Finding The Right Funding

The Age

Friday April 20, 2007

Denise Cullen

Shopping around for the right finance is as important as choosing the right car, writes Denise Cullen.

When fierce competition between car manufacturers has created a host of value-laden options, it's tempting to trade one set of wheels for another.

Yet even buyers who shop around to find the car they want with the cheapest price tag typically aren't as diligent in the hunt for finance - and that can be a costly mistake.

In the worst-case scenario, a hasty or ill-considered decision could cost you "thousands of dollars", says Carolyn Bond, co-CEO of the Consumer Action Law Centre in Victoria.

Consumer groups such as Bond's recommend you stump up as much of your own money as possible to reduce the cost of borrowing, given the car will fall in value the second you drive it out of the showroom.

"With a bigger deposit you'll be borrowing less, and you can probably get a better deal on the credit (you need)," says Bond.

But where substantial borrowing is unavoidable, there are still ways to cushion the blow to your bottom line.

According to Lisa Montgomery, head of marketing and consumer advocacy with Resi Mortgage Corporation, drawing down on your mortgage can be one of the cheapest ways to finance a new vehicle.

"Often there's a mental barrier there," she says. "People don't want to use their home as security (for a car loan) but this is a time to let your head manage the situation."

Montgomery says mortgage rates of 7.5 per cent compare favourably to both secured (8-9 per cent) and unsecured (9-12 per cent) personal loans.

However, younger people, or others without property behind them, will have little option but to look at alternative forms of finance, says Anthony Sexton, a financial analyst with information provider Cannex.

The key is to get the finance sorted out before you arrive at the car yard "so you're not feeling pressured" to sign up for more expensive dealer finance. Dealer finance can be tempting because of its convenience - just sign up and drive away - but can ultimately cost a bundle more.

While dealers argue their finance often comes with built-in bonuses such as car insurance and extended warranties, Bond says that bundling these services together makes it harder for people to determine the true cost of each individual component.

She particularly warns of "gap insurance" offered by dealers, which covers borrowers for any shortfall between what the insurance company pays out and what you owe on the car should it be stolen or written off. In many cases the benefits are small and premiums highly inflated, she says.

Sexton says that for most people, car loans are the most economical way to go because the interest charged is usually 2-3 per cent lower than the interest charged on a personal loan.

Even then, it's worth shopping around not just for the cheapest interest rate, but other features. Consider, for instance, any fees you might be up for (such as application fees, ongoing monthly charges or possible penalties) and whether fixed or variable rates suit you best.

"Fixed rates are usually lower, but you must pay (the loan) out over the (specified) amount of time, versus variable rates, where you can pay more than required if you want to," he says.

In its analysis of the best-value products, Cannex found that smaller institutions, such as credit unions and building societies, were more likely to offer the best deals.

But, Sexton adds, it is worth investigating what deals you can strike with your existing lender. "It can pay to stay with your institution," he says. "You might qualify for a lower rate if you already have lots of business with the bank."

Leasing has also become a popular method of car financing and there are a range of different ways to go about it, says Matthew Honan, managing director of leasing advisers The Remunerator Group.

Under an operating lease, the finance company retains ownership of the vehicle and provides the customer (usually a business) with exclusive use of the vehicle for one to five years in return for lease payments. However, employees who gain the use of a vehicle via an employer's operating lease usually don't have a lot of choice about the car they drive.

For that reason, there's been a surge in the number of novated leases, which give employees the power to choose their own vehicle.

Honan says novated leases have been growing at "a phenomenal rate", jumping from around zero to 40 per cent of all lease arrangements in the past seven years or so.

Under this salary-packaging arrangement, the employee leases the car, but the obligation for the payment of lease rentals is transferred, or novated, from the employee to the employer for the term of the agreement.

The good news from the employer's point of view is that, if an employee leaves, the car and all its attendant costs and responsibilities go with them.

Another benefit of the novated lease is that it allows people to make a balloon payment (or residual) at the end of the term, and either keep the car or swap it for a new one.

Associate leases work in much the same way but the vehicle is driven by an associate of the employee, such as a spouse or family member.

KEY ISSUES

Before going ahead with any leasing arrangement:

- Seek independent financial advice.

- Get quotes for different lease terms.

- Calculate the proportion of business to private use.

- Plan for the long term.

- Consider the resale value of your vehicle at lease end.

- Look after your vehicle, as you are taking the risk.

- Don't over-commit yourself. -- Source: The Remunerator

© 2007 The Age

Back to News Index | Back to Home