Types of Car Finance

Posted on Wednesday, February 24, 2016 - 12:18

Say you’re thinking about purchasing a new vehicle, but you’re not exactly flush with cash, so you need to figure out some type of financing. What are the financing options available for a person wishing to buy a car in Australia? Let’s see.

Personal lease

With a personal lease, you are not buying a car as much as you are actually renting it for a limited period of time, which can range from one to five years. During this time, you will be paying a monthly sum. At the end of the five years or however long you have rented it for, the vehicle may be taken back by the company and advertised as used, or it can be sold. People use personal lease when they plan on keeping the car for private use, but business utilisation will grant you a tax deduction.

Operating lease

An operating lease is ideal for a person who uses their car a lot, someone who likes to change their car frequently, or a company that needs business vehicles that have a high turn-over. The car continues to be owned by the company who rents it to you for a period between one and five years, and you pay a monthly rental payment. The best part is that any devaluing of the car at the end of the agreed time slot is swallowed by the company, so you don’t have to worry about it or about the wear of the car. You can also deduct the payments from your taxes unless it’s a luxury vehicle.

Conventional loan

The most frequently used method and the easiest is to take out a conventional loan from a finance company or bank. A bank will be able to offer you a personal loan over an extended period of time, while a finance company will have a stricter repayment schedule of two to five years. The car itself acts as collateral, and the interest rate for automotive loans is low and fixed, so it’s simple for anyone to know how much they need to pay back and actually afford to do it. This has allowed a large number of people to purchase new vehicles.

Hire purchase

Similarly to a lease, with the hire purchase option, you need to buy the car at the end of the period, by making a balloon payment. A balloon payment is the final payment one makes for a car, usually in a larger amount. This type of financing is good for small businesses because it offers flexibility in payment arrangement. For example, they may wish to pay a larger deposit, combined with a larger balloon payment at the end, in order to have smaller monthly payments, according to their cash flow. Tax deductions may be applicable.

Chattel mortgage

A chattel mortgage is similar to the hire purchase option, in that it features a balloon payment at the end, in addition to the monthly repayment schedule. The amount of time can be adjusted if the buyer needs more time to pay or wants to fluctuate on monthly repay sums. A cash business can claim the GST back, and while under a hire purchase, it must claim it over the entire finance contract. With a chattel mortgage, it is allowed to take it back all at once.

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