You've found the car of your dreams, but there's just one problem - even selling your granny won't enable you to cough up the asking price.
So what do you do? Since we don't advocate stealing, you might want to consider a number of the financing options available to you....
Most banks and finance companies have a range of products on offer to cater for both your personal and business automotive requirements. Of course the lender will need to be convinced you are capable of meeting the repayments - but provided you can do that, you're one step closer to sliding behind the wheel of your dream machine.
"Borrowing can be a good way of buying a car, rather than waiting three or four years," says Edward Peake, a used-car finance consultant at a prominent Melbourne Holden dealership. "Banks are in the business of 'selling' money, which means it is readily available and there are some fairly competitive rates around," he said.
But choosing the right finance package to suit your needs is important, so you should weigh up the options before signing your life away. Business borrowers in particular should take into account factors other than just interest rates when entering a finance agreement, according to Reg Seit, managing director of Melbourne-based Regent Finance.
"There are issues to be considered such as GST, residual values and tax benefits - in other words, what you can claim. You might be better off turning your car over every two years to maximise your tax benefits," Mr Seit says. He suggests borrowers should talk to a reputable finance broker. A list of brokers can be viewed on the Australian Asset Finance Association website.
There are a myriad of ways to finance your vehicle purchase - personal loan, consumer mortgage, asset purchase (also referred to as commercial hire purchase), finance lease, operating lease or novated lease. And the capital can be sourced from banks, finance companies, dealer-based financiers or brokers.
Making the choice that best suits your needs will involve some independent research on your part, but here is an outline of the options available to you, and their respective pros and cons:
Borrowing Against Your Home Loan
As mentioned earlier, banks are in the business of "selling" money, and borrowing against your home loan is one of the ways they can let you have it. In a nutshell, you basically borrow the money against your home loan and the interest rate you pay is partly determined by how much equity you have in your house.
It's possible to pay quite low interest in certain cases, which makes good financial sense. The only catch is that it takes three to four weeks to gain approval - but this may not be a drawback unless you are in a huge hurry to take ownership of your new vehicle.
Overall, this is one of the more cost-effective ways of financing a vehicle for private buyers.
Personal Loan
Nothing too complicated about this one. Any bank can lend you the money, provided they are convinced it's an acceptable risk for them.
Typically, banks will offer you a better interest rate than your average car-yard-based financier - the reason being that the latter usually gets a commission on their dealings. So take it as read that the higher the interest rate they quote, the higher their commission.
When borrowing from a bank you will find there is some variance from one institution to the next, but figure on paying mid-low interest rates as a general guide. Not as cost-effective as borrowing against your home loan, but a reasonable choice if you haven't got a home to borrow against.
Consumer Mortgage
This arrangement is also angled at borrowers who will be buying the vehicle primarily for personal use. You normally repay the principal and interest over a fixed term of up to five years, although it is possible to specify lower monthly repayments by opting for a balloon or lump sum payment at the end of the term.
Mr Seit says consumer mortgage agreements offers buyers more protection should they fall into financial hardship than is the case with a commercial financing arrangement such as leasing. "There are more guidelines for lenders to abide by under a consumer mortgage," he says.
In addition, the amount being borrowed can be smaller than is typically the case with an asset purchase or leasing agreement. The trade-off is that interest rates are slightly higher.
Asset Purchase (Commercial Hire Purchase)
If you can manage to claim on your tax a run down the coast in the BMW M3 on a sunny weekend, then a commercial hire purchase agreement probably makes good sense.
Mr Peake says this method of financing a car is best suited to self-employed individuals such as plumbers or electricians. The basic proviso is that the vehicle being financed must not be more than three years old.
Under this type of arrangement, the finance company sets monthly payments over a set term and - as is the case with a consumer mortgage - you may specify a balloon payment at the end of the term.
Many car companies are now also using the final balloon payment as a guaranteed buy-back figure should you wish to trade-in after the contract period rather than pay out the final sum and keep your car.
But Mr Seit says buyers are better off specifying a straight purchase than having a balloon payment. "By doing so you will have a higher equity in the vehicle and be able to trade-up to a better vehicle at the end of the term," he says. "You have to work out what you can afford, but the last thing you want is to have a higher payout than the vehicle is worth.
Mr Seit warns buyers to be wary of deals that appear affordable but are financially unwise in the long term. As an example, he quotes the 5-year/55 per cent residual terms offered by some dealer-based financiers at prestige car yards.
The advantage of an asset purchase agreement versus a consumer mortgage is that interest rates are usually better. Under this arrangement the vehicle owner can usually claim the depreciation allowance (up to $55,134) and the interest component of the monthly repayments.
These claims are skewed higher during the initial part of the term so it works in your favour to turn over your car every couple of years.
Leasing
Leasing is another option worth a look given that motor vehicles remain one of the few significant allowable tax deductions for a business operation.
After all, if you can legally claim the business usage of your car off your tax, why not make it a pleasurable experience and lease the type of car you want to drive?
Finance Lease
Under a finance lease, the term and approximate value of the car at the end - its residual value - are set by the finance company and the monthly payments worked out on this basis. For tax purposes, this type of lease must be included on a company's balance sheet as an asset.
You can claim the monthly repayments - which includes GST, stamp duties and interest - out of your pre-tax income.
However, the risk on the residual is entirely yours, so if at the end of the term the bottom has fallen out of the used Porsche market and your treasured Boxster is worth little more than a Leyland P76, you will have to make up the shortfall...
Operating Lease
An operating or fully-maintained lease, which can include full maintenance, insurance and registration costs for the term, works more as a long-term rental agreement. If you use the car wholly for business purposes, the entire lease costs are tax deductable and are listed off the balance sheet as an expense.
It's a good idea to sit down with your financier and work out how many kilometres you plan to travel each year and which expenses you want covered - these may include tyres, servicing, repairs, registration, etc. The repayments are then worked out accordingly. Obviously, the more expenses you want covered, the higher your monthly repayments will be.
But you should be warned that there is a penalty if you travel more kilometres than you specified in the agreement or if you pay out the loan early.
Operating leases are usually the choice of large companies with big budgets at their disposal. The principal benefit is the simplicity of the agreement, but the drawback is that such an arrangement tends to be inflexible.
Novated Lease
Another form of leasing that has become highly popular, especially with the increasing ability to salary-package cars, is novated leasing. Novated leasing allows an employer to provide a car for an employee as part of their salary package without taking any risk on the vehicle.
What you do is enter into a lease agreement on a car of your choice with a finance company and enter into a sub-lease with your employer, who will agree to pay the leasing costs while you remain with the company. There are FBT considerations to consider that will normally be paid by you, so check with your employer about those potential costs.
Should you part company with your employer, the car becomes yours, with the option of either renegotiating the lease payments with your new boss or continuing to make the lease payments out of your own pocket.
Interest rates are much the same as is the case with an asset-purchase agreement. Once again, there is a penalty for an early payout so think carefully about the term you will be keeping the car for.
Wheeling and Dealing
While most of these finance options are available through traditional banks and retail finance companies, the arrival of the professional finance broker network, vendor finance companies and car manufacturers' own in-house finance arms simply makes the competition stiffer.
With a much wider choice of finance packages and providers to choose from, interest rates remain competitive and deals abound. It is a veritable buyers' market. So before you sign on the dotted line, shop around.
The car companies are in business to sell cars and if they can make it easier for you to step into the car you desire, they will.
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A Modified Car?
Few people do it, bit it is possible to negotiate financing that includes not only the purchase of a car, but also its modification. The Impreza WRX that we covered at "Wonder White" had an additional $11,000 worth of mods included in the original leasing deal. Something to think about, eh? And on the other hand, don't forget that some leasing or hire purchase deals require that you make no modifications to the car that's been purchased under the finance. Make sure you check this aspect out!
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