make
an offer for the vehicle at the end of the term and pay out or refinance
the residual to take ownership.
Novated Lease
Novated leases are becoming a very popular way of including a car
as part of your salary package to help reduce your taxable income.
You take out a standard finance lease on a vehicle of your choice.
You then arrange for the lease payments to be paid by your employer
through a novation agreement which remains valid as long as you
stay with the company.
The lease payments, running costs and fringe benefits tax any car
supplied to an employee for their private use is subject to FBT
calculated on a sliding scale depending on the value of the vehicle
and annual kilometres travelled are then taken out of your pre-tax
salary.
If you resign or the words forced redundancy start being bandied
about in the canteen, then the responsibility for the vehicle and
the subsequent lease payments reverts to you.
At the end of the lease, the choice is there to turn over the vehicle
into a new lease, trade it in on a new car on a novated lease or
even purchase the vehicle through a third party.
As with any standard finance lease, the responsibility for the
residual lies with the lessee and if at the end of the term, the
market for used Porsches has taken a dive then it is you who must
make up the difference to finalise the lease contract.
But similarly, if there is a sudden demand for purple Range Rovers
and you have acquired, and then decide to sell, the vehicle, you
are not subject to either a property fringe benefit tax or tax on
any profit made on the sale of the vehicle.
According to Volvo Car Finance's manager insurance and product
marketing, the main tax benefits for novated leases lie in the ability
to reduce your pre-tax income.
The majority of people that do fall into the bracket of having
a vehicle packaged generally have some component of the salary in
the 45 cents in the dollar, the highest tax bracket.
The car component comes out of pre-tax so it reduces your taxable
income so in the majority of cases for people who are middle management
it will drop them back into that lower tax bracket. It can be a
way of effectively avoiding bracket creep.
Commercial Hire Purchase
Since the introduction of GST in mid 2000, it is now preferable
to use Commercial Hire Purchase (CHP) rather than leasing. Even
though there is little difference in the cost to you, with CHP you
won't be fiddling around with GST Statements.
If you have a company, it is also preferable to take out the contract
in the company name, rather than a private name.
Operating Lease
The operating lease, is essentially a long term rental, and is
becoming increasingly popular especially for cars breaking the six
figure bracket.
Operating leases can be non or fully maintained with payments based
on a fixed monthly rental.
The residual risk on the car lies with the finance company, there
is no question of you gaining any equity and at the end of the term
you simply hand back the car.
Apart from the benefits of taking no risk on what is a continually
depreciating asset, if you own a company, the lease payments are
off balance sheet thereby improving the look of your bottom line.
Gerry can
help with any advice or steer you in the right direction and remember
competition is alive amongst the financial institutions, its your
money and you decide the best deal.
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