To finance the purchase of a motor vehicle there are various methods like hire purchase, finance lease, operating lease, novated lease, car loan or a line of credit against your home in addition to purchase with liquid cash.

Do you know purchasing a new motor vehicle through a business makes you eligible to claim the GST in your Business Activity Statement (BAS)?

The reasons behind financing the purchase of a motor vehicle may vary. You can utilize your vehicle for business purposes and hence be entitled to the benefit of tax deductions.

Once you have decided to finance for a motor vehicle purchase then the next step is to select your loan type. The following points provide greater detail on each method and the respective advantages and disadvantages.

HIRE PURCHASE 

To finance the vehicle over a fixed term with a pre-agreed payment plan. Free title of the vehicle passes to you only after the final payment.

MERITS 

• You can make pre-agreed balloon payments through the lease(generally upfront and at the end)
• Pre-agreed payments and fixed interest rate provide certainty.

DEMERITS

• The full cost of maintaining the vehicle is your responsibility. If the vehicle is used for business purpose you might be eligible for getting a tax deduction.

FINANCE LEASE

For the financing of the vehicle over a fixed term with the final payment representing a balloon payment (usually 30% of the value). Free title of the vehicle passes to you once the final payment is made

MERITS

• Fixed payment and interest rate provides certainty.

DEMERITS

• The full cost of maintaining the vehicle is your responsibility, in the same manner as Hire Purchase financing.

OPERATING LEASE

For the renting of the vehicle and includes financing of the vehicle over a fixed term. At the end of the lease term you return the vehicle to the financier. Generally, you have the option to buy the vehicle at market value.

MERITS

• The full lease payment is tax deductible where the overall use of the vehicle is for income producing purposes (no depreciation is deductible).
• As the responsibility for maintenance falls with the financial institution you are not exposed to unexpected high maintenance costs.
• Fixed payments and interest rate provides certainty.

DEMERITS

• There is no pre-agreed purchase price for the motor vehicle (note this could be advantageous if the value of the vehicle has fallen significantly).

NOVATED LEASE

Under this finance model you lease the vehicle from the financial institution and novate the lease to your employer. For the financing of the vehicle over a fixed term. The final payment representing a balloon payment (usually 30 %of the value). Free title of the vehicle passes to you once the final payment is made.

MERITS

• Flexibility to purchase a second hand car (provided purchase is through a motor vehicle dealer).
• Fixed payments and interest rate provides certainty

DEMERITS

• Not generally suited to self employed individuals.
• The full cost of maintaining the vehicle is your responsibility in the same manner as Hire Purchase financing

CAR LOAN (CHATTEL LOAN)

Under this finance arrangement the vehicle is used as security over the loan. Generally with this type of loan there is no balloon payment at the end of the term.

MERITS

• Fixed payments and interest rate provides certainty.
• As there is no balloon payment you are paying off a greater principal component of the loan each month. This reduces the amount of interest paid (although repayments may be higher due to the additional principal payments)

DEMERITS

• The full cost of maintaining the vehicle is your responsibility in the same manner as Hire Purchase financing

LINE OF CREDIT (LOC)

Using this financing mechanism you can draw down a line of credit against your home and utilize the money for the purchase of the vehicle.

As you are generally only required to pay interest on this type of loan, you need to be disciplined! Ensure that you pay down the LOC over a short period of time; otherwise the benefit of a low interest rate is lost

MERITS

• You are able to make additional repayments at any time.
• Relatively lower Interest rates as the LOC is secured against property

DEMERITS

• Variable interest rate- subject to rate changes.
• There are no fixed repayments and accordingly you need to be disciplined and ensure you pay down the LOC over a short period, otherwise results in a higher borrowing cost.
• You need to have sufficient equity as the lender will require security over your home.
• Like in Hire Purchase financing the full cost of maintaining the vehicle is your responsibility