Is it better to get finance for a car or to buy it outright?
If you have the available funds, you are better to pay for a car outright without finance. Most cars will depreciate each year, especially new cars, which will go down in value as soon as you drive it out of the car yard.
If you are looking to buy a house or invest in a business in the near future, you may need to keep your funds to help with a deposit for the purchase. Just keep in mind that when finance companies calculate the amount you can borrow they will take away from your wage and other income, the amount of your car repayments and credit card limits.
What terms should I get for my car loan?
Based on reviewing hundreds of loans for our clients, we recommend the following as the most common and suitable terms for most people:
1. 10% deposit (especially if you are in business and claiming the GST back). This will give you immediate equity in the car, which will offset the initial depreciation and keep the interest lower.
2. Repayments over 3 years if you can afford the repayments. The most common period that our clients keep their cars is for a minimum of 3 years.
3. Maximum of 30% residual at the end of the loan period. This way at the end of the 3 year period you will have the option of paying out the balance of the loan or selling the car and using the proceeds to pay out the loan. After 3 years the majority of cars are worth at least 30% of the amount you paid for them 3 years previously.
Lease, Chattel Mortgage, Hire Purchase or Loan?
If you are using the car in your business and you are registered for GST, then Chattel Mortgage is the most suitable. Assuming your business is on the cash basis for GST, only the Chattel Mortgage and Loan methods will allow you to claim the business portion of GST at the start of the loan. In Lease you will claim the GST on each payment.
For tax purposes each method works out to similar amounts to claim. Under lease you claim each payment as a tax deduction, however under loan and chattel mortgage you claim the interest and depreciation.
If you are not in business, then the best method is the lowest interest rate. Make sure that you use the comparative rates to compare interest rates as most car loans will include a number of setup and monthly fees.