Understanding The Different Types Of Motor Vehicle Finance
I thought this week I would touch base on the different types of Motorvehicle finance that there are. It can be quite confronting sitting down in a dealership F&I (finance and insurance) office, and be asked what type of finance you require. Will it be a standard loan, a novated lease, a finance lease, a commercial hire purchase, a chattel Mortgage or an operating lease. Most mum and dad purchasers will only usually use two of these. It always helps though to go in informed and eyes wide open, hence the article. Castle Mortgages are mortgage brokers in Adelaide who also specialise in motor vehicle finance. We would love to run you through all your options through a wide selection of lenders and answer any questions you may have. If you would like to be further informed in a stress-free non-sales environment, get in touch with us today.
Standard Loan Or Higher Purchase
This would be the type of loan that most mum and dad standard sort of purchasers would go for when buying a car that is going to be used for personal use. The car is used as security. Usually, lenders also divide applicants into two tiers, homeowners and non-home owners. Non-homeowners being seen as a riskier lend will often incur a higher interest rate than homeowners. You will have set repayments for the loan over a set period. You can either own the car at the end of term or if you choose to have a residual or balloon amount at the end. This Balloon amount you can pay that to own the car, or refinance that last bit over another term. Ownership of the vehicle will be the clients in the end.
This is where the lender or financier will purchase the car on behalf of the client. The lender will then rent the motor vehicle back to the client. The advantage here is that the client gets the use of a new motor vehicle with minimum capital outlay, as no deposit etc, is required from the client.All maintenance and running costs are those of the client. The client is also liable for keeping the car in acceptable condition for the hand back of the car at the end of the lease. To avoid any nasty surprises, I recommend having a close look at the lease agreement as to the condition the asset needs to be in at hand back. A client will have the option of purchasing the car at hand back.
A novated lease is a three-way agreement between an employer, an employee, and a lender. An employee will salary sacrifice a part of their wage in pre-tax dollars to lease the car from the lender. The employer has an obligation to pay the lender through a novated deed on the employee’s wage. All operating costs are covered by the employee too, and these are normally packaged together as a card through a novated leasing company. The motor vehicle can be used for private or business use, and the employee has the option of buying the car at the end of the lease. Should the employee leave the company, the employee has sole responsibility for the car at the termination of employment. A novated lease is a nice way to bolster someone’s employment package and use pre-tax dollars to ease a new car.
This is the same as a standard loan above except that this is for business use. So if the Motor vehicle is going to be used for business use, then you can use a chattel mortgage to purchase the car. You can put down a deposit of trade a car in on the deal. The lender will provide the funds for the purchase and then take a mortgage over the vehicle. The business will pay this back over a set period. Ownership of the motor vehicle is the clients from day one. You again have the option of a residual or balloon payment at the end.
A lender will purchase a vehicle and then lease it out to a business. They are thus used for business purposes. The business has no risks associated with ownership, including the residual at the end of the period. Businesses will have the option to buy the car at the end of the lease or rent it again or upgrade to something newer.
Hopefully, this has unmuddied the waters a little when it comes to an understanding of the different types of motor vehicle finance. It is always best to chat with someone to see what will suit your circumstances. If you have an accountant, I would always run it past them. With regards to setting up finance, it would be prudent to compare a number of different lenders. Castle Mortgages are mortgage brokers in Adelaide who specialise in Motor Vehicle finance. Unlike a specific bank or dealership financier, we have no bias to who we use. We aim to put you with the lender that will save you money at the end of the day. If you would like to have a chat or have any questions, please get in touch with us.