Owning a car is a big deal for Australian life and Small Business
Buying your car is already a complex decision – what to buy, what colour etc.
Often times, the hardest decision of all is how to pay for your car. There’s so many providers spruiking great deals and encouraging you to get finance because it’s ‘so easy’ to do so.
Then, there’s the hidden traps of Fringe Benefits Tax if you buy the car in your business name without first talking to your Tax Advisor.
No matter if you are buying a car for your business or for personal use, there are three options available to you.
- Pay with your own money
- Buy with Finance Lease / Loan
- Operating Lease
In this week’s episode, we guide you through this mindfield, and outline our ultimate preference. We also share our hot tips on how to protect your purchase.
Option 1: Pay outright
I strongly believe buying a car that you can afford that is reliable and low maintenance will always cost you less in the long run.
I’m not saying buy a bomb of a car.
But to buy the best value car with the money you have saved – even if that is a quality second hand vehicle.
Why?
The moment you drive a car out of the driveway the car starts depreciating – which means to lose value.
All the other strategies below have ongoing additional costs – such as interest, and lease payments. You’re financially going backwards – with depreciation and ongoing charges.
By paying outright with cold hard cash, you’ve reduced your losses and are financially better off.
Also, you can put the money you were going to spend on the repayments for option 2 or three below into a separate savings account, and in 12 months time, upgrade your vehicle.
Think this logic sounds a bit crazy? Check out Scott Pape’s “How to get free cars for life” – it’s a brilliant read!
Option 2: Get a loan or finance agreement
This could be a loan with a bank, credit union or through dealer finance.
The loan is usually secured over the value of the car, and the car will appear as a mortgaged asset on the PPSR register.
You’ll have to pay interest, administration fees and ongoing repayments.
If what you can afford is truly a bomb, this option might be your best – especially if you can find really cheap finance (less than 5% per annum).
The best times of year to do this is the end of year ‘runout’ deals (for new model soon to be released) or ‘End of Financial Year’ stock clearance deals.
But, be warned!
Be careful about “Balloon” values which is a big lump sum at the end of the finance term.
This is a lump sum payment to make at the end of the repayment term, and is designed by some car dealerships to ‘entice’ consumers to roll over their finance agreement into a new lease at teh end of the term.
You’ll be approached to come and trade in and get a new car (and a new finance agreement).
This keeps you trapped in the debt cycle.
If at all possible, request finance agreements without the ballon repayment at the end of the term.
Option 3: Get a car lease
A car lease means you’ll pay a monthly fee for the use of the vehicle – you never own it.
It is kind of like going to a car hire company and renting your car 24/7. They pay for fuel, insurance, onroad and repairs and maintenance.
Many clients ask about the salary sacrifice of a new car lease and whether or not it is truly worth while.
The short answer: only if you have a high volume of business related kilometres (which don’t include kilometres from home to work). Example jobs include travelling sales people, sales reps.
As a deduction for small business, the Operating Lease is deductible when paid in the proportion of business kilometres to personal kilometres. To substantiate this, you need to keep a logbook (you can get from a newsagent / office works etc) for a minimum of 12 weeks for every 5 years or when changing your vehicle is used.
Similar to Option 2, you often times have a balloon payment which involves either paying the balloon to own the vehicle or to trade it in to get another car lease.
Again, this is designed to entrap you in the cycle of the operating leases.
Tips for the faint hearted
If you’re buying second hand and direct from the previous owner, make sure:
a) Check the PPSR database
Checking the PPSR database (previously called a REVS check) is important for any finance on the car.
If there is finance listed, you must pay the finance company the outstanding balance otherwise your “new” vehicle could get reclaimed if the old owner stops paying off the debt.
b) Get a Registered Mechanic’s opinion
Also, get a registered mechanic to check the vehicle for faults prior to offerring a price. Your local NRMA can often help.
If you’re buying within your business, please check out our episode on FBT for vehicles and get in touch with your Tax Advisor first to avoid getting yourself into FBT hot water!
The upshot?
Our first preference is always for you to buy your vehicle without finance and with your hard earned cash. This limits your overall and ongoing financial loss. It also keeps you out of the debt trap.
As always, this blog is for information purposes only and should not be taken as personal advice. For personalised advice we strongly suggest you get in touch with your Tax Advisor or get in touch now!
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Thanks for sharing such an informative blog! With these tips, we surely protect our purchase.. Keep Sharing!