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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.
- 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.
- 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.
- 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.
- 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.
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Frequently asked questions
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 a dealership?
A dealership is a car yard or a place where cars are sold.
What is CTP insurance?
CTP insurance, also known as compulsory third-party insurance or a green slip, is compulsory if you want to register a vehicle in Australia. If you’re responsible for a car accident, your CTP insurance will be used to pay any compensation due to anyone who might be injured or killed. However, CTP insurance doesn’t cover you for vehicle damage or theft.
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 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.
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 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.
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.
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.
What is a secured car loan?
A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.
Can I get car finance on a pension?
Yes, as long as you meet basic criteria set out by lenders you are eligible for car finance. Your interest rate will be determined based on your financial history which can be found in your credit report, your income and any property you may own.
Comparing car loans for pensioners before you settle on one is important though, if you want to secure the best possible loan for your circumstances.
Should I service my own car?
There are also costs associated with vehicle ownership, such as paying for petrol and the obligatory ongoing maintenance. But should you cut down on costs by servicing your own vehicle?
If you’re considering getting out the tool box, spanner, and grease-laden towel, you need to carefully weigh up the risks and benefits. A trained mechanic will need to complete certain tasks, while you may be perfectly capable to handle other aspects yourself.
If you’re short on time, it may be worth paying for the convenience of a full vehicle service. However if you’re trying to slash your expenses, there are some basic maintenance tasks that you can complete yourself.
You should call a mechanic if you’re unsure about a vehicle maintenance task you’re about to take on. However there are a number of maintenance tasks that you may be able to complete with your own two hands including:
- Replacing your car battery
- Changing the oil
- Replacing worn windscreen wipers
- Replacing blown fuses
Remember to keep your car’s body in good condition, by washing and applying a protective wax on a regular basis, too.
Always check your car warranty agreement as some new car purchases come with an extended car warranty provided your services are conducted at the vehicle service centre where you purchased the car. In these circumstances, you may find the service fee is capped, alleviating some of the maintenance woes.
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.
Where can I find lenders who offer no credit check car loans?
You might be better off finding a specialist lender who will look at your credit history and income, who will decide whether or not you are able to responsibility pay back the loan. Alternatively, you could contact a car finance broker.
What is a guarantor car loan?
A guarantor car loan is a type of loan that features a guarantor on the agreement. The guarantor is a third-party individual, often a friend or relative, who guarantees the loan will be repaid if the borrower defaults on the car loan.
Guarantor car loans are often geared at people who might otherwise struggle being accepted for a secured car loan when purchasing a vehicle. Some of the reasons might include a lack of credit history such as with a student or young person, if there’s bad credit, or age as a factor such as with pensioners.