Four different ways to finance a car purchase

When you are buying a new car, there are a number of factors to consider when selecting the right finance.

One key decision is whether to use a secured or an unsecured loan. A secured loan (which involves using the vehicle as collateral) can require more paperwork from the borrower and a longer assessment period. On the flip side, the borrower usually gets a lower interest rate and may gain access to additional loan features as well.

With an unsecured loan, the borrower will not need to provide collateral, so they will probably be asked for less paperwork and can expect a faster assessment period. However, they will usually need to accept a higher interest rate and, potentially, a less feature-rich loan.

Balloon payments

The borrower will also need to decide if they want their car loan to include a balloon payment, which is a lump-sum payment they would need to make at the end of the loan.

The upside of including a balloon option is the monthly repayments are reduced throughout the life of the loan; the downside is that once the balloon payment is added at the end, the life-of-loan costs become higher. Avoiding the balloon option means higher monthly repayments but lower life-of-loan costs.

As a result, borrowers may wish to:

• Choose the balloon option if their finances are stretched at the time of purchase, but they’re confident of making the balloon payment at the end of the loan.
• Avoid the balloon option if they’re confident about being able to make higher monthly repayments throughout the life of the loan.

Novated leases

Another option for borrowers to consider is a novated lease, which would be a three-way agreement between the borrower, their employer and the lender. Under a novated lease:

• The lender would retain ownership of the vehicle and lease it out to the borrower.
• The employer would facilitate the borrower’s lease payments through a salary-sacrificing arrangement (which means pre-tax income can be used to make loan repayments).
• The borrower would take possession of the vehicle at the end of the lease period by making a balloon payment.

The reason novated leases exist is because all three parties can benefit:

• The lender can profit from the financing arrangement.
• The employer can reward their employees without having to give them more money.
• The borrower can acquire a car while reducing their taxable income.

That said, borrowers need to remember that if they can’t afford the balloon payment at the end of the lease period, they may be forced to sell the vehicle to raise the funds. Also, if they leave their job during the lease period, they would need to keep making the monthly repayments – but from their private, post-tax savings.

The benefits of using a broker

I can compare loans from a diverse range of lenders on your behalf. If you go direct-to-lender or use dealer finance, you will be more limited in your options.