Types of Car Loans and How to Choose the Best Fit
Purchasing a car is likely the largest purchase you will make, outside of buying a home. The simple fact is many Australians sign up for car loans every day, but with so many types of loans it can become very overwhelming. Choosing a type of car loan usually begins with the decision between a loan and a lease. Though some may think you pay the same for the vehicle regardless of the loan type you choose, this couldn’t be further from the truth. In fact, understanding each type of car financing can save you money in the end. The following information will provide an overview of each car loan type, and help you decide which the best fit for your situation is.
How Car Loans Work
Car loans are available for people who are purchasing new or used vehicles, but do not have enough cash on hand to buy outright. Such loans can be obtained from individuals, financial institutions, or sometimes even the car dealership. The borrower is expected to pay interest on the money borrowed, and can choose to have a fixed or variable interest rate. Additionally car loans generally last for periods of 12 months up to 5 years, and can be either secured or unsecured, depending on the individual situation.
Types of Car Loans Available
Here is a look at the types of car loans and the advantages of each:
Standard Car Loan
A standard, or conventional car loan can be obtained from a credit union, bank, or other financial institution. It is considered the simplest form of car loan, but it usually requires a borrower to have good credit and money to spare each month. Since these loans are secured by the vehicle, the financier will require it to be fully insured at all times. There are several advantages to a standard loan such as the loan usually includes on-road costs, they feature lower interest rates, and the monthly payments are negotiated at the time of purchase.
A personal lease allows a person to “rent” a car each month for a negotiated period of time that usually lasts from 1 to 5 years. With this type of loan the borrower is responsible for paying a monthly payment which is much like paying rent each month for a home. The motorist is responsible for regular maintenance on the car, and is subject to mileage limitations. After the personal lease ends, you can choose to go ahead and purchase the car or give it back to the dealership where they’ll sell it as a used vehicle. This is a great option for those who use their vehicle for personal reasons at least 50 percent of the time. The advantages associated with personal leases include lower upfront costs, lease payments are created from pre-tax dollars, and interest rates are lower because the loan is secured by the vehicle. Moreover, you can usually deduct the repayments from your taxes, but keep in mind that GST is payable.
Commercial Hire Purchase (CHP)
A commercial hire purchase can be used by individuals or businesses, and offers great flexibility. With this type of car loan, the financier pays for the vehicle in full and then “hires” it back to the consumer for a set amount of time. Generally monthly loan payments are calculated to include the entire amount of the car over that specific amount of time. What this means is at the end of the commercial hire purchase, the car will be transferred into the consumer’s name because he or she will have paid the entire loan amount after the last payment is made. Such loans are not as popular as they once were simply because they’ve largely been replaced by Chattel mortgages. There are several advantages with CHP’s such as fixed interest rates, they’re tax deductable when used for business, feature flexible terms, and have fixed monthly payments.
A chattel mortgage is a commercial financial product where the financier advances a customer money to purchase a vehicle. While the customer takes ownership of the car at the time of purchase, the financier takes a mortgage on the vehicle as security on the loan. After the mortgage is created, the financier registers their required interest with PPSR. The customer has the option to finance the entire loan amount, place a low down payment toward the loan, or even offer a trade-in. For the most part chattel mortgages are repaid after the last payment is received; however some require a residual payment at the end. Advantages of chattel mortgages include minimum initial capital required, very flexible contract terms, the interest charged and depreciation are tax deductable, lower interest rates, and repayments that are fixed but can be altered if needed.
A personal loan is a loan issued by a financier with no security backing the loan. This type of loan may also simply be called an unsecured car loan. These loans can be rather easy to obtain if you have good credit. The terms range from 12 months up to 120 months, and can have variable or fixed interest rates attached. Just keep in mind that unsecured personal loans tend to have higher interest rates because they are a higher risk for the financier, as there is nothing backing the loan. There are many advantages to personal loans including less strict borrowing guidelines, your car does not secure the loan, and the contract terms can be very flexible.
Bad Credit Loan
Bad credit loans are issued to Australians who have less than perfect credit. The one downside to this loan type is you may have a difficult time finding an institution that will allow you to borrow a large amount. At any rate, such loans are unsecured and can feature higher interest rates because the borrower is considered high risk. Yet if you obtain a bad credit loan to purchase a car it can be very beneficial, as it serves as the first step to reestablishing good credit. Advantages of bad credit loans include flexible terms for repayment and the fact they are tailored for those with bad credit histories.
A novated lease is a form of salary packaging. It is a formal three-way agreement in which an employee allows wages to be reduced for vehicle benefits of an equal value. The financier directly leases the car to the employee. In exchange for the car, the employee pays the financier a novated deed on their wages. With a novated lease, the employee also covers all normal operating costs associated with the car such as maintenance, insurance, tires, and registration. In the event the employee’s employment is terminated, he or she assumes sole responsibility for the vehicle. There are several benefits with this loan type such as the employee having the option to purchase the car when the lease ends, the vehicle can be used solely for personal use, the payment is deducted from pre-tax income, and the employee even gets to choose the car.
When it comes to purchasing a car it is just as important to know about the different types of loans as it is to know about the car you are buying. Knowing how to choose the right loan for your situation can not only save you money, but it can also make buying your next car that much easier. Knowledge is power, so when you have a clear understanding of the language a financier will use, you will be able to negotiate deals that much better!