Besides buying a house, for many Australians, buying a car is one of the most expensive purchases they ever make in their life.
There is no doubt Australians have a passion for cars and other motor vehicles.
An interesting fact is that most Australians don’t buy a car outright. 90 percent of all car sales are arranged through finance.
There are many different vehicle financing options available. In this article we will explore four of the most popular options, outlining the pros and cons.
Novated Car Lease
In a nutshell, you make regular payments over a set amount of time in order to pay off the car. Loan terms are typically between two to five years.
The main types of car leases are novated leasing, operational lease and finance lease. In this article we only look at novated leasing.
A novated lease is a three-way arrangement between yourself, your employer and a financing company. The main benefit of a novated lease comes in the form of tax savings. Lease payments are made by your employer to the finance company. Payment amounts come out of your pre-tax salary which reduces your taxable income. Often maintenance and running costs of the car can also be paid from your pre-taxable income which makes a novated lease even more attractive.
At the end of a novated lease you typically have three options:
- You can start a new lease which means you either trade your current car in for a new one or you sell the current car and pay off the residual amount owed to the novated leasing company.
- Keep the car and refinance on the residual amount owed.
- Pay off the residual amount to fully own the car.
- You are saving on tax because payments are made from your pre-tax earnings which reduces your taxable income
- No GST payable which saves you upfront costs you otherwise would have.
- Maintenance and running costs are set aside from your salary (= more tax savings)
- Savings on fuel
If you want to calculate your savings on a novated lease, you can find many novated lease calculators from various providers.
- You do not own the whole car until you pay the residual amount at the end of your lease
- You cannot make modifications
- Admin fees from the novated lease company
- High interest rates
- Future car value can be less than the residual
Personal Loan (Unsecured)
A personal loan can serve you to acquire a wide range of things, such as paying for a holiday, a home renovation or the car you’ve always dreamed off.
In a nutshell, you borrow money from a lender and you pay them interest over a fixed term, typically between one and seven years.
With fixed rate personal loans you pay the same interest amount each month and you know exactly how much you have to pay over the lifespan of the loan.
With a variable rate personal loan, like the name suggests, interest rates vary over time.
Technically speaking, if you believe the economy will hold strong over the loan term, you might want to look at a fixed rate personal loan. However, if you believe the economy will deteriorate and interest rates will go down over time, a variable rate loan could be the better option for you.
Either way, no one can be sure of the economic outlook.
- Easy to get a personal loan.
- You can spend the funds anyway you want.
- No collateral needed
- Split into manageable monthly payments
- Fixed payments – If you don’t pay on time, the lender can sue you.
- Higher rates if the loan is unsecured
- Shorter loan repayment terms with unsecured loans.
- Payment of origination fee upon taking out the loan.
- If you pay off the loan before the term ends, the lender can impose a penalty.
A car loan is not much different from a personal loan. The main difference is that the car will be used as collateral. Car loans or secured personal loans are arranged via a finance company. Once you have paid the final repayment, the car is fully owned by you.
- Lower rates than unsecured loans
- You can borrow more money with a secured loan
- Build a good credit profile (assuming you pay on time)
- You could lose the car if you don’t keep up with repayments
- Vehicle serves as collateral for the loan
- You don’t own the car until the final payment is made
- Upfront deposit usually required
In the past, credit cards had high interest rates and balance transfer fees. It wasn’t an attractive option to buy a car with a credit card. With low interest rates and balance transfer fees these days, for many Australians it has become an option to consider.
An important factor to look at is your credit card limit and whether it covers the cost of the car you want to purchase. Generally speaking, credit cards can be a good option if you are buying a car in the lower range or second hand.
- Alternative option if you don’t qualify for a car loan
- You can finance the car partly with your savings and partly with your credit card.
- Take advantage of low introductory credit card rates if you have plans to pay it off in the short-run.
- You can get many reward points
- When introductory credit card period ends, you can’t do a balance transfer if the amount used to buy the car is 90% or more of your card limit.
- Risk of running into cashflow difficulties if you rely on your credit card for other purchases.
- Some dealers ask for a credit card surcharge of up to 1.5%.
- Credit card fees