5 different types of car financing and their uses
Whether you’re a cash-poor professional who needs a car for personal use or a taxi driver who needs a car for work, check out the options below to find the type of car loan that’s right for you.
The type of car finance you select will depend largely on your personal circumstances and the way in which you intend to use your vehicle.
A standard car loan
A standard loan provides the most straightforward way to purchase a vehicle. The lender supplies you with funds to purchase a vehicle, after which you commit to repaying the loan amount, plus interest, at regular intervals for the duration of the loan term. Repayments are usually made weekly, fortnightly, or monthly.
In most cases, the vehicle you purchase functions as collateral for the loan: this is also known as a ‘chattel mortgage’. Because the vehicle functions as collateral, you’re usually in a better position to access a competitive interest rate. This makes standard loans a popular choice for individuals who require a car for personal use and seek an accessible loan type. Of course, failure to make repayments on time may lead to the lender repossessing and selling the vehicle to recover their investment.
An operating lease – for a vehicle is a form of rental agreement in which the finance provider purchases a vehicle and you rent it from them. As a result, you never assume ownership of the vehicle and needn’t be concerned about its depreciation in value over time. Instead, you commit to renting the vehicle for a set period of time, at the end of which you may have the option of purchasing it.
With a fully maintained operating lease, the financer commits to covering all operating costs (excluding petrol). This frees you from the responsibility to pay for insurance, tyre replacement, roadside assistance, registration, and so on.
A novated lease is a form of salary-packaged operating lease. In other words, your employer subtracts the amount from your pre-tax salary in payment of the lease. The lease amount generally covers all maintenance costs, including services, tyre replacements, and insurance. Some novated leases also include fuel costs. A novated lease is an excellent way to access a car, avoid the responsibilities of ownership, and take advantage of significant tax benefits.
A finance lease is broadly similar to an operating lease with some key differences. For instance, with a finance lease, you, not the leasing company, are responsible for all maintenance costs. Moreover, operating leases tend to be short term—this allows the leasing company to resell the vehicle before it depreciates in value significantly. By contrast, finance leases cover a longer period of the vehicle’s life. When the lease period finishes, you generally have the option to purchase the vehicle for its residual value—that is, an amount equal to the remaining balance on the car plus GST.
In addition to the loan types that are specific to vehicular purchases, you can also apply for personal credit and use the funds you receive to buy a car. A personal loan can be secured or unsecured and works in much the same way as a standard car loan, albeit it with greater flexibility. The lender provides you with the requested sum of money and you commit to repaying it with interest at set intervals over the duration of the loan term.
This information does not constitute financial advice and you should consider whether it is appropriate to your circumstances before you act in reliance on it. Any opinions, forecasts or recommendations reflect the judgement and assumptions of RateSetter as at the date of publication and may later change without notice.