So many options to pay for your new car – how do they all work? Photo: Thomas Lucraft.
Despite continued stock shortages, rising interest rates and long wait times, demand for new cars in Australia remains high.
Amid current economic uncertainty, Canberra Toyota dealer principal Mirko Milic says buyers should consider their financing options as carefully as their choice of car.
Most people are familiar with the standard lease arrangement whereby you enter an arrangement with your financier to rent a car for a time. At the end of the lease period, typically you can opt to pay it out and have ownership transferred to you, refinance and extend the lease or the car would be sold to offset the remaining value.
Perhaps lesser known is the novated lease.
“This is a three-way arrangement between you as an employee, your employer and your financier,” Mirko explains.
“Your employer makes payments on your behalf and deducts them from your salary. Because it’s coming out of your salary you can include everything that costs you to run the car in your weekly deductions – fuel, insurance, maintenance can all come out of your pay.
“Aside from the tax benefits that come from that, it’s also very convenient.
“These two types of lease, along with chattel mortgages, Commercial Hire Purchases and standard personal loans, are traditional financial instruments used to fund the asset purchase but are treated differently by the tax department than a standard personal loan.”
Mirko points out one advantage of obtaining a traditional loan is fixed rates – meaning, unlike home loans, borrowers lock down the current interest rate for the term of the loan.
He also highlights the guaranteed future value loan, also known as the Toyota Access – a relatively new product to hit the market.
“Cars are depreciating assets, but this loan guarantees the future value of that car,” Mirko says.
“So if you bought a RAV4 for $40,000 and the loan was over four years, at the end of four years the finance company will guarantee that car will be worth X amount. If the market fell apart in that time and that car was worth less in real market dollars, you’d still get the agreed upon value. And if the market went the other way, you’d get whatever the increased market value was. Hence, it gives the borrower real peace of mind.”
Canberra Toyota dealer principal Mirko Milic. Photo: Thomas Lucraft.
Another option buyers routinely consider is the “mortgage redraw” (withdrawing money contributed towards a home loan over and above minimum required repayments).
While a legitimate option for those able to pay off that portion of the loan within a fixed timeframe, there’s a caveat.
“The attraction of the mortgage redraw is the interest rate, which is usually lower than a car loan. One pitfall customers need to be aware of is if that portion of additional lending were to go for a longer period than a car loan would have, you might actually end up paying more because of the compounding effect of interest,” Mirko says.
“The flip side is, if you’re disciplined and manage to pay the loan off inside the redraw period, you can make substantial savings.”
Mirko says the simple message when it comes to any depreciating asset is to get the appropriate type of financing for your particular situation.
Car financing options can be overwhelming, not just for financing but financiers. Mirko says the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which placed banks and financial institutions on notice for poor practices, and the subsequent ASIC review, forced a paradigm shift in car dealerships.
“A lot of car buyers have concerns about obtaining finance from a dealership, there’s a misperception that car dealers are big bad people when it comes to money, but times have changed,” he says.
“Following the royal commission, the actual interest rate set for the buyer is set by the financier, not the dealer anymore. So it really boils down to the applicant’s credit profile. Customers now have that peace of mind, when entering into a financial agreement with their dealership, that they’re not going to get a rogue dealer selling high rates – they can’t do that anymore.
“All these options are available through dealerships and the biggest attraction is convenience. Dealerships can get same-day approvals for loans and most of the time, it works out to be a better deal for the customer than going through a financial institution.”
For more information, contact Canberra Toyota.
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