The Coronavirus pandemic continues to wreak havoc around the world, causing people to re-think the way they conduct their lives.
This is no different in Australia.
With people shunning public transport due to safety concerns, and with domestic travel outpacing international travel, theirs been an uptick in demand for cars.
While new car sales are down to historic lows, the used car market has never been stronger.
Australia has a large used car market, particularly in comparison to our smaller population, which means there’s a wide supply of cars to choose from.
Even before looking for the type of car you want to buy, it’s a good idea to figure out how much you can afford on a weekly or monthly basis to cover the cost of owning a car.
Aside from the purchase price itself there are several other ongoing costs that you should consider including:
- Registration
- Insurance
- Fuel
- Servicing
- Tyres
You can use tools like MoneySmart Cars’ app to calculate the actual cost of owning and running a car, factoring in some of the above.
You can get a Prices People Pay Valuation Report to work out what you should be paying for a used car considering the current market conditions.
Once you’ve established what your budget looks like it’s probably a good idea to get an idea of what finance options you have. Aside from using straight cash there are a number of options available, all with different benefits.
Car Loan
The most commonly used financing option in Australia is taking out a car loan, with a bank or finance company. A car loan is simply a personal loan, specifically taken out for a car. If you are a business a car loan can also commonly be referred to as Chattel Mortgage. Below are some of the different aspects to consider in a car loan:
Fixed or Variable interest rate
Fixed interest rate loans means the interest rate is set to one rate for the entirety of the loan term, so your repayments (whether they are weekly or monthly) will always be the same amount.
This can be useful when budgeting as you don’t need to worry about any fluctuations in your repayments. However, if you wanted to pay off the loan early or just make extra repayments then this may attract additional fees.
Variable interest rate loans have interest rates that vary over the course of the loan, depending on how interest rates move in the overall market. This means your repayment amounts can change over time, however you generally will be allowed to make extra repayments without any fees or charges.
Secured or Unsecured Loan
A secured loan means the car is attached as security to the loan, so if you can’t pay the loan back then the car can be repossessed by the lender to recoup their money.
Because this provides more security for the lender the interest rates are generally lower for secured loans. Unsecured loans are the opposite, the car is not held as security for the loan and hence interest rates are generally higher. In effect, unsecured loans are simply personal loans.
Balloon or No Balloon
Most lenders will allow you to add a balloon payment to the end of your car loan if you meet their lending criteria. A balloon is simply a lump sum payment you make to pay off the remaining balance of the loan as the final repayment.
So, for example, if you are purchasing a car for $30,000 then you could take out a loan for $20,000 with a balloon of $10,000. This means you will pay repayments over the loan term to cover the $20,000 and then one final payment of $10,000 at the very end.
By having a balloon, it allows you to reduce your weekly or monthly repayment amounts which can help with budgeting. However, you run the risk of having to pay a large amount at the very end of the loan.
It’s common for consumers to sell the car at the end to recoup the funds required to pay the balloon amount off, which means understanding what your car is worth becomes valuable in this scenario.
Lenders will generally allow you to set the balloon at a value that suits you, as long as it is below the balloon limit they have for the age bracket the vehicle will be in at the end of the loan. The older the vehicle becomes then the lower the balloon limit will be.
Using Prices People Pay you can get an early read of what your car might be worth in the future so that you can be comfortable in deciding what amount to set the balloon.
If you elect not to have a balloon, then you pay off the same amount every week or month which provides more consistency for budgeting. However, your repayments will be higher.
Length of the loan term
The loan term you choose will also have a large influence on your repayment amounts. Generally, lenders can offer loan terms from anywhere between 1 and 5 years with many willing to provide even shorter or longer terms.
Generally, the longer the loan term the lower your weekly or monthly repayment amounts. However, this also means that over the course of the entire loan you will end up paying more interest, all else being equal.
Trading in your existing car
If you have an existing car you want to replace or no longer need then you’ll have the option to trade it in and reduce the loan amount for your new car.
Lenders use different methods in determining the value of your car and some allow some negotiation. Therefore, having access to all the used car information in Prices People Pay can ensure you have a firm sense of your cars market value and what you can get for it from your lender.
Lenders
In terms of finding lenders, there are a myriad of providers out there. Having a look at Canstar or Finder is a great place to start your journey in seeing what rates are available and considering the various options, such as the ones above, that would suit your needs.
Car Leasing
A car lease is like renting a car, with the main difference being you can make a payment (the balloon or commonly knowns as the residual value in leasing) at the end of the lease to take ownership of the car. This residual value will generally be reflective of what the car is worth at the end of the lease. Unlike car loans where you own the car from the very beginning, a car lease means that you don’t own the car but are simply ‘renting’ or ‘leasing’ it from the lessor.
This can be an attractive option if you don’t want to actually own a car for a long time, but simply need it for a period of time that’s longer than what you would usually rent a car for. There are a few additional differences to a car loan that you’ll need to note for a car lease:
- If you want to terminate the lease early there are usually early termination fees that apply.
- A car lease usually dictates how many kilometres you can travel for the duration of the lease. If you travel above and beyond the allocated kilometre allowance, then you can be charged excess kilometre charges.
- Lessors will usually provide terms on what condition the car should be at the end of the lease. So, for example, if the car has plenty of scratches, dents and other damage then there’s a chance you will be charged additional fees to cover the cost of the damage.
In the United States, car leasing is incredibly popular however in Australia it is very much a niche market with limited offerings.
Novated Leasing
If you work for a company that provides Novated Leasing then this can be an attractive option for you. Novated Leasing works just like a car lease however the lease repayments are made by your employer on your behalf from your pre-tax income. As a result, there can be some tax advantages depending on your financial circumstances.
In addition novated leasing providers also package together all the running costs of your vehicle including registration, fuel, insurance, servicing and tyres. These can all be included in your lease repayments which can really simplify your budgeting and provide certainty in your expenses.
However, similar to a car lease, you don’t actually own the car in a novated lease which means you will need to pay out the balloon (commonly called the residual value) at the end of the lease if you want to take ownership of the vehicle. In addition, the same conditions listed above for a car lease around early termination, kilometre usage and vehicle condition charges will apply.
Unlike car leases, where the arrangement is simply between you and the lessor, a novated lease also involves your employer. While there are many novated lease providers in the market, your ability to take out a novated lease will also depend on your employer.
Hire Purchase
A Hire Purchase works similar to a car lease except you always take ownership of the car at the end of the term. Also, unlike a car lease, there doesn’t have to be a balloon, so you can simply make the same repayments for the entirety of the hire purchase term and then own the car at the end.
Hire Purchases are largely only used by commercial businesses as they can give certain accounting advantages.
Guaranteed Future Value
One of the finance options gaining traction in Australia is a Guaranteed Future Value (GFV) loan. GFV loans are simply car loans where there is always a balloon that is guaranteed by the financier. What this means is that at the end of the loan you can either:
- Pay out the balloon, just like you would in a normal car loan
- Or simply hand the car back and the financier will pay out the balloon for you, since they have guaranteed it
The GFV is set by the financier and generally reflects a slightly reduced value of the car. This means at the end of the loan there is a higher chance that the car will be worth more than the balloon amount, leaving you with some equity if you wanted to sell the car yourself or trade it in for another car. However, if the car is worth less than the GFV then you can simply hand it back for the GFV amount, leaving you in a better off position.
The financier will use sophisticated techniques to determine the future value of your car and it will depend on the age of the car at the end of the loan as well as the number of kilometres it will have travelled.
The younger the car and less kilometres it has then the higher the GFV amount will be. The older the car and more kilometres it has then the lower the GFV amount will be.
This means that not only do you get reduced repayment amounts throughout your loan, but you also have added security that your car is guaranteed to be worth the balloon amount at the end of the loan. So regardless of what happens in the car market, or the broader economy in general, you are protected from fluctuations in car values.
In the past few years many brands have launched GFV loan programs including Toyota, Lexus, Volkswagen, Audi, Skoda, BMW, Mercedes-Benz, Volvo, Holden, Jaguar, Land Rover and Hyundai.
Over the next few years many more brands are scheduled to release their own programs as well, as GFV lending products have shown to be incredibly popular in overseas markets due to their customer benefits.
Like a car lease, there are generally conditions like early termination fees, kilometre usage fees and vehicle condition charges that also apply. However, unlike a car lease you will have ownership of the car from the very beginning.
Using GFV means you are generally paying for the usage of the car throughout the loan so making sure you understand how much you’ll use the car is important to ensure you aren’t left paying additional fees. Financiers generally provide loan terms of 2 to 5 years for GFV loans.
While most GFV loans are only restricted to new cars, there are several brands such as Toyota who now provide it for used cars as well. This can be an attractive option for people who like to have a different car every 3 to 5 years, making sure they keep up with all the new technology and safety features that are being rolled out in cars every day.
How to choose what’s best for you
There’s no clear answer as everyone has different circumstances. However, being as informed as possible on all the different options available can help in deciding what is best for you when it comes to purchasing your next car.
Have you used any of the above finance options? Comment below on what worked best (or didn’t work best) for you.
Disclaimer: This is a general information service only and we do not provide advice or take into account your personal circumstances, financial situation or needs. Please seek professional advice with regards to how any of the material on this website can impact your own financial situation. Prices People Pay is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.
