CONVENTIONAL LOAN
The easiest way to get car finance is to go to a bank or finance company and take out a loan, which is usually secured against the vehicle itself. Most loans from finance companies must be paid off over two to five years, although banks offer personal loans that can be repaid over a longer period.
Automotive loans are generally set at a fixed interest rate, which simplifies budgeting for repayments. One of the biggest factors behind the record sales of new cars has been the low interest rate environment and the ability of consumers to borrow against the equity in their homes to buy new cars.
PERSONAL LEASE
A personal lease basically means you rent the car for a given period (usually one to five years) and make monthly repayments as you would when you are renting a house.
The big difference is that at the end of the agreed rental period, the car may be sold or, in some cases, the finance company may take it back and sell it as a used car.
The personal lease is generally used by people who will use their car for private or household use more than 50 per cent of the time, although some tax deductions may be available if the vehicle is also used for business purposes.
HIRE PURCHASE
The hire purchase option is often used by small businesses because of the flexibility it offers. As with a lease you are obligated to buy the car by making a final payment at the end of the agreed
hire purchase period. This payment is known as the balloon payment.
The hire purchase option gives a business the ability to arrange the deal in such a way that the monthly repayments are suitable for the business's cash-flow and budget - by increasing the size of the deposit or balloon payment, the monthly payments can be made smaller.
This is handy for businesses that are starting up and have a lot of different calls on their cash-flow. some tax deductions may be available for depreciation and interest charges.
OPERATING LEASE
This is the best option for the business that runs its vehicles hard and turns them over frequently, such as a company with sales representatives or delivery vehicles that are constantly on the road.
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Under an operating lease, the financing company retains ownership of the vehicle and provides the customer with exclusive use of the vehicle for one to five years in return for lease rental payments - just like a long-term hire car.
Importantly, the user does not have to worry about the residual value at the end of the lease and the finance company bears the risk of losing money on the resale of the vehicle. Operating leases will not show up as assets on the balance sheet, so vehicle borrowing costs will not affect gearing levels. In addition, lease payments are fully tax-deductible, except for luxury vehicles.
CHATTEL MORTGAGE
This financing option suits businesses that account for their operations on a cashbasis.It works the same as a hire purchase agreement: the customer makes a series of monthly payments, then a final balloon payment. It also offers a great deal of flexibility, because the buyer is able to set the length of the lease payment and adjust the monthly repayments by increasing or decreasing the amount paid as a deposit or balloon payment.
Under a hire purchase agreement, businesses are allowed to claim back some or all of the GST contained in the price of the vehicle. But where a business that uses an accrual accounting system can claim the GST back in one Business Activity Statement, businesses that use a cash accounting system must claim the GST over the full term of the finance contract.
This can create cash-flow problems and adds to a company's administrative burden. But the tax office has ruled that using a chattel mortgage allows a cash business to claim the GST back in one hit. Andrew Gibson, general manager of sales and marketing for BMW Financial Services, says: "It's come to the fore because of the cashflow benefits for traders."
OTHER OPTIONS
Financing companies have expanded their product offerings in the past few years, and many of the European marques - including Volkswagen, DaimlerChrysler and BMW - follow the example set by their parent companies, which often offer customers a complete range of banking and financial services products.
In Australia, automotive financing companies offer products including insurance, fleet management, maintenance, fuel cards and even credit cards.
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