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Financing a car without breaking the bank can be difficult. Fortunately, there are many types of car loans that can help you out in this endeavour.
In this article, we will explain the different kinds of car loan along with their advantages and disadvantages.
Hopefully, this will help you finance your new car in ease and comfort.
Standard Loans
You can get conventional loans to finance the purchase of a new or used car from institutions such as banks or credit unions.
This form of loan is the simplest but can come with extra expenses such as the insurance of the car itself.
With secured loans, the car is used as collateral, whereas with an unsecured loan, there is no collateral involved.
Thus, secured loans tend to have a lower interest rate when compared to unsecured ones. Because unsecured loans rely on the word of the borrower, these tend to be less frequent.
You can pay back standard loans through fixed monthly payments over a specified period. Usually, the terms are flexible and can be adjusted based on the needs of the individual requesting the loan.
Commercial Hire Purchase
With this kind of loan, you rent or hire the car rather than own it yourself. The financier will buy the vehicle and loan it to you over a set timeframe.
This type of loan can be for individuals or businesses. Only once the entire payment is made will the owner of the vehicle be transferred to the borrower.
Monthly payments are standard. However, commercial hire purchases are mostly replaced by chattel mortgages.
This is an outstanding loan to pick as it is flexible. It allows the financing of the total price of the vehicle, a deposit, or even a trade-in.
Meanwhile, repayments and interest rates are fixed. It is easily modified to fit the borrower’s budget.
Finance Lease
Finance leases are very much like commercial hire purchases. The vehicle is bought by the financier and leased to the borrower. This kind of contract can also be used for both individuals and businesses.
You can immediately use the car with little to no capital outlay. However, as the borrower, you are responsible for the maintenance and trade-in residual risk of the vehicle.
By making fixed monthly payments until the end of the lease period, you can then either return, sell, refinance or buy the car for the residual amount.
The great thing about this loan is that interest rates are low and repayments are generally tax-deductible.
Novated Lease
A novated lease is a three-way arrangement that allows your salary to be deducted in exchange for an equal value of vehicle benefits.
In this situation, the car is leased by an employee from the financier. However, it is the employer who must pay the financier through a novated deed on the employee’s wage.
At the same time, the miscellaneous costs of the car, including insurance and registration, are covered by the motorist. Should the employee be terminated, they still hold sole responsibility for the vehicle.
Although this loan may seem a bit complicated, it is an excellent choice. On the employer’s end, providing this option to employees can boost your remuneration package with low risk.
For employees, you can make use and later buy the car without paying for it out of your pocket.
Operating Lease
An operating lease is another form of loan where the financier owns the vehicle and loans it to you.
There is no risk associated with ownership, which includes the residual at the end of the loan term. At the end of the loan period, the motorist has the choice to buy or continue renting the car, along with changing to a newer car.
This form of rent is tax-deductible while still involving fixed payments. The most significant upside will be that you will face low risks as you do not own the car.
Chattel Mortgage
A chattel mortgage is where a financier advances money to the borrower to buy a vehicle. The financier holds the mortgage over the car, which is used as security for the loan.
It is possible for the borrower to finance the total purchase price or to pay for the deposit or even use a trade-in. Meanwhile, a residual payment may also be placed at the end of the loan.
With this form of a loan, you get to own the car right at the outset with minimal capital outlay. As the loan is secured against the vehicle, interest rates are usually low. At the same time, repayments are exempt from GST.
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