Very few OTA website visitors can stroll into their local dealerships and cough up cash for new 4WDs – or even used ones. Even for those who can come up with the readies there are tax advantages in paying off a new 4WD over a few years.
Most people are confused about vehicle finance packages, so we’ve done our best to clarify and simplify the situation. Nearly all financial choices are covered in the generic categories listed below, even if some finance ‘products’ are disguised by brand names.
Most personal-use loans for vehicle purchases are secured – the new 4WD is used as security for the loan. When the vehicle is traded-in or sold the loan must be paid out and a new loan is needed to buy a replacement. Secured loans generally have a lower interest rate than unsecured loans.
Unsecured loans can be used for nearly any purpose and, because there is no security the interest rate is usually higher than for a secured loan.
Insurance, warranty and loan protection can be added to loans and a deposit is not required in most cases.
Loan interest is calculated on the unpaid balance daily, just like a home loan, so additional payments will shorten the term and reduce interest charges.
There may be an option to have the interest rate fixed for the term of the loan, so it won’t go up in a rising market. Although it is a personal use loan, depreciation and interest charges could be tax effective claims if the vehicle is for business or work-related usage. Loans are also available with a ‘balloon’ payment or residual option. A payment set for the end of the term reduces monthly payments and at the end of the term, the amount owing can be paid out or refinanced.
Now, let’s look at the options for those lucky enough to be able to have their toy as a business vehicle. The golden rule for business finance buyers is to consult their accountants before signing up for any deal. Some finance options suit different businesses better than others and some businesses are better off paying cash.
The traditional form of ‘pay as you use’ finance is Hire Purchase and the original form is still available today, for private and business buyers. Hire Purchase is a rental agreement under which the goods automatically become yours once all terms of the agreement have been completed.
Businesses, for tax purposes, can claim equipment depreciation and interest paid, against business income.
Hire Purchase can require an upfront deposit or trade-in to reduce the rental commitment, or a balloon payment may be needed at the end of the term. Alternatively, rentals may clear the debt in full over the term of the agreement.
Chattel Mortgage is essentially a charge over goods to be financed. The Chattel Mortgage allows businesses that operate under a ‘cash accounting’ basis to claim the full input tax credit from GST-incurred expenses immediately.
Finance Lease is a form of rental agreement under which a 4WD is leased for an agreed term and rental amount. A residual value is set to reflect the equipment’s value at the end of the term.
The lease rentals are tax deductible, provided the goods are used in connection with producing assessable income. At the end of a Finance Lease term the user can make an offer to purchase the equipment from the finance company, trade it in on a replacement, return it, or extend the lease for a further term.
A Novated Lease (Latin: novae tabulae – debt cancellation) is effectively an agreement between the employee, the employer and the finance company. A Finance Lease Agreement is created between the employee and the finance company.
All parties, transferring responsibility for the lease rental commitment to the employer, enter a Novation Agreement. When the employee leaves the company the novation ends and responsibility for the lease returns to the employee.
Novated leases have become popular because companies don’t have the costs and responsibilities of running a vehicle fleet and employees can choose their preferred ‘company’ vehicles.
Rental Finance, also called an Operating Lease, is an extension of a vehicle rental agreement. A finance company or a vehicle rental company owns the vehicle and the business pays a monthly rental figure for the use of it. Vehicle standing charges and maintenance costs are often borne by the lender.
The monthly rentals are off the balance sheet and fully tax deductible.
‘Buying’ a car via a subscription may seem attractive, but it’s really aimed at car users, not typical 4WD travellers. For a start, the vehicles are stock standard, so the usual modifications that nearly all 4WD buyers want and need, won’t be included.
The weekly subscription rate for a 2022 Prado wagon was $500, in August 2023.
Ramifications of Finance
For most finance deals the resale value of the 4WD at the end of the payment term is critical to the viability of the deal. Finance companies are some of the principal subscribers to vehicle valuation services and the balloon or residual payments due at the end of finance agreements reflect the likely value of the vehicle.
If you’ve done your homework on current used 4WD resale values you’ll know if the residual is a realistic one. However, don’t be too optimistic, because it’s likely that the resale values of 4WDs will slide in the years to come, as the market gets flooded with used machinery.
If you treat a financed vehicle as ‘someone else’s property’, knock it around and neglect its servicing, it’ll come in at a valuation well below the industry standard.
Will the finance company reduce the size of your residual payment to make life easier for you? Get real.
In the case of a loan or a hire purchase agreement, where you get to own the vehicle at the end of the payment period, it’s in your own interests to keep the 4WD in good nick. Who wants to pay off a loan and finish up with a vehicle that’s not worth much?
Because you don’t own a 4WD that’s under finance until you make the final payment you’re responsible for insuring it fully. You can’t afford to cut corners and give finance company lawyers a loophole they’ll drive a Hummer through.
No, you’re not bound to insure comprehensively in the case of a loan-purchased vehicle, but you’ll be stuck with the loan payments, even if your pride and joy is now a new island off Fraser.
Don’t be a hurry to sign on the dotted line. It’s important that you know as much about the finance options available as you do about the different 4WDs on the market. It’s not unknown for buyers to sign up for punitive interest rates that take the gloss of what looked like a good deal.
Be suspicious of finance deals that seem too good to be true, because they usually are.
Manufacturers have adopted different finance packages over the years to help shift stubborn stock, or to quit ‘dungers’. In Australia the love affair with the car – 4WDs in particular – guarantees that local makers and importers can sell everything they can get their hands on, so there’s not too much pressure on dealers to push for zero interest rates.