BUYING a new car is the second-biggest purchase in most people’s lives.
Yet there is a big difference between buying a house and parking something shiny and new in the driveway, especially because a car is such an emotional purchase.
It’s far too easy to blaze into a showroom with a car in your sights but without doing enough homework on the most important part of the purchase — the bottom line.
Unless you’re a multi-millionaire with an unlimited budget for a luxury toy, or a retiree dipping into the superannuation for a round-Australia wagon, finance will be part of the deal. It’s a giant business. More than $400 million in new-car finance is written every month, just by Esanda and St George.
There is plenty of money available, so it’s important to have a plan — starting with your ability to make the repayments.
Car loan specialist Steve Sell, of Yes Loans, says your credit history is critical to buying with a finance package.
If you have a bad credit history, you face a rocky time and interest rates at the top of the scale. But Sell says it’s not a dead-end.
“History is that — history. You can turn your credit rating around and that will make life easier and cheaper for the future,” he says. “If you pay on time for 12 months, you can re-establish your credit rating and get lower interest rates.”
Financing a new car, as opposed to paying with cash, is generally quick and easy. But is also the most expensive way to get on the road.
Looking closer into the business, national chain AHG does big business in financing through its dealerships by taking advantage of an on-the-spot deal with an interest rate that’s in line with those of the banks because that’s generally where it gets the money.
AHG writes about 1700 new and used-car loans a month and finance manager Gus Kininmont says buyers are increasingly using dealerships as a source of finance.
“Getting finance from a dealership is just as competitive as from other lenders, plus it is a significantly simpler arrangement,” he says. “There’s an 85 to 90 per cent approval rate for all loans.”
Kininmont says the National Consumer Credit Protection Regulations — which license financiers and monitor car dealers — led to banks tightening their criteria on personal loans. “There’s more rigour in finance because of the regulations. But it has led to more finance being written by dealerships,” he says.
Sell says the types and amounts of finance changed dramatically after the global financial crisis.
“The size of the loans are also down significantly. The majority of our clients are price-sensitive. Most are smaller loans and the customers are buying small, inexpensive cars such as Hyundai Getz.”
Sell says most are chattel mortgages and consumer credit loans, secured on the car.
According to data from loan comparison groups such as Cannex, a low-risk, high-credit-rated borrower could have an interest rate of 10 per cent for a secured loan.
However, if the loan is unsecured — that is, with no collateral — the borrower could pay 14 per cent.
Commercial rates are lower, so a low-risk loan could be charged at 7.8 per cent as a base rate. However, reflecting increased risk, the rate may grow to 16 per cent.
Financiers use a point-score system to assist in determining repayment capacity. This can be used in conjunction with the Henderson Poverty Index, a sliding scale taking into account marital status, income, disposable income, length of employment, number of children and more.
Used-car loan rates are more expensive than new car rates. “That’s based on the car’s age,” Kininmont says.
“There are other variables as well, mostly affecting insurance, such as the driver’s age and driving record, type of car and so on.”
Generally, a used car buyer can expect to pay two to four percentage points more in interest.
But, for a lucky few prospective car buyers, there is still cash. Kininmont says 10 per cent of buyers pay that way.
“Cash buyers have usually saved the money, received a payout from work, for example, or have access to other sources of lump sums,” he says.
But don’t think cash is king in a dealership.
Kininmont says the benefit of using cash is all to do with the negotiations.
“Each individual transaction is based on its merits. There is no real advantage or disadvantage in using cash for the purchase of a motor vehicle.”
—– THINGS TO CONSIDER —–
1. There are rates and there are comparative rates. You usually pay the comparative rate, as opposed to the rate that is advertised in the newspaper, which can be up to 5 per cent higher.
2. Establishment fees are a one-hit cost to do just that — establish your loan. Not all financiers charge this. It can be $300.
3. Service fees. These are ongoing, usually monthly, charges for the pleasure of your business. They can be common with some financiers; others, including most credit unions, don’t have them. Service fees can be 5 per cent of the monthly repayment, which can add up to a significant amount over a four-year loan term.
4. Exit fees. Pay off the loan early and you’re smiling — and your financier might be, too. Paying off early can incur a penalty of up to $500. This varies between finance providers. Some charge no exit fees.
5. Try to make fortnightly repayments. This changes how the interest is accrued and therefore you pay less interest. That can also reduce the term of the loan.
—– WHICH LOAN IS THE RIGHT ONE FOR YOU? —–
STANDARD LOAN
The financier (bank, credit union etc) lends the customer the money to buy a new or used vehicle. It is the simplest of loans but you need to be financially sound and prepared for some extra expenses. It can be secured or unsecured (higher interest rate). The vehicle is the security for the loan so the financier will demand it be fully insured.
UPSIDE:
* Finance can include on-road costs
* Agreed monthly payments over agreed time period
* Low fixed or variable interest rate
* Flexible terms for time and repayments
COMMERCIAL HIRE PURCHASE
The financier buys the car and then hires it to the consumer over a set period. Can be for individuals or businesses. Monthly payments generally pay out the entire loan in the set period and the vehicle is transferred to the motorist when all payments are complete. Mostly replaced by chattel mortgages.
UPSIDE:
* Flexibility allows financing of the total price; a deposit or trade-in; or even allow for a lump sum balloon payment
* Repayments and interest rates are fixed
* Easy to modify to suit borrower’s budget
* Low capital outlay and no GST on repayments
FINANCE LEASE
The financier buys the car and then leases it to the motorist. This offers the immediate use of the car with little or no capital outlay. These leases are available for individuals and businesses where the car is for business purposes. The motorist pays fixed, monthly rental payments and is financially responsible for the maintenance and trade-in residual risk of the car. At the end of the lease period, the motorist is given the option to refinance, return, sell or buy the car for the residual amount.
UPSIDE:
* Immediate use of the car with little or no capital outlay
* Repayments can be tax deductible but GST is payable
* Lease payment is made from pre-tax dollars
* Interest rate is fixed and is low because finance is secured against the car
NOVATED LEASE
The employee salary sacrifices in exchange for an equal value of vehicle benefits and leases the car directly from the financier. The employer has to pay the financier through a novated deed on the employee’s wage. Operating costs (registration, insurance, servicing, tyres etc) are covered by the motorist, who has sole responsibility for the car on termination of employment.
UPSIDE:
* Can buy the car at the end of the lease
* Can be leased for 100 per cent private use
* Employee can salary sacrifice with pre-tax income
* Employee has the choice of a preferred vehicle
* Employer benefits because it is a simple way of boosting a remuneration package
OPERATING LEASE
An agreement where the financier buys the vehicle and rents it to the motorist. The financier retains ownership of the car. The motorist has no risks associated with ownership, including the residual at the end of the period. At the end of the term, the motorist can buy the car, continue to rent it or change to another (usually newer) car
UPSIDE:
* Businesses don’t list operating leases on balance sheets so doesn’t affect debt ratios, though this may change
* Fixed repayments over a fixed period
* No risks with ownership and residual payments
* Rent is tax-deductible
CHATTEL MORTGAGE
A fixed loan. The financier advances money to buy a vehicle and holds a mortgage over the car, which is security for the loan. Motorists can finance the total purchase price, make an up-front deposit or use a trade-in. A residual payment may be placed at the end of the term.
UPSIDE:
* Motorist takes ownership at time of purchase
* Minimal capital outlay
* Flexible contract terms
* Fixed repayments which can be tailored
* Repayments exempt from GST
* Depreciation/interest tax-deductible
* Lower interest rate as finance is secured against the car
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