Car financing in Australia is not only confined to traditional banks and dealerships.
Knowing the different types of car finance available can help you find the cheapest option for you.
Secured Car Loan
Most Australian banks offer secured loans, which means the car you’ll buy will serve as the collateral.
During your loan application, the car will be appraised by the bank. If you fail to pay back the loan, the bank has the right to sequester the property to recoup the funds.
Some banks offer unsecured loans, but they usually have higher interest rates because they take a bigger risk.
Secured auto loans are perhaps the most popular type of car financing in Australia because they are easy to understand and are often used for new and second-hand purchases.
Getting a secured loan is ideal for first-time car buyers because the process is more straightforward, and the rates are lower compared to other options.
Car Loan Broker
Another popular option for car financing is working with an auto financing broker.
Your chosen broker will evaluate your application and submit it to different lenders.
After a few days, you’ll have a list of car loans you have been pre-qualified for.
Most brokers will not charge you any fee. Instead, they earn money through commissions from the lender you have selected.
Using a broker is ideal for those who want to avoid the leg work of finding the best rates available.
Chattel Mortgage
A chattel mortgage is similar to a home loan because you can only claim car ownership if you have paid your lender in full.
This car financing option is popular among businesses who want to offer car services to their employees.
Businesses benefit from tax deductions and GST claims as long as the vehicle is used for business operations and rarely for personal use.
Novated Lease
There will be three parties involved in the car purchase agreement in a novated lease – you, your employer, and the lender.
It’s challenging to grasp the concept of a novated lease because the car you have to pay will not be yours at the end of the lease.
You will pay for the car as part of your salary package. Because the car payments are made from pre-tax income, your dues will be lower.
Another attractive feature of a novated lease is that you don’t need to pay GST of the car, further reducing the cost to at least 10%.
Car Dealership
Car dealers can offer their financing, and in some instances, the rates and terms they offer are lower than the options discussed above.
Also, a dealership could help you assist your application for car financing from a lender.
Most car dealers also welcome applicants with average credit scores because they are keen to make a sale.
So always do your due diligence, and ask for the total purchase price and the total repayment amount on your car loan, including all the fees.
Take some time to compare this price against the offers from other options.
Perhaps you can buy the same car at a lower rate and better terms if you find your financing.
Car Depreciation and How it Affects Financing
Depreciation refers to the difference between the price you buy an item and the price you can sell it for.
Depreciating assets include clothes, appliances, and cars.
Most car models depreciate significantly during their first year of use and will slowly decrease after Year 3.
Car depreciation often reaches a plateau during Year 8 of ownership.
A lot of people overlook depreciation when they buy a vehicle because they instead focus on fuel economy.
It’s okay if you want to buy a fuel-efficient car, but buying a car brand with slow depreciation will help you save more money in the long term.
You still need to look into depreciation even if you are considering taking a personal contract purchase (PCP) but are not planning to buy the car in the end.
Remember, the repayments you make towards this deal are computed to include depreciation. So, you are more likely to pay lower monthly payments on cars with slow depreciation compared to models with fast depreciation.
If you are on a personal contract hire (PCH) for a new car lease, this is the same case. The monthly payments are designed to cover the depreciation, so the less value the car is projected to lose, the lower the repayments will be.
How to Compute Car Depreciation
Calculating the rate of how vehicles depreciate depends on several factors. But there are two popular ways for depreciation calculations:
Diminishing Value Method
In this method, the vehicle’s base value is used.
Car’s Value upon Purchase x (Days owned / 365) x 200% / Effective Life Years)
Prime Cost Method
In this method, we need to calculate the car’s drop value as a fixed percentage.
Lost Value = Running Car Expenses x (days owned / 365) x (100% / Effective Life Years)
Negotiate for Better Rates and Deals
There’s no magic formula for getting approval for a car financing deal.
After all, banks and lenders are keen to lend you money because that’s how they profit, and many car dealers and brokers will find a workaround to offer deals to most potential buyers.
But of course, having a good credit score, a stable income, and a demonstrated capacity to pay the loan will help you get approved and negotiate for better terms.
Take note that you can negotiate rates, so take some time to look around and try asking for a rate.
Try to seek professional advice if you find it challenging to understand the different car financing offers.
Working with a broker or loan advisor will help you make an informed decision. Such as choosing a cost effective car, calculating repayments, and even calculating car depreciation.
What are Your Thoughts?
Which car financing option looks best for you? Do you think you are ready to negotiate for better rates? Share in the comments section below!