Motor vehicle financing differs greatly depending on who owns (or will own) the vehicle, and for what purpose the vehicle is used.
Obtaining a motor vehicle (generally a car or motorbike) loan as an individual is fairly straightforward. This kind of loan is essentially a secured personal loan (read more about them
here), where your vehicle acts as 'security' for the loan.
The benefit in applying for a specific motor vehicle loan instead of an
unsecured personal loan usually lies in the interest rate. With your vehicle acting as security for the loan, a lender will usually offer you a lower interest rate than they would if you were providing no security at all. Motor vehicle financing is generally only available on cars that are fairly new, so you may need to revert to an unsecured loan (and therefore a higher rate) if your vehicle is more than a few years old.
Because motor vehicle loans take security over your vehicle, you cannot sell the motor vehicle without first making arrangements to pay out the loan against it, much like a home loan. Therefore, you need to be careful in the early years of the loan because cars often drop in value at a faster rate than you pay off the loan. In such cases, you would be left out of pocket by selling the car unless you have been making extra repayments on the loan.
For more information, please
contact us.
To qualify for business motor vehicle finance, your use of the vehicle must be at least 50% business purposes. Purchasing a motor vehicle as a business generally gives you much more control over exactly what type of loan will suit your situation best. The main differences between the different types of business motor vehicle loan products lie in the ownership of the vehicle, and how your loan is treated from a tax perspective.
For a chattel mortgage, you the customer purchase the motor vehicle in your own name (or business name). The lender then registers a mortgage against the vehicle and lends you the necessary money to purchase it. Because this requires a formal mortgage registration process, chattel mortgages often involve a higher initial cost than the other loan types. Chattel mortgages also allow you to nominate a "balloon" payment, which allows you to avoid paying the loan off in its entirety during the loan term, and instead pay it down to a "balloon" amount. At the end of the loan term you can then elect to pay that amount off in full, or refinance the outstanding balance again.
If you purchase the vehicle through an entity that is registered for Goods and Services Tax (GST), then you can usually claim the GST paid on the vehicle purchase in your next Business Activity Statement. The ongoing repayments of a chattel mortgage are not tax deductible in their entirety. Only the interest portion of your repayments and the relevant depreciation on the vehicle are tax deductible.
Please remember that this type of financing will only usually be relevant to you if you are using the vehicle for more than 50% business use.
The fundamental difference between a hire purchase and a chattel mortgage is the ownership of the vehicle. With a hire purchase, the financier purchases the vehicle, and you the customer hire it from the financier. The vehicle registration will still be in your name for practicality's sake. Because this doesn't involve registering a mortgage against the vehicle like with a chattel mortgage, the upfront fees for this type of financing tend to be lower. As with a chattel mortgage though, you still have the ability to nominate a balloon payment that corresponds appropriately with your loan term.
Goods and Services Tax (GST) on a hire purchase is only claimable by you if you are registered for GST on an accrual basis from an accounting perspective. Please clarify this with your accountant if you are unsure. The ongoing repayments for a hire purchase are treated the same as with a chattel mortgage from a tax point of view. You can claim only the interest portion, and the relevant depreciation of the vehicle's value.
Please remember that this type of financing will only usually be
relevant to you if you are using the vehicle for more than 50% business
use.
As with a hire purchase, a lease means that the financier purchases the motor vehicle and rents it back to the customer for a fixed monthly charge. Leases usually come with a compulsory "residual" payment. This "residual" is like the "balloon" for a chattel mortgage or a hire purchase, and requires that you have a certain residual amount owing on your lease at the end of your lease's term.
Goods and Services Tax (GST) on a lease is claimed upfront by the financier, since they are the owner of the vehicle. The amount financed therefore usually excludes the GST amount, meaning that the loan amount and consequently base repayments on a lease are a little lower. GST is then added to each monthly repayment, however, bringing the total repayment roughly in line with the other loan types. The ongoing repayments on a lease are generally fully tax deductible.
Please remember that this type of financing will only usually be
relevant to you if you are using the vehicle for more than 50% business
use.
A novated lease operates in almost exactly the same way as an ordinary lease, except that it usually involves your employer agreeing to pay the lease on your behalf out of your pre-tax income, generally as part of a car allowance package. This usually involves fringe benefits tax, so you should discuss your options with your accountant before proceeding with a novated lease. Something else to bear in mind is that if your employment with that particular employer ceases, their payment of your novated lease also ceases, so you will be required to fund the lease payments yourself from then on.
Again, please remember that this type of financing will only usually be relevant to you if you are using the vehicle for more than 50% business use.
Please
contact us if you would like more information or are unsure which method of motor vehicle financing will suit your circumstances.