Buying a car is fun – you get to choose make, model, colour and all the other things you want. The not so fun part is paying for it. Most cars are financed these days and I get lots of questions about the various types of finance available and the differences between each one.
Whether you use the car yard finance, bank finance or a broker – you are going to be asked what type of finance you want.
Loan
By far the easiest option to understand, this is the traditional loan where you make monthly repayments over a set period of time.Most car loans will have a term of 5 years however some banks will offer a longer period of time if you secure the loan against another asset like your home.
From a tax viewpoint, you can claim the interest on the loan and the depreciation on the vehicle as well as the normal car costs.
Chattel Mortgage/Equipment Loan
Usually used by business purchasers, this style of finance is very flexible. You can choose a residual – which is the amount that will be required to be repaid at the end of the finance period. You also choose the term of the loan often between 1 – 4 years in length. The choice of these options significantly impacts the monthly repayment amount which can assist with cash flow. If you are GST registered, you can also claim the GST back on your next BAS.
Taxwise, you can claim the interest on the loan and the depreciation on the vehicle as well as the normal car costs.
Hire Purchase
Again a favourite for business purchasers, the hire purchase finance option is exactly that – you make monthly hire payments and then purchase the car at the end of the loan term. By increasing the purchase amount at the end of the loan, the monthly payments will be smaller. Due to recent changes in legislation, there is no GST disadvantage in choosing this finance option.
At tax time you can claim the interest on the loan and the depreciation on the vehicle as well as the normal car costs.
Lease
This option will suit those who change their cars over frequently as a lease is basically just a monthly hire fee paid to the finance company for the use of the car. It’s basically a rental system. At the end of the lease you simply hand the car back to the finance company.
The tax deduction allowed is the value of the lease payment (provided that the car is less than about $57k.)
My hot tip is to get your quotes and then check with your advisor that the interest rate quoted is the actual interest rate. Some car yard rates aren’t the actual rates and you need to make sure you are comparing apples and apples.
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