In a perfect world, we’d all pay cash for a new or used car purchase. But, in reality, very few of us have enough money on hand to pay for a car in full.
This is where financing comes to the rescue. Financing lets you get behind the wheel of the vehicle you need now, instead of waiting until you have saved up the money.
Given that many people need a car to get to work or to do their jobs in the first place, saving up without a vehicle may not even be possible.
One of the first steps to buying a car is finding how to finance a car.
To finance a car there are a number of different options including
- applying for a car loan
- applying for a personal loan
- salary sacrificing (a novated lease agreement)
- redrawing on your home loan
Below, we look at the best way to finance a car in Australia.
Novated Lease
If you're in the market for a new automobile, a salary sacrifice car loan - also called a novated lease - might be worth considering. However, keep in mind that when you take out a novated car lease, you are only leasing the vehicle and not truly owning it. For many people, it's not even an option because it needs cooperation from your company, which may or may not be forthcoming. We won't go into too much detail about it because of these factors.
A novated lease is a three-way agreement between you, your employer, and a finance company. In essence, you ask your employer if they will agree to make lease payments on a car using your pre-tax wage, and if they say yes, you can take out the lease with a finance company. This company may be chosen by your employer, who will be responsible for making direct lease payments to this company on your behalf as well as paying fringe benefits tax (FBT).
A novated lease is often regarded as the most tax-effective way to buy a car.
Making car payments with your pre-tax wage can lower your taxable income, lowering the amount of tax you pay each year. However, the downside is that a residual value may be owed at the conclusion of the lease, that higher interest rates and admin costs may apply, and that you may be liable for the car if you lose or change jobs.
Loan for a car
By far the most common method of financing a car in Australia is simply to take out a car loan.
Borrowing money for a car can provide you with immediate access to a vehicle, and car loans operate in a straightforward way. To buy a car, you take out a short-term loan, typically 3-5 years. In exchange, you agree to make a series of regular payments until the entire loan, plus interest, is paid off.
As well as quick access to the money, another advantage of a car loan over other financing methods is that making regular repayments on a car or personal loan might help you improve your credit score. If you need a home loan to make a large purchase in the future, such as buying a home, this could be useful.
Here are some smart steps you can take before taking out a car loan to ensure that you get financing that is appropriate for your circumstances.
1. Get preapproval
It is a good idea to get preapproved for a loan before you start looking for a car. There are a number of advantages to this. If you get pre-approval before you step into a car dealership or go online to buy, you will have a good idea of the price range you can afford. That will help you to resist pressure to overspend as a result of dealer pressure or your own desires for a better car. It's important to remember that a pre-approval does not guarantee that the loan will be approved, it is simply a guide.
Pre-approval will also provide you peace of mind when you visit the dealer because you'll know you're not reliant on them for financing. This leads us to the next point.
2. Don't take out a loan from a dealer
The majority of car dealerships will give you a financing option. While this may appear to be a more convenient option and the bargain may appear to be appealing on the surface, it is rarely a wise decision. Dealer finance sometimes has lower interest rates than a traditional auto loan, but it usually comes with a balloon payment at the end of the term or you have to pay more for the car upfront. Also, car loans from lenders can be used to buy new or used automobiles from dealerships or private sellers. Dealer finance programs are mainly limited to new cars.
When haggling with the dealer, relying on dealer credit reduces your negotiating leverage. It makes it more difficult for you to walk away, which is the ultimate bargaining tactic, so you're more likely to overpay for the car.
3. Keep the loan duration as short as possible
You will pay more interest on a car loan if you take longer to repay it. That's not all, though. Banks frequently charge higher interest rates for longer loans, raising your credit cost.
It's tempting to spread your car loan out over more years to receive a lower monthly payment, but you'll end up paying a lot more in interest over time. Cars depreciate quickly, so if you don't pay off your loan quickly, you'll soon find yourself "underwater," which means the vehicle is worth less than the existing loan sum, and if you sold it, you'd have to come up with additional funds to reimburse your lender.
4. Make the most of your deposit
Although it may be tempting to take out a no-deposit loan, you will end up paying more interest in the long run. That's because you'll have to borrow more money, and lenders will charge you a higher interest rate if you don't have a deposit because the loan is riskier for them.
5. Use a car loan broker
A car financing broker or car loan broker, such as carloans.com.au , has access to a variety of lenders and can help borrowers locate the right car loan for them. Instead of representing only one lender with their limited range of loan products, we search for loans from a variety of distinct and independent lenders. We can help borrowers looking for car loans save money and time by searching for the best deal on their behalf. That includes all types of car buyers including those with poor credit, people just looking for a pre-approval, and business customers seeking a tax deduction for buying a car for business.