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What is business vehicle finance?

You’ve already poured money into your business, but now find yourself left short on cash for a business vehicle, like a car or truck. One option you may choose for car financing is the money from your business loan if you’ve taken one, or you may want to consider choosing a business car loan that fits the needs of your business. 

Australian lenders offer several options for financing business vehicles, like finance leases, commercial loans, commercial hire purchase, and novated leases. Usually, you can buy any and as many business vehicles as needed through these options, although the interest can vary based on the type and age of the vehicle. 

For most businesses, the preferred financing options tend to be either fixed regular repayments or a fixed interest rate. The choice will likely depend on your business’s accounting method, but you might also want to factor in potential tax advantages. If you anticipate a lot of business travel, you may choose a business vehicle finance lender who will let you trade in the vehicle when the lease runs out as this will save you maintenance costs in the future. Comparing various business car loan offers from different providers can help you decide which financing option is most convenient for your business.

You can get a business car loan from a business car lender, specialist asset finance lenders, and finance brokers. Regardless of the lender you go with, you may need to show that the vehicle is used for your business more than half the time. This allows you to account for the vehicle financing costs as part of your business’s cash flow, and also affects any tax deductions you may be able to claim. If you use a car for both personal and business use, you will have to calculate the percentage of use for each purpose.  

I want a business car loan - what are my options?

Most Australian lenders offer the following business car finance options. 

  1. Finance lease: You lease or borrow the vehicle from the lender by paying monthly instalments over the term of the lease. When the lease is about to expire, you can decide whether you want to own the car or exchange it for a different vehicle. You can also extend or refinance the lease if that works from a business perspective. If you opt for a finance lease, you’ll likely get lower interest rates but maintaining the vehicle is your responsibility. You may also be eligible for tax deductions on the lease payments.

  2. Commercial Loan: Sometimes also called a chattel mortgage, this financing option is similar to a home loan mortgage. The vehicle is treated as collateral or chattel, but you retain ownership and make regular payments to the mortgage lender. Commercial loans may involve a balloon payment, which is the final scheduled payment on the mortgage. Your lender will likely suggest that the amount of this balloon payment should at least equal the vehicle’s resale value, which gives you the option of either making the payment and keeping the car or exchanging the car for a different one and adjusting the payment accordingly. 

    You may be eligible for some tax advantages if you choose a commercial loan. For instance, during the term of the commercial loan, you can declare the vehicle as a business asset and claim an instant asset write off. This is a tax deduction which effectively translates to your business vehicle making you money. Consider asking your tax consultant whether your business is eligible for the asset write-off as the rules can change often. You can also get a tax deduction on the interest you pay as well as on the balloon payment.

  3. Commercial hire purchase: This business vehicle financing option combines features of a finance lease and a commercial loan. The lender owns the car for an agreed period, as in a finance lease, but you can opt for a balloon payment to keep the rental payments low. Just like a commercial loan, you may be eligible for tax deductions on the interest and the balloon payment. Businesses sometimes opt for a commercial hire purchase rather than a commercial loan based on whether they want to present the vehicle in their accounting as a cash flow item instead of an operating asset. 

  4. Novated lease: This is a suitable option if you’re a salaried professional, provided your employer agrees to you taking on the lease. You can go for either a novated operating lease, wherein you don’t own the car at the end of the lease period, or choose a novated finance lease and take ownership of the vehicle once the full payment is made. In either case, the lease payments are deducted directly from your pre-tax wages, which will likely bring down your tax liability. However, you have to be sure of staying in the job for the duration of the lease. 

How do I go about financing my business car?

The first thing you need to know is whether your business is eligible for one or more of the different vehicle financing options, and, if so, which option meets your business needs. For this, you’ll have to figure out if you want to own the car eventually and consider aspects like accounting and tax deductions. You should also consider the particular qualifications required by different financing options. For instance, you’ll need to gauge if you are in a stable, well-paying job with a supportive employer if you’re looking for a novated lease. 

Next, consider exploring various lenders and the financing options a lender has to offer. Based on the financing option you avail, your lease term usually varies from one year to seven years. You may also be able to include maintenance and vehicle operating costs as part of the business car loan. If you are choosing a commercial loan or a commercial hire purchase, you may have to decide what kind of balloon payment you are comfortable paying.

Consider discussing your vehicle financing with an accountant and tax consultant as they can advise on the impact of financing costs on your business’s balance sheet, and help identify potential tax advantages. For example, they can compare the tax deductions available, given your business profile and the amount of financing you need, and recommend the business vehicle finance option that is unlikely to affect your business’s profits. 

Further, your accountant can help you gauge how much your business can manage to borrow based on its health and profit levels. You may also want to discuss what to do when the financing term is over, and whether it is a sound business decision to extend the lease, take ownership of the vehicle, or trade it in for a different type of vehicle.

Consider using one of the online calculators provided by lenders to understand how repayments work and how you can lower either the repayment amount or the interest rates. These calculators can also be useful in understanding how much flexibility you have in negotiating lease terms. Ideally, you’ll be able to fine-tune the terms of the business car loan option you find suitable. You can then approach a lender and see how the option they offer compares against your estimation in terms of costs and repayment terms.

What do I need to do to apply for a business car loan?

Before applying for a business car loan,  you should confirm that the lender you’re applying to offers the type of loan and terms that you seek. If you’ve already decided on the vehicle you need, you’ll know how much you need to borrow from the lender. You may be asked for business-related documents which show how long you have been operating the business. Depending on this and the amount of financing needed, you may need to fulfil further business vehicle finance requirements, such as submitting your business activity statement and proof of GST registration. 

Some loan types may have specific eligibility requirements, such as proof of employment and income. If your business is a sole proprietorship, the lender may ask for your personal credit history and homeownership status. Just as with a home loan, good credit history may mean you are more likely to be approved for a lease, as well as the repayment terms you need. You may want to check business vehicle finance options offered by a dealership or a finance broker to see if you get better terms. Usually, these may be easier to access than financing offered by a bank but can involve greater costs.

What should I look for when I compare business car loans?

Comparing various business vehicle financing options online is an easy way of finding the right loan for your specific needs. Naturally, you may tend to focus on the interest rate and repayment terms which are usually considered the most important. For instance, you may want to check how the length of your financing term affects the interest rate you are offered, and if lenders offer significantly different interest rates for loan periods.

You should also compare any potential fees being charged by the lender for administering or servicing the financing option. Sometimes, lenders may also charge you an establishment fee. If your preferred business vehicle finance involves you borrowing the car, you should find out if you need to buy car insurance as a precondition for availing the financing.

Deciding how long your business car loan runs may require examining your business’s projections to gauge if any other financial obligation might come up. Would you need to renegotiate your business vehicle financing terms to allow you to hire more vehicles? Also, if your financing option involves a balloon payment, a longer loan term could mean that the balloon payment falls below the resale value of the vehicle, which may not be acceptable to your lender. Ideally, the duration of financing you opt for should stagger the repayments evenly for as long as possible.

You can also check if any lender offers you flexible repayment terms, such as allowing you to repay the business car loan well before the completion of the loan term without any additional cost. Consider checking what the lender’s terms say about missed or delayed payments because of unavoidable business circumstances. Another option to check is whether the lender will allow you to borrow more than the vehicle’s purchase price as this will allow you to account for additional costs, such as car insurance and maintenance. These may be a significant cost and hard to pay out of your business earnings, so bundling them into the business car loan would be a wise choice. You should also speak to shortlisted lenders and confirm t there isn’t any difference between what they suggest or advertise online and what they offer in reality.

Frequently asked questions

What is a commercial hire purchase?

A commercial hire purchase, or CHP, 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. Once the final payment is made, you take ownership of the car. 

What is a CHP?

A CHP, or commercial hire purchase, 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. Once the final payment is made, you take ownership of the car. 

How to get a chattel mortgage?

Both businesses and individuals may use a chattel mortgage, provided that the car is being used predominantly for business purposes. 

To apply for a chattel mortgage, you need to first consider your options and choose a suitable lender that meets your requirements. Once you have selected a lender, you can apply for the loan online by filling out a form. If the lender doesn’t offer an online application process, you can either call them or visit their nearest branch. 

After you’ve applied, the lender will ask you to supply documents that confirm your identification, income, job profile, etc. If everything is in order, most lenders will arrange the loan’s settlement, so all you need to do is pick up your car!

Can an individual apply for a chattel mortgage?

Lenders offer chattel mortgages as a way to finance vehicles used for business purposes. Companies, as well as individuals, are eligible to apply for and receive chattel mortgages. The essential eligibility requirement is that the vehicle is used for business at least 51 per cent of the time. If you’re a tradesman and require a new utility vehicle to move equipment, you can apply for a chattel mortgage to finance the purchase.

A chattel mortgage for individuals is an option if you’re self-employed and have an Australian Business Number (ABN). You’ll also need to be registered for the Goods and Services Tax (GST) and have a clear credit history. Like all other loan types, you’ll have to prove your capability to service the loan to qualify for a chattel mortgage.

You’ll retain the ownership while the lender holds the vehicle as security for the loan in a similar way as they would a property with a home loan. You repay the borrowed amount in predetermined monthly instalments. Once you repay the entire loan amount, the lender will remove the mortgage.

What is vehicle finance?

Vehicle finance, also known as a car loan, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Vehicle finance can be used for both new and used vehicles.

What do I need to apply for a chattel mortgage?

Chattel mortgages are a form of secured car loan for businesses. The lender will set up a mortgage, while you take the car’s ownership. When the mortgage is paid off, you own the car. The borrowed amount is repaid through regular installments over a fixed period of time.

To qualify, you’ll have to meet the following chattel mortgage requirements:

  • The car should be used for business purposes at least 51 per cent of the time.
  • You must hold a valid Australian Business Number (ABN).
  • You must show you can service the loan on time
  • Identity proof
  • Financial records, such as profit and loss account and balance sheet
  • Details of the vehicle you want to buy
  • Bank statement for your business

How do you get a car loan?

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

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 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 loan?

A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.

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. 

Can you refinance a car loan with the same lender?

You may be looking to refinance your car loan to get lower interest rates or reduce the total monthly amount you have to pay. Often, this leads to the question ‘can I refinance a car loan with the same bank?’

While it’s always worth shopping around for a better deal or at least to compare offers from other lenders, you can sometimes refinance to a different loan with the same lender. It may be simpler,  as the lender already has your details and knows your repayment history. 

Having said that, knowing the terms offered by other lenders may help you negotiate a better deal with your current lender.

How to find a great car loan

Historically, finding a great car loan would require excess research ranging from visiting an excess of websites or making phone calls, but technology has moved on. Using RateCity, Australia’s leading financial comparison service, you can check out great deals from a range of lenders on the one site.

To start, select the amount you want to borrow and the length of the loan, narrowing your search to show just fixed or variable interest rate results.

Once you’ve indicated your search criteria, you’ll see an immediate list of lenders, ranked by interest rate or application fees. You’ll also be able to view the monthly repayment amount for each result, helping you to know what you can afford.

Up to six products can be compared side-by-side, complete with more information about each car loan, giving you more information about your options.

When comparing your car loan options, it’s ideal to keep in mind some points find a great car loan for your needs. Consider the following:

  • Choosing a low interest car loan can reduce costs
  • Selecting an option with low fees and charges is ideal, because these can really add up
  • Be aware of penalties, such as early exit penalties if you pay off the loan sooner than expected
  • Consider the features that best suit your situation

There are many ways to ensure that you get a great car loan. Ultimately, you’ll end up with the best deal by doing your research and selecting the most suitable product for you.

Where can I get a student car loan?

Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.

A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.

Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.

To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.

What are the pros and cons of guarantor car loans?

Like all things, there are positives and negatives to guarantor car loans, though one may outweigh the other depending on your needs.

Guarantor car loan pros may include that you’re more likely to be approved for a long if you have no credit or a history with bad credit, that you’re more likely to secure a car loan with a lower interest rate, and that because your guarantor car loan is based on a relationship, you will be more inclined to meet your repayment schedule.

However, there are negatives, as well. Guarantor car loan cons may include leaving a detrimental mark on a personal relationship with added strain if you don’t meet your repayments, and you may take out a loan that you can’t actually afford.

Weighing these pros and cons will give you a greater understanding of whether a guarantor loan is ideal for your circumstances.

Can I get a car loan with poor credit?

Poor credit doesn’t necessarily mean you won’t be able to get finance for your car purchase, though your options aren’t likely to be the same as someone with good credit.

In fact, a number of specialist lenders exist offering car finance for customers with poor credit, able to provide access to bad credit car loans.

However having a history of poor credit will likely mark you as a potential risk to lenders, so your car financing needs could see higher fees and interest rates. Alternatively, consider a secured car loan, which is a type of loan that uses the car you purchase as collateral, reducing the risk.

Other options include getting someone close to act as a guarantor for your car loan, or to talk to a broker about a personalised rate specific to your circumstances.

What is a guarantor on a car loan?

A guarantor on a car loan is a third party, usually a relative or friend, who guarantees to meet the repayments of a loan for the purchase of a car, if the borrower/owner of the car defaults on the loan.

Guarantor car loans can be useful for people who would otherwise struggle in being accepted for credit to purchase a vehicle. These may include people with bad credit, students and young people who may have no credit history, as well as some pensioners.

Many lenders offer guarantor car loans, guarantor personal loans and guarantor home loans, because of the significantly reduced risk to the lender.

Can you get a chattel mortgage with bad credit?

Getting approval for a chattel mortgage with bad credit may be possible, given ‘chattel’ (usually a piece of equipment or car) is put up as security for the loan. That means if you fail to repay the loan, the creditor can recover the loaned amount by repossessing and selling the car or piece of equipment. This differs from unsecured car loans, where the asset is not tied to the loan and cannot be taken if you don’t meet the repayments. 

What is a dealership?

A dealership is a car yard or a place where cars are sold.

What is resale value?

The resale value is the price you could realistically charge if you were to sell your car. Almost every car loses value each year, although at different rates. As a guide, cars depreciate on average by 14 per cent per year in the first three years and then eight per cent per year after that.