Financing a car through a business

Financing a car through a business

There are a number of Australian lenders and car dealers that offer multiple small business vehicle financing options. Generally, business car loans are available with flexible options and can also provide tax benefits.

Business car loans

Applying for a car loan in a business name is simple and may be done online. You will have to provide income and trading history of your business, which allows the lenders to determine your eligibility for small business car finance. You may repay the borrowed amount through periodic instalments over an agreed period. Alternatively, you may opt for smaller repayments initially and a lump sum payment at the end of the loan duration. You may claim interest as a tax deduction as long as the car is used for business purposes.

Chattel mortgages

Chattel mortgages are secured car loans for business use that are repaid over a fixed term. The car is used as security, which means you cannot sell it before the end of the contract. Some lenders may allow repayment based on the cash flows of your business while others may offer fixed equal instalments payable over the loan duration.

Commercial hire purchase

This is similar to financing a vehicle through a business car loan, which is repaid in fixed instalments. The lender will purchase the car and hire it back to your business until the borrowed amount is repaid. However, you will need to pay a certain upfront deposit. Once all the instalments are paid, the car ownership is transferred in your name.

Finance lease

The financing company buys the vehicle and leases it to you for a fixed period. At the end of the lease term, you can pay the residual value and assume ownership, refinance the lease, or trade the car. While financing a car for business use with this option, the payment is fixed and is not affected by inflation.

Operating lease

Unlike the finance lease that allows you to take ownership of the car by paying the residual value, the lender will take back the vehicle at the end of the operating lease term. Generally, operating and maintenance costs are included in the lease amount, which may make it slightly more expensive but is generally more convenient for financing a car through your business.

Novated lease

This is a tripartite agreement that allows your employees to buy a car using their pre-tax incomes. The employer arranges for the repayment to be deducted from the employees’ salaries, which decreases their taxable incomes.

How to decide on the best business car loan?

With several options to finance a business vehicle, ask yourself some questions, like whether you want to retain ownership, what the primary use of the car is, and what the situation of your business is. For example, if you want to retain ownership, a finance lease is not the right option. Similarly, novated lease is available only to employees and if you are a sole trader, financing a car through a business with this option is not an option.

Considering the tax implications is also important as the deductions vary for every option. A chattel mortgage allows depreciation and interest as tax deductions, while you may be able to claim the entire amount if you opt for a finance lease.

Understand the business car loan requirements before applying to ensure a quick and seamless process. Finally, don’t forget to compare various car loan options to find the best way to finance a car through a business.

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Learn more about car loans

What is an asset lease?

An asset lease, also known as a finance lease or car lease, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. At the end of the lease, you can either buy the car or hand it back.

What is a car lease?

A car lease, also known as an asset lease or finance lease, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. At the end of the lease, you can either buy the car or hand it back. 

What is a finance lease?

A finance lease, also known as an asset lease or car lease, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. At the end of the lease, you can either buy the car or hand it back. 

What is an operating lease?

An operating lease is an arrangement by which a company leases a car from a vehicle fleet supplier for a set period. It’s a bit like a long-term car rental in that the company gains access to the car but the supplier retains ownership. Companies like operating leases because they are tax-deductible and because they save the company from having to make a large upfront payment to buy a car.

How much is your car worth?

If you already own a car, you could potentially bring down the cost by selling your car in the process. Before that happens, though, you’ll need to find out how much your car is worth.

One of the first places to find this value is to research the value of your current car, giving you an idea of roughly how much it’s worth in its peak condition.

There are plenty of websites that offer a free online valuation, allowing you to enter your car’s make, model, year, badge and description, with results listing a price guide based on both selling your car privately and through a dealership.

Of course, dealerships will try to profit on your trade-in by buying it for less than they can sell it, making it highly unlikely that you’ll get the same price selling a car to a dealer as you would selling a car privately.

However, private car sales can be costly and can take months to sell, making car trading more convenient with a guaranteed return, even if you may not be able to realise the total value of your car’s worth.

Remember that everything is negotiable. If the dealership is offering you less for your trade than you wanted, try to negotiate elsewhere to gain that money back. Start by negotiating on the price of the trade and then ask them if they can give you a further discount on your new car.

What is dealer finance?

Dealer finance is a car loan organised through a car dealer – as opposed to car loans organised by a finance broker or directly by the lender.

What is an upfront fee?

An upfront fee is a one-off fee that many lenders charge when you take out a car loan.

What is a novated lease?

A novated lease is a car lease that is ‘novated’, or transferred from one party to another. Novated leases are often used when companies provide a car as part of a salary package. The employer signs for the lease and makes the lease payments, but the employee assumes the responsibility of looking after the car. While most car leases involve two parties, novated leases involve three – employer, employee and financier.

What is a fixed-rate loan?

A fixed-rate loan is one where the interest rate remains constant for an agreed amount of time. For example, if you take out a five-year fixed-rate loan at 8.75 per cent, the lender is obliged to leave your interest rate at 8.75 per cent for at least five years. By contrast, if you take out a variable-rate loan at 8.75 per cent, the lender can change the interest rate whenever it wants.

What is the luxury car tax?

The federal government imposes a luxury car tax of 33 per cent on the value of a car above a threshold. As of the 2017-18 financial year, that threshold was $75,526 for fuel-efficient vehicles and $65,094 for other vehicles. So a fuel-efficient car worth $80,000 would be taxed only on the difference between the threshold and the value of the car ($4,474), rather than taxed on the entire $80,000. Similarly, an ordinary car worth $70,000 would be taxed on the $4,906 above the threshold, rather than the entire $70,000. The luxury car tax is paid by dealers that sell or import luxury cars, and also by individuals who import luxury cars.

What is proof of residence?

Before giving you a car loan, lenders will ask for proof of residence – documentary evidence that you live where you claim you live. Lenders will typically want some combination of utility bills, bank statements, mortgage documents or driver’s licence. The reason lenders want proof of residence is to verify your identity and credit history.

Where can I find car loans for single mothers?

Single mothers can sometimes find that due to their circumstances the bigger banks can be less inclined to lend to them, but there are smaller companies and specialist lenders who can be willing to provide loans to people in a range of circumstances.

Single mothers could benefit from getting in touch with a car finance broker, as a broker is likely to have knowledge and access to options that are suited to their needs.

Advantages to using a broker:

  • Finance brokers often don’t charge for their services as they work on a commission basis from lenders.
  • Brokers will have industry knowledge and contacts within lending companies and is therefore more likely to be able to find the best deal for your circumstances.
  • Brokers are qualified professionals who are licensed under the National Consumer Credit Protection Act so have an obligation to follow responsible lending practices and to work in your best interests.

 

Can I get a loan if I am on aged pension?

Yes, there are certain lenders that provide loans for people on aged pensions. Your viability for a loan will be assessed by a lender by your credit report and your income. They will also take into account any assets you have that you may want to secure the loan with. The better your credit score, the more likely you are to be accepted for a loan, and the lower the interest you will have to pay on that loan.  

If you have a bad credit rating and are on an aged pension however, don’t despair, because there are specialised lenders who still may be willing to provide you with a loan.

What is a pink slip?

A pink slip is another name for the safety check that needs to be done before a car owner can renew the vehicle’s registration.