Car Finance: Interest Rates and the Fine Print

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Finance deals are big marketing tools in the car industry today, so we think it timely to throw some light on the subject.

Let’s expose some of the myths of the various ‘lucrative’ new car finance offers available through dealerships at present and uncover the truth behind them.

Below are 3 typical examples of marketing ploys used by dealerships to keep you on their car lot and get you in that car “Today”!

0% Comparison Rate

Isn’t it great to get car finance at 0% interest rates?  So what’s the catch?  Well, the car dealers will have you think there is no catch and it’s just their way of looking after you.  If only that were true.

For a start we need to ask ourselves how it is possible to obtain 0% finance without having to put our house on the line.  Particularly when the published 90 day bank bills are trading at around 3.5% and home mortgage rates are averaging around 6.5%.

The reason why car dealers can offer such seemingly attractive deals is because the cost of finance is capitalised into the car price.  That means instead of dropping purchase prices to realistic levels dealers are able to sell their cars at full profit with a subsidy coming in the way of very cheap finance.

Your finance payments will actually be the same, if not less, by buying the car at a discounted price and paying a realistic interest rate.

Furthermore, these types of offers are usually restricted to certain, limited models of cars which the car companies need to sell to keep their production lines moving.

Discount Rates

We have all seen and heard about various finance offers on vehicles at heavily discounted rates to others. Advertisements claiming 1.5%, 3.9% etc are common place. The fine print reveals the facts.

Typically what happens is that the sale price of specifically selected cars only are discounted from the actual retail price and a monthly repayment is calculated. The amount of interest earned on the contract will therefore be reduced because of the lower purchase price.

These figures are then compared back to the original retail price and the interest rate re-calculated appears to be extremely low.

The fact is that the interest rate is actually not discounted, the car is, and the car will be sold for that price regardless.

” 0% – 50/50 ”

The “no interest” sounds appealing, but what does 50/50 mean?

This type of offer basically adopts the same principle as the 0% comparison rate.  The cost of finance is capitalised into an inflated purchase price rather than discounting the car price  and is restricted to limited models only.

It also means you pay for half of the car today and the other half in 12 months. It might seem like something to consider for those who have a large initial capital deposit and who are capable of pulling together the same amount of cash again 1 year later.  But the reality is, most spare cash should be going towards reducing ineffective tax debt such as a home loan or credit cards.

Even if you do have spare cash and absolutely no personal debts you would still be better off placing your hard earned money into a term deposit rather than buying a depreciating asset.  There are other, tax effective ways to buy cars, most notably through a novated lease.

Novated Lease

Novated lease arrangements do not require you to pay an upfront deposit and are very tax effective.

This product is not restricted to certain, limited makes or models.  In fact you can finance just about any car whether it is new or used or even a sale-&-leaseback for a car you may already own.

Unlike any of the other seemingly attractive finance offers the repayments for novated leases are made from pre tax income.  That’s right; instead of paying  all the income tax to the ATO you use some of your tax dollars to pay off the finance on your car.

It doesn’t stop there.  A novated lease also allows you to save GST on the purchase price of the car, save the GST on running cost expenses and pay for some, if not all, of the running costs from pre tax income helping you save even more income tax.

There is much more…..Call Enlist today to find out.

1300 773 829

So don’t forget, there is more to car financing then the interest rate.  Don’t get caught up in the hype and make sure you properly compare all your options.

Call Enlist to obtain a free consultation and see how much you can save.

Here’s how the numbers compare

	Novated Lease	0% Comparison Rate	0% – 50/50
Gross Salary	$150,000	$150,000	$150,000
Less Pre-Tax Deduction	$9,453	–	–
Taxable Salary	$140,547	$150,000	$150,000
Less Income Tax	$42,057	$45,697	$45,697
Less Post-Tax Deduction	$9,600	–	–
Less Private Finance Payments	–	$10,800	–
Less Private Running  Costs	–	$7,200	$7,200
Take Home Pay Per Annum	$88,890	$86,303	$97,103
Cash in Hand After 3 Years	$266,670	$258,909	$291,309
Less Initial Deposit	–	–	$27,500
Less Residual After 3 Years	$22,590	$22,590	$27,500
Cash in Hand After 3 Years	$244,080	$236,319	$236,309

This comparison is based on a car at RRP $55,000 ($50,000 with fleet discount), identical running costs in all cases, 3 year term, 17,000 kilometers per annum