Key Takeaways
- A chattel mortgage is a secured loan where your business owns the car from day one, offering tax benefits and flexible repayment options.
- A finance Lease is a long-term rental agreement with options to upgrade, return, or buy the vehicle at the end of the lease.
- An operating lease is a short-term rental-style agreement with no ownership, ideal for businesses that prefer frequent upgrades.
- Hire-purchase is an option where your business gains ownership after making all lease payments.
- Rent-to-own is a flexible financing option where part of each payment goes toward eventual ownership of the car.
- Fixed rate car loans provide predictable repayments throughout the fixed term, offering stability.
- A car loan with a balloon payment has lower monthly repayments but requires a large lump-sum payment at the end of the term.
- Assess your business’s financial position, the type of vehicle you need, potential tax benefits, and your ownership preferences when selecting a loan type. Seek help from lending experts to choose the right one for your business.
A fleet of vehicles, cars for your employees, or simply a work car to keep your business moving—having the right vehicles for your business can greatly improve operations. To get the vehicles you need, financing is a must. The good news is that there are several types of business car loans available in Australia, each tailored to meet the unique needs of your business. Our guide will go over the key types of business car loans available in Australia, as well as different loan structures and how to secure the right loan for your business.
Types of Car Loans for Businesses in Australia
Here are some of the most common business car loan options in Australia:
1. Chattel Mortgage
A chattel mortgage is one of the most popular types of secured business car loans for businesses in Australia. It’s a secured loan where the vehicle acts as security, and the business owns the car from the start.
Key Features
- Ownership: The business owns the vehicle immediately.
- Tax Benefits: Potential GST claim on the purchase price and interest deductions.
- Flexible Terms: Options for fixed or variable interest rates and balloon payments to lower monthly repayments.
2. Finance Lease
A finance lease is a long-term rental agreement where the lender buys the vehicle and leases it to your business. At the end of the lease, you can upgrade, return, or purchase the vehicle at its residual value.
Key Features
- No Ownership During Lease: The financier owns the car until the final payment.
- Tax Deductible Payments: Potential deductions on lease payments.
- Flexible End-of-Term Options: Upgrade, purchase, or return the vehicle.
3. Operating Lease (Novated Lease for Employees)
An operating lease is similar to renting a car for a fixed period. It’s often used for company cars or employee novated leases. The business never owns the vehicle, making it an off-balance-sheet expense. The lender buys the car and leases it to your business. You pay a monthly fee, and at the end, you return the car with no further obligations.
Key Features
- No Ownership: The financier retains ownership.
- Tax Benefits: Lease payments may be tax-deductible.
- No Residual Risk: No need to worry about resale value.
4. Hire Purchase
A hire purchase agreement allows businesses to lease a car with an option to buy at the end. It’s structured like a loan but with ownership transferring after the final payment. The lender buys the car and leases it to your business. You make fixed repayments over a set term. After the final payment, ownership transfers to you.
Key Features
- Ownership at the End: You own the car after the last payment.
- Tax Benefits: Potential interest and depreciation deductions.
5. Rent-to-Own Car Finance
A rent-to-own car loan allows businesses to rent a car with the option to buy it later. Unlike a lease, part of each payment goes toward the purchase price. At the end of the term, you can buy the car at a predetermined price or return it.
Key Features
- Flexibility: No long-term commitment.
- Ownership Option: Payments contribute to the purchase.
Fixed vs. Variable Rate Car Loans Australia
When deciding on a car loan, you can choose from different structures depending on your needs. Two popular loan structures are fixed and variable loans. Here’s how they differ:
Fixed Rate Car Loan
A fixed rate car loan means that the interest rate on the loan remains the same for a certain period (around 1-5 years), after which the loan rolls over to a variable structure. This provides businesses with the benefit of predictable repayments, making budgeting easier for a certain period.
Why Choose Fixed Rate Car Loans?
- Predictable Repayments for the Fixed Period: Since the interest rate is fixed, your repayments will remain the same throughout the fixed period, making it easier to manage your cash flow.
- Temporary Protection Against Interest Rate Rises: If interest rates rise during the fixed period, your rate will remain unaffected, meaning you won’t pay more.
Variable Rate Car Loan
A variable rate car loan means the interest rate can change over time, usually in line with the Reserve Bank of Australia’s official cash rate or market conditions. Variable rate car loans can be suitable for businesses that are comfortable with some level of risk and want to take advantage of lower rates if the market moves in their favour.
Why Choose Variable Rate Car Loans?
- Potential Benefit from Rate Drops: If interest rates decrease, your repayments may go down, which can be an advantage in a falling interest rate environment.
- Flexibility in Repayment Options: This type of loan structure allows you to make extra repayments or shorten your loan term to help you pay off your debt faster.
Car Loan with Balloon Payment Explained
A car loan with balloon payment involves smaller monthly repayments throughout the loan term, followed by a large final repayment (the balloon payment) at the end of the loan term. The balloon payment is typically a lump sum that covers the remaining balance of the car loan. Car loans with balloon payments can be attractive for businesses looking to keep monthly repayments low, but it’s essential to plan ahead for the large final payment.
Advantages of Balloon Payment Car Loans:
- Lower monthly repayments: Because a large portion of the loan is deferred to the end of the term, your monthly repayments are reduced, which can help with cash flow management.
- Flexibility to refinance: When the balloon payment is due, you can choose to refinance it, trade the car in for a new one, or pay it off in full.
Disadvantages of Balloon Payment Car Loans:
- Large final payment: The balloon payment can be a significant sum, which could cause financial strain if your business is not prepared to make it.
- Higher overall cost: Due to the deferral of the principal balance, the total cost of the loan (interest and fees) can be higher over time.
Getting a Loan for New vs. Used Cars
In Australia, you can get a loan to purchase both new and used cars. Here’s how both scenarios work:
New Car Loan for Business
A new car loan for business is designed specifically for businesses purchasing a brand-new vehicle. These loans typically offer more favourable interest rates and terms compared to used car loans, as new cars are considered lower risk for lenders due to their higher resale value and warranty protection. However, since the vehicle is new, the principal will always be higher than that of a used car loan.
Advantages of New Car Loans:
- Lower Interest Rates: Lenders often offer competitive rates for new car loans as new cars hold their value better and have fewer maintenance concerns.
- Manufacturer Warranties: New cars come with warranties, which means fewer unexpected costs for your business during the life of the loan.
- Tax Advantages: Businesses can potentially claim a tax deduction for the depreciation of new cars under the Australian Taxation Office’s (ATO) guidelines, which can help lower the overall cost of financing.
Disadvantages of New Car Loans:
- Higher Principal: New cars are generally more expensive than used ones, so your loan may be larger, which could mean higher repayments.
- Depreciation: While new cars have a higher resale value initially, they also depreciate faster, which could affect your asset’s value over time.
Used Car Loan for Your Business
A used car loan for your business is a financing option for businesses purchasing a secondhand vehicle. Since used cars are typically less expensive than new ones, the principal for used car loans is much lower than for new car loans. However, the interest rates can be higher since lenders consider them to be at higher risk.
Advantages of Used Car Loans:
- Lower Purchase Price: Used cars generally cost less than new cars, meaning lower loan amounts and potentially lower monthly repayments.
- Plenty of Options: The used car market offers a wide range of vehicles at different price points, giving you more flexibility to choose a car that suits your business needs.
Disadvantages of Used Car Loans:
- Higher Maintenance Costs: Used cars may require more maintenance and repairs than new cars, which could lead to additional expenses during the life of the loan.
- Limited Warranties: Unlike new cars, used vehicles may not come with manufacturer warranties, leaving your business exposed to unexpected repair costs.
Car Finance Options for Low Credit
If you or your business has a low credit score, securing a car loan can be more challenging, but it’s not impossible. Traditional lenders may be more cautious when offering loans to business owners with poor credit, as they are considered higher risk. However, there are still bad credit car finance options available from alternative or private lenders. If you’re in need of a bad credit business car loan, contact our team at Dark Horse Financial and we’ll connect you with lenders willing to meet your needs.
How to Choose the Right Car Loan for Your Business in Australia
When deciding on the best type of car loan for your business, you should consider the needs of your business, your financial position, and your long-term goals. Here are a few steps to help you choose the right car loan for your business:
- Assess Your Financial Situation: Consider your cash flow and how much you can comfortably afford in monthly repayments.
- Think About the Type of Vehicle: Whether you are buying a new or used car, make sure the loan matches the vehicle’s value and your business’s needs.
- Consider Tax Benefits: Some types of car financing offer better deductions. If you’re looking to save more over time, it’s smart to look at tax implications before applying.
- Ownership vs. Flexibility: Do you want to own the car or upgrade frequently? This is an important question to ask yourself before deciding on a business car loan.
- Seek Professional Help: Lending experts like Dark Horse Financial know the ins and outs of business car finance. Reach out to our team to get customised terms and the best rates possible for your situation.
To Sum it Up
When selecting the best type of business car loan for your company, it’s important to consider factors such as your business’s cash flow, how long you intend to keep the vehicle, and whether you want to own it outright or prefer flexibility.
For businesses that prefer asset ownership and tax benefits, a chattel mortgage or hire purchase may be ideal. On the other hand, businesses that need short-term flexibility or don’t want the responsibility of maintaining a vehicle may find an operating lease or finance lease more suited to their needs.
If you have bad credit or limited financial history, some lenders offer car finance options for low credit. Lending experts like Dark Horse Financial can help you compare business car loan interest rates and secure the best ones along with favourable terms.
Ultimately, choosing the right type of car loan for your business depends on your unique circumstances, financial goals, and the vehicle’s role in your business operations.
Get a Business Car Loan Today
Need a car for your business? Our team can help you secure the best loan product that meets your needs and goals. If you want the best rates possible and customised terms, we’re here to help. Reach out to us to learn more.
