19 Frequently Asked Car Loan Questions Answered
It can be confusing when arranging finance for your new car, and we wanted to take some of the sting out of it, so here are 19 Frequently Asked Car Loan Questions Answered.
NEXT TO YOUR HOUSE, a car is usually the biggest purchase you’ll make, and over your lifetime you’ll make that purchase a few times, so it pays to get the finance sorted.
The basic choices of car finance are: buy outright; get a loan; go for a novated lease; or opt for a manufacturer finance package. Which is best? Well, they each have their pros and cons.
1. Buying Outright
Of course you have to have the cash, but once you’ve bought the car that ‘rainy day’ money is gone…
But for those who aim to keep their car for a long time – let’s say 10 years – this can make sense because over a long period of ownership, the car, as they say, doesn’t owe you anything.
On the minus side, as the car gets older it will begin to cost you more to run simply because parts wear out and servicing can become more expensive.
As soon as you drive a car out of the dealership it starts to lose value (around 20%) so, if you intend to sell that car five years later, in many cases it is not worth paying for it outright because you’re just burning your money.
To get a better indication of this loss in value or depreciation, Adrian Allier from firstratecarloans.com.au tells Practical Motoring you should “use all the available car classified websites, like Gumtree and compare used prices on the same models with comparable kilometres. By doing this, you can roughly see what your car might sell for in the future enabling you to make a better purchasing decision”.
2. Take Out a Loan
If you intend to keep the car less than 10 years it’s often worth looking at a loan. Which loan though? Well, that’s where it gets complicated.
At the moment interest rates are at all-time lows, but that doesn’t mean a car loan from a bank or finance company will be cheap. As an example, with base rates at 3% at the moment, an average car loan for the full price of a new car could be as high as 16% per annum. And that’s another point to watch – ask what the APR is (annual percentage rate) because that’s the amount of interest you will pay on the loan each year. Some companies misleadingly quote x-amount interest but they may be referring only to an equivalent monthly rate.
There may also be additional fees involved in a car loan, including monthly account keeping fees, for example, so always make sure you know what all the costs are, and what you’ll be paying in total.
Can you get out of the loan early by paying any outstanding amount off? Some loan companies make this difficult, and I’m not just talking about dodgy loans, I’m talking about mainstream lenders too, so always read the small print and ask those important questions before signing on the dotted line.
3. Car Dealer Finance Package
Usually offered through new car dealers, these often appear attractive, offering very low interest rates. But make sure you read the fine print because many depend on you paying a hefty initial deposit. Still, if you are able to do that, some of these loans can be attractive.
Additionally, some car manufacturers are offering a simple form of lease arrangement which starts with you putting a deposit down but includes servicing costs for an agreed period of ownership – usually five years but you can negotiate less too. The initial deposit is up to you, though of course the amount impacts on what the ongoing monthly payments are.
As usual, make sure you are familiar with all aspects of the loan, but for some buyers this type of finance can work well.
4. Novated Lease
Novated leases are an arrangement between yourself, your employer and a car lease or finance company. If your company offers novated car leases it is a form of salary sacrifice which in some circumstances can be very attractive.
For a monthly sum the lease/finance company provides a new car of your choice for a set monthly fee which is taken out of your salary before tax. This has the effect of lowering your taxable income so you pay less tax.
Depending on your salary if you pick the right price point for your new car, you can end up losing very little in take home pay and have a new car.
Most companies involved in this business buy the car for you and often can negotiate better deals than you can. They can even add on fuel costs as part of the monthly fee (they supply you with a fuel card after you estimate how much you will spend on fuel each month), repairs, servicing, tyre and windscreen replacement. At the end of each year if you’ve gone over and above the agreed mileage then monthly costs going forward are adjusted, but it can be in your favour too if you’ve spent less.
You don’t necessarily have to buy a new car either – novated lease companies usually allow you to opt for a car up to five years old if you want.
If you leave your company you get to keep the car, but if your new company doesn’t allow novated leases it means you either have to buy the car outright or give it back to the lease company, or negotiate a new monthly fee.
5. Balloon Payment Lease
These are often offered by car dealers and can be attractive on more expensive cars. You pay a deposit, usually at least 10%, and then a regular monthly amount based on the sort of mileage you think you will do and the price of the car. You have a balloon payment at the end. This means that at the end of the term – which is typically five years, but you can arrange less – your car is still worth an agreed amount. At that stage you can pay that amount – the balloon – and keep the car, or give the car back and use that balloon amount as a down payment on another car, and then go through the whole process again.
This finance scheme makes a lot of sense if your company offers a car loan element as part of your salary package. The car loan is an untaxed element of your pay so if you use some or all of that on a lease finance scheme it can work out well. However, there are always tax implications, including fringe benefits tax in some circumstances, so check with your accountant about that.
The top Frequently Asked Car Loan Questions
1. Can I get finance to buy a car privately?
Yes, most car finance houses will assist you in financing a private sale vehicle. That said, some lenders may require used vehicles to have a vehicle inspection prior to payment to verify the asset exists which ultimately ensures that the buyer is protected.
2. Can I get finance to buy a car from a dealer?
Yes, you can get finance when you buy from a dealer. Indeed, this is actually the preferred option for many finance houses. Most people prefer to get a pre-approval in place before stepping in to the dealership, because they are able to make a move straight away when they find their car.
3. I’m self-employed, can I still get car finance?
Yes, in some cases it might even be easier to obtain a pre-approval if you have been operating a business for a number of years. Assuming that you are interested in reaping some of the tax benefits that come with financing a car for business use, finance lenders can provide you with a number of options that will be beneficial to your individual tax return.
4. How long or short a term can I finance a car for?
Depending on what you feel comfortable with, you can finance as short as one year and as long as seven years. The majority of lenders offer five year terms. The question come down is, how long are you planning to keep this car for? Some lenders offer no early termination fees, meaning if you do want to refinance after, say, two years you won’t be out of pocket.
5. Can I pay the car down quicker than the term if I’d like?
Yes, you can. Depending on which lender you want to go to, you may be penalised. If you are planning to pay it down quicker than the term, then find a lender that doesn’t offer early termination fees.
6. I have an ABN, can I finance my car through that?
Definitely you can. Whether you are a proprietary limited company, a sole trader or an individual with an ABN, finance can be arranged, although the loan structure would be Chattel mortgage if there is a predominately business usage.
7. What kinds of forms/documents are required to finance a car?
There are only two forms required; an Application Form and a Privacy Consent form. The Application Form gives the financier an overview of the applicant and his/her financial position. The Privacy Form allows the financier or the broker to obtain information on the applicant’s behalf to process and move forward with the application. These forms are required irrespective if the car is for personal use or business use.
Additionally, a copy of a valid driver’s license and a proof of income are required to verify the applicant’s identity and serviceability. In most cases, the above forms/documents are all that are required for an approval.
8. How long will it take to get my finance approved?
The approval times, generally speaking, range from 60 minutes to 24 hours after the finance house, or broker have received all the necessary documents. They vary depending on which financier the application is put through, and the strength of the application.
9. I have a bank account. Do I have to use the same account for my finance?
As long as you are the signatory for an account, you are able to use any bank account you choose. The most popular and convenient option is to set up a direct debit function to ensure the repayments are made on time, though you are also able to make repayment using BPay.
10. What happens if I am unable to repay my loan?
If your circumstances change and you are not able to make the repayments, you may be eligible to apply for hardship assistance. This may allow you to reduce or defer your repayments for an agreed amount of time until your financial situation improves. The conditions and eligibility requirements differ between financiers.
11. Can I finance running costs or just the cost of the car?
You could do both. You may finance the running costs and also just the cost of the car. There are two main types of Novated Lease – Fully Maintained, and Non-Maintained. Some employers offer a selection and then some just offer one or none. What is included in a Fully Maintained Novated Lease is all the operating costs for the vehicle which are built-in as included in your salary package. On the other hand, with a Non-Maintained Novated Lease you are accountable for all running costs and vehicle maintenance.
12. Can I insure my repayments in case I become unemployed and am unable to repay?
Yes, you are able to insure your repayments. There are plenty of insurance companies that provide cover in case you are unable to meet your repayments resulting from involuntary unemployment, disability, or in the event of trauma. Most finance companies, or brokers will be able to offer you this insurance option in addition to your finance and comprehensive cover.
13. How are my monthly repayments calculated?
Your repayments will be based on the term of the loan, the interest rate, and your preferred balloon payment.
14. What is a residual payment?
A residual payment or balloon payment is a lump sum outstanding to the financier at the conclusion of a loan term once all consistent monthly repayments have been made. Ultimately, this permits the borrower to repay only a portion of their loan over its duration. This decreases the monthly repayments though in return for that, the remaining amount is owed to the financier as a total sum at the conclusion of the loan term.