Most personal use loans in Australia for cars, boats and bikes are secured.
As an individual you are borrowing money to purchase a tangible item like a vehicle or boat which will be used as security for the loan. When you trade-in or sell you must then payout your car loan, and take out a new loan if you require money to buy something else.
Secured loans generally have a lower interest rate than unsecured loans.
This is a more versatile loan and can be used for nearly any purpose including debt consolidation, a holiday, furniture, or even cars and boats. There is no security required for this type of loan, thus interest rates are slightly higher than secured loans.
These facilities are mostly used for business and have a variation known as a balloon payment or residual option. There are a number of different leasing styles, which suit different circumstances and you will find by setting a larger balloon payment for the end of term,(which can vary according to circumstances), your monthly payments can be reduced to better balance your budget. At the end of the term, you then have the choice to either pay out the full amount in one payment or re- finance the balloon amount and continue paying off the vehicle over a new loan period or trade up to a new one.
Note: This would be subject to approval conditions at that time
An Asset Purchase (or hire purchase) is ideal when financing motor vehicles, business plant and equipment, luxury assets as well as all forms of office equipment.
A typical Hire Purchase structure has a term of two to five years with payments made monthly, although other options are available. The Agreement will normally run the full term, otherwise penalties may be incurred if terminated (paid out) early.
With this type of agreement, because it is a contract for the hire of goods, the title over the goods remains with the financier and does not pass to the purchaser until either the option to purchase is exercised by the purchaser, or the final instalment is paid.
When you wish to own the asset from the outset, this type of purchasing finance is an alternative to leasing. The hire purchase contract is a legally binding agreement between the financier and yourself (the hirer) where the amount repayable is calculated over a fixed term and fixed rate, with fixed repayments. You also have the choice of a balloon payment (residual value) when the term expires, depending on the age, type, usage and depreciation of the goods.
GST is usually financed over the term of the asset purchase agreement; however, GST accrual- based entities can generally pay the stamp duty upfront and claim the GST component immediately (please refer to your accountant for confirmation of your circumstances).
A Chattel Mortgage is ideal when financing cars and other motor vehicles such as trucks, buses, bobcats, as well as business equipment, office equipment, etc.
A Chattel Mortgage can be structured similar to an Asset Purchase facility, however, the total stamp duty (where applicable) is payable up front. This facility is ideal for clients who operate their accounts on a cash basis, for GST purposes, and wish to claim the GST up front as input tax credit (please refer to your accountant for confirmation of your circumstances).
The term is usually two to five years and a residual value (or balloon amount) can also be included into the loan for payment when the term expires, depending on usage and depreciation of goods. The chattel mortgage contract is a legally binding agreement between the financier and the client (you) where the amount repayable is calculated over a fixed term and fixed rate, with fixed repayments. As well, you have a choice of a residual value (or balloon payment) when the term expires.
A Chattel Mortgage is a security over chattels (movable articles of property) held by the lender, giving the lender recourse against the chattel (property) in the event of default by the borrower. Chattel Mortgage Agreements register a Bill of Sale/Chattel Mortgage/Debenture in favour of the lender.
Under a chattel mortgage, the purchaser (you) takes title in the chattel from the time of purchase. You then finance the purchase price (or part thereof) of the chattel by way of a loan, obtained from a lender, and apply the borrowed funds as payment to the supplier.
The fundamental difference between a chattel mortgage arrangement and a hire purchase agreement is that under the chattel mortgage you take title at the time of purchase, where the title remains with the financier until final payment is made under a hire purchase arrangement.
A Finance Lease is a traditional form of finance for professionals or corporates, mainly used when purchasing motor vehicles and plant & equipment for business purposes. With a Finance Lease, the repayment is generally allowable as a deduction (as compared to interest and deprecation with an asset purchase or chattel mortgage), which may provide some individuals with some taxation advantages (please refer to your accountant for confirmation of your circumstances).
A typical finance lease structure has a term of two to five years, and the residual value is usually nominated by the client, and is generally in line with Australian Taxation Office guidelines.
A Finance Lease allows you (the lessee) the use of the goods for the specified period. The person who grants the finance lease (the lessor) remains the owner of the property until all rentals have been paid, including the Residual Value. The finance lease contract will always have a residual value that is guaranteed by you (the lessee). This residual value amount must be paid out at the end of the contract period before ownership can be transferred to you (the lessee). Finance Lease monthly rentals are calculated on the net purchase price and GST is added to the monthly repayment.
A Novated Lease is a Tripartite Agreement between a finance company, employer and employee enabling the packaging of motor vehicles for employees.
An employee leases a motor vehicle from the financier using a standard finance lease agreement. A Deed of Novation is then entered into between the employee, the employer and the financier under which the employee’s obligation to pay the lease rental under the finance lease is transferred to the employer for the term of the Deed of Novation or term of employment. The employer then pays the lease rental to the financier, and the amount of the lease payment will be deducted from the employee’s pre-tax salary as part of the employee’s salary package.
On payment of the last lease payment, or on termination of employment, a further novation may occur. The deed of novation usually contains a clause stating that on the earlier of, say termination of the lease or cessation of employment of the employee, the employer’s obligations under the deed of novation are novated to the employee who again becomes the lessee. In the case of cessation of employment this enables the employee to enter into a new novated lease arrangement with another employer.
There are two main types of novation arrangements:
– a ‘full’ or ‘split full’ lease novation that involves a revocation of the original lease, and – a ‘partial’ lease novation that does not revoke the original lease.
The GST consequences differ between the two types of novation arrangements due to the different flow of supplies between the parties under each arrangement, so advice from your accountant is recommended.
An Operating Lease is an “off balance sheet” financing procedure, which provides all the benefits of ownership without the end risk of a residual value commitment and is always business related. This method of financing is ideal for businesses that enter into a contract to supply goods and services for a predetermined period, say 5 years and require specific equipment for the term of the contract. At the end of the term, there may not be the opportunity to extend the goods & services contract further and therefore the equipment that has been financed is no longer required. Additionally, if the equipment is required on a month-to-month basis, a rental arrangement may be negotiated without entering into a long term agreement.
To maintain taxation guidelines a “residual value position” will be required by the financier. This amount will usually be guaranteed by the supplier, insurance company or a third party, (which indemnifies the financier, ensuring the residual value will be paid at the expiration of the lease term). The rental payments are treated as an expense, and ownership may be negotiated for a fair market value at the expiration of the agreement.
Operating Leases for motor vehicles are more widely accepted as a traditional way to finance business fleets. Motor vehicle manufacturers will need to guarantee the residual value of their product in order to compete in the motor vehicle fleet market. At the expiration of the lease period the lessee returns the vehicle (under the prescribed conditions) and there is no further obligation.
A typical consumer loan will be used when you wish to purchase a motor vehicle, boat or other asset that has no business use for the goods.
This facility is for personal use only. A consumer based loan requires the goods to be used as the security for the loan. This facility falls under the Uniform Consumer Credit Code (UCCC). The
interest rate, commission and other fees are disclosed on the contract. All consumer credit conditions apply to this loan.This facility can be structured with a balloon payment.
The term is usually two to five years.
This facility is generally available for equipment or vehicles that have been purchased within the previous 3 – 6 months.
Using a Sale & Hire Back facility, you are able to refinance your existing equipment or vehicle to the financier. The equipment is then hired or financed back to you over pre-agreed terms. Sale & Hire Back Finance can provide you with valuable cash-flow enhancements.
Chattel mortgage finance would be the typical finance instrument when considering this method of refinancing. Selling the goods to a financier may incur a taxation liability, whereas committing to a chattel mortgage agreement over the goods does not allow title to flow. The financier simply has a charge over the goods. (Consultation with your accountant is always recommended when financing under these circumstances).
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