WHEN there’s a mortgage, it goes without saying that most surplus savings is paying that down first and foremost.
So when it comes to replacing the car that’s on its last legs, ideally the redraw facility has the funds right there to access.
If not, it might be time for a little cash out, or some form of car finance.
The options can be daunting and will depend on a whole range of factors, but here’s how not to overstretch the budget.
Regardless of whether the cash is ready to go or finance is required, a great rule of thumb on which car is affordable is to divide the car price by eight, and have that in the budget year after year, either accumulating in savings or being paid out in some form of finance arrangement.
This should comfortably provide for finance (if needed), the odd unexpected expense, and an upgrade when required.
So for a $50,000 car, around $6,250pa needs to be set aside in the budget every year, plus running costs of course.
Financing is then required if the full amount isn’t available as savings, if financing, the first consideration is whether it’s for business purposes or not.
If it is for business purposes, a chattel mortgage will ensure the car is owned upfront, interest and depreciation are tax deductible and the GST can be claimed upfront.
Alternatively, a lease can be paid in pre-tax dollars and GST is claimed over the life of the loan.
If it’s personal use, a novated lease provides the opportunity for employees to package both lease and running costs of the car, or a standard fixed term loan secured against the vehicle will provide the most cost-effective personal use loan in most cases.
The “term” and whether or not a “residual” (or balloon) is chosen drives the repayment schedule and total cost of the loan.
There’s no right or wrong and the topic can make for a great dinner party debate! But here’s the basic maths:
A residual or balloon is how much you need to pay out or refinance at the end of the term, typically 20-40 per cent.
Using a higher balloon reduces the amount payable each month but relies on the vehicle being worth at least that amount at the end of the term chosen.
So here’s where new vs used, and how well a brand retains its value becomes important.
A brand-new car out of the showroom is less likely to still be worth 40 per cent of the purchase price after five years!
Paying a car over three years rather than five will definitely minimise interest but may be a stretch too far in terms of cashflow.
For example, a $50,000 car with a 20 per cent balloon, leased over three years would cost around $1,183pm.
If it’s affordable, it’s the most cost effective, low risk financing option as 80 per cent of the car would be paid off in three years.
The final consideration is whether any form of new finance or refinance may be around the corner.
A lease can be a big monthly expense that is factored by the banks when determining borrowing capacity.
Not all lenders will refinance a car lease to allow more money to be borrowed, just one to watch and consider in the big picture.
For more information on financial solutions to suit your individual situation, please contact Lanie from Surfcoast Life & Lending on 0418 938 646.
Advice in this column should be taken as general in nature and might not apply to your personal circumstances.