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Lenders getting increasingly personal with their car loans
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Like the age old battle between buying and renting your home, leasing a car and buying a car each have their pros and cons. If you’re in the market for a new car, but don’t want to buy it outright, a car lease could be a competitive option.
Is it better to lease a car or get a loan?
The right decision for you will always depend on your own financial situation. When you’re comparing car loans and car leases, you should consider a number of factors including your income, employment status and whether you're willing to pay for a car that you won't own.
What is the difference between a car lease and a car loan?
Car leases are essentially rental agreements. However, unlike holiday car rentals, car leases can last between two and five years. A short car lease term requires higher monthly payments, but you’ll be able to move to a new lease and upgrade to a new model sooner.
The monthly payment for a long term lease is typically lower than the monthly repayment to buy the car outright, which is why long term car leases can be appealing. However, other regular expenses attached to a leased car can be more expensive, particularly insurance, which can often be an expensive policy chosen by the dealer.
Unlike owning a car, leases come with a number of restrictions on use, including maintenance and alterations. Plus, you only possess the car temporarily - you will never own it.
Car loans, on the other hand, involve borrowing a principal amount to cover the cost of buying the car. You then pay back this amount plus interest and any fees and charges over an agreed loan term. Car loans can be both secured and unsecured, and the borrower decides whether they would like to use collateral against the loan to reduce the risk to the lender. By doing this, you will be able to get a lower interest rate, so many borrowers choose secured car loans.
Car leases, however, are always secured by the car itself as you do not own the vehicle outright. This is why if you get a car lease, you will have much cheaper repayments than those under a car loan.
Don’t forget that while car lease repayments may be cheaper than loan repayments, you are not building any equity in the car you are leasing, and you will not own the car outright. If you decide you want to buy the car, your lease repayments do not count toward the price of the vehicle.
Compare the pros and cons of a car lease
- Repayments: A leased car may have cheaper repayments than if you took out a car loan. This is useful if you are an undisciplined saver. Leases also often have lower interest rates than car loans.
- Budgeting: You know what the repayments will be each month, as these will have been agreed with the lender, and they are often cheaper than car loan repayments.
- Package deals: Many lease packages come with maintenance, repairs and insurance included. If the repairs are mechanical faults, not consumer driven faults, the car’s owner, not you, needs to pay for them.
- Potential ownership: You may be able to own the car outright at the end of the lease period, or enter into another arrangement with the finance company.
- Latest models: You can switch your car every few years to upgrade to the latest model.
- Early exit fees: Leaving a lease early means you have to pay out the remaining lease payments and the residual value of the car.
- More expensive: Multiple car leases for the one car are often more expensive than getting a car loan to buy that car outright.
- No alterations: With car leases, you cannot improve or alter the car as you do not own it.
- Driving restrictions: Many leases have restrictions on how many kilometres you can drive and how much wear and tear the car endures.
- Additional costs: Add-ons like insurance are chosen by the dealer and can be very expensive and not be the best option for your situation. Breaching restrictions on driving or alterations or wear and tear will attract extra costs.
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If you do not want to own the car outright, and have decided that a car lease is the best option for you, the next step is to apply for the car lease of your choosing.
Ahead of submitting your application, it’s important to gather the necessary documentation, to reduce your chance of rejection. Being rejected from a credit application can have a negative impact on your credit rating, so for your benefit, it’s best to be prepared.
Proof of Identity
If you’re getting a car lease, you will need to prove that you are who you say you are. The following identity documents can help you with this:
- Driver's license, passport or proof of age card
- Birth certificate or citizenship certificate
- Proof of Australian residency
- Medicare or credit card
- Concession or pension card
- Utility bills or bank statements
Proof of Income
To prove to the lender that you can meet your car lease repayments, you can provide income documents including:
- Pay slips if you are a full time, part time or casual employee
- Previous years’ tax returns / notice of assessment if you are self-employed
- Rental income receipts (if you currently own a rental property)
- A letter from your employer can help your application
- Bank statements, usually at least three months
- Superannuation statements, especially if you receive income from your super fund
- Any other document that shows you receive regular income
What is a novated car lease?
A novated car lease can help you to effectively reduce your taxable income.
How does a novated car lease work?
- You choose your car with your employer and supplier, and organise a car lease.
- Your employer makes lease payments on your behalf, deducting them from your salary prior to you being paid, and prior to being taxed.
- Your taxable income is reduced, so you pay less tax at or get a bigger refund at tax time.
Before you apply, make sure you look at all the factors so you can make the best financial decision for you.
Disadvantages of a novated car lease
If you were to lose your job while you had a novated car lease, the lease would become a consumer lease, meaning you will lose the benefits of tax deductions.
Many car leases do not allow you to choose your own insurance, so you may be stuck paying for an expensive car insurance policy, and this will carry on regardless of whether you lose your job and the lease changes to a consumer lease.
If you damage the vehicle or drive more than the stipulated kilometres during your lease, you'll have to pay excess charges when the lease term ends.
What documentation do you need to supply for a novated lease?
The documentation needed to secure a novated car lease differs slightly from the documentation required for a standard lease. This is mainly because this is not a consumer lease, but a lease that involves an employee, employer and supplier agreement. As there are tax deductions that benefit the lease, you’ll need:
- Signed copy of your lease quote (signed by both you and your employer)
- Completed novated lease application
- Your insurance declaration form
- Privacy and consent declaration
- A copy of your driver’s license
- A copy of your most recent pay slip
- A copy of your rates notice or rental agreement which indicates where you live
Your credit history is a record of the dealings you’ve had with credit providers such as banks, credit card companies, mobile phone companies and internet companies. Your credit history records how successfully you’ve managed your repayments. It also records how many credit applications you’ve made and how many of those were rejected.
Credit providers refer to your credit history when deciding whether or not to extend you credit. Missing repayments is a bad sign; making too many applications or having applications rejected can also be a bad sign.
Credit infringements can remain on your credit history for five years – or seven years for serious infringements.
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.
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.
There’s no set number. That’s because borrowing capacity differs from person to person, as well as lender to lender.
Lenders don’t give out car loans unless they’re confident they’ll be repaid. Each person is different, so the amount of money one person can successfully borrow will differ from another person’s number. Also, each lender uses its own formulas to calculate borrowing capacity – so Mr & Mrs Smith might find that while Lender X will give them a car loan for $20,000, Lender Y will offer only $18,000.
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.
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.
A car loan calculator is an online tool that helps consumers understand how much they would have to repay under different scenarios. Consumers can create these different scenarios by entering different borrowing amounts, interest rates, loan terms and repayment schedules into the car loan calculator.