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Types of Car Loans

Standard Car Loan

This type of Car Loans are finance products where the financier lends the customer the funds for the purchase of a new or used car. The customer takes ownership at the time of purchase, and regular payments are made over an agreed period of time. The vehicle acts as security against the loan, and this is discharged upon payment of the final installment. It is often a requirement of the financier that full comprehensive insurance is taken out on the vehicle before the loan is approved.

Advantages of Standard Car Loans include:

- Lower interest rates as finance is secured against the vehicle
- Fixed and variable interest rates are available
- Cash or trade-in deposit may be used
- Flexible contract terms
- Repayments can be structured to suit the individual
- Finance can include on road costs

Commercial Hire Purchase

Commercial Hire Purchase is a finance product available to businesses and individuals where the financier agrees to purchase the car / asset and then hire it back to them over a set period of time. Contracts are usually structured so that the regular monthly payments are set to payout the full amount by the end of the term. The business or individual has use of the vehicle during this time, however ownership remains with the financier until the end of the term, at which time it is transferred. Flexibility in structuring the contract means that the total purchase price may be financed, a deposit or trade-in used or a final lump sum balloon payment option given.

Benefits of Commercial Hire Purchase include:

- Fixed repayments
- Fixed interest rates
- Easily structured to suit budget
- Minimal capital outlay
- No GST on repayments
- Deposit may be used to reduce amount borrowed

Finance Lease

A finance lease is a straightforward option whereby the financier purchases the equipment or car required and then leases it to you (the lessee). This provides immediate use of the asset with little or no capital outlay. Finance leases are available to businesses or individuals where the car / asset is for business purposes.

The lessee is responsible for regular monthly rental payments, which are fixed for the entire term of the agreement. The lessee is also responsible for the running costs and residual risk of the car / asset. At the end of the lease term the lessee is normally given the option to refinance, return, sell or purchase the asset for the residual value.

Benefits of a finance lease:

- Rentals/payments are generally tax deductible
- Lease payment is made from pre-tax dollars
- Little or no initial capital outlay
- Budgeting easier as costs are known in advance
- Fixed interest rate
- Lower interest rate as lease is secured against the car

Novated Lease

Novated leasing has become an increasingly popular form of car financing and is central to salary packaging arrangements between an employee and an employer. Under such an arrangement an employee agrees to forego a portion of their salary or wages in exchange for vehicle benefits to that amount. The employee leases the car directly from the financier and has the right to take the car with them should they change jobs. The obligation to meet the repayments under the finance lease lies with the employer, via a Novated Deed through the employees salary packaging.

A Fully Maintained Novated Lease exists where, under agreement, all operating costs of the vehicle are covered by the lessee. This includes servicing, registration, tires, insurance etc.

Benefits of a Novated Lease to the employee include:

- Option to purchase the car at the end of the lease
- Allows the employee to salary package
- Greater choice of vehicles
- Financing may be paid with pre-tax income
- Employee retains any equity built up in the vehicle
- car may be leased for entirely private use

Benefits of a Novated Lease to the employer include:

- Simple and cost-effective way to add value to renumeration packages
- Higher borrowing ratio
- The responsibility for the car passes to the employee should the employee leave
- Reduced administration costs

Operating Lease

An Operating Lease is a rental agreement where the financier purchases the vehicle and rents it to the customer for an agreed payments over a fixed term. The financier retains ownership of the car. The risks associated with ownership are therefore avoided and the future residual asset liability remains with the leasing company.

Ownership does not pass to the customer at the end of the term, however they may choose to purchase the car at this stage, continue to rent or hand back the car (and perhaps upgrade).

A major advantage of Operating Leases for businesses is that they are not listed on the balance sheet, meaning the business' debt to equity ratios are not adversely affected.

Advantages of an Operating Lease include:

- Finance cost is known for a fixed period of time
- Risks of ownership and residual asset liability are avoided
- Lease rentals are tax deductible

Chattel Mortgage

A Chattel Mortgage is a fixed loan where the financier advances funds to the customer who takes ownership at the time of purchase. The financier holds a mortgage over the car which is used as security for the loan.

Flexibility is an advantage of a Chattel Mortgage wherein the full purchase price of the car may be financed or an up front deposit or trade-in may be used. A residual payment may also be placed at the end of the term.

Advantages of a Chattel Mortgage include:

- Minimal capital outlay
- Flexible contract terms
- Fixed repayments may be tailored to a budget
- Repayments exempt from GST
- Depreciation and interest charged are tax deductible
- Lower interest rates as finance is secured against the car


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