The age-old question – is cash or finance the best way to purchase a car or equipment?
You need to buy a new car or piece of equipment for yourself or the business and you ask yourself should I pay cash or finance the purchase?
Paying cash is the quickest, easiest and cheapest option; you don’t need to get documentation together for the application, there are no fees which are applicable to a loan and best of all there are no monthly repayments. If you don’t currently have sufficient cash in the bank how long will it take you to save the amount needed?
If you do have sufficient cash then you need to be sure that your finances will be able to cope once you’ve made the purchase. If you do pay cash, will you still be able to expand the business as you planned? Will you be able to still meet the maintenance & statutory costs going forward? Unforeseen expenses seem to occur at the worst time, will you still be comfortable meeting them?
So if you decide not to pay cash then you can finance the purchase via a number of different vehicle and equipment finance methods, use a credit card, use your home loan or line of credit attached to this facility.
Car & Equipment Finance
The most common way to finance vehicles or equipment has been via the traditional finance methods – Chattel Mortgage, Finance Lease, Novated Lease, Corporate Hire Purchase, Fully Maintained Novated Lease, Consumer Mortgage Car Loan or Personal Loan. Interest rates have never been lower than they are today! Given that the above finance options come with fixed interest rates for the term of the loan it has probably never been cheaper to take out finance. Using these methods allow you to budget more accurately as your fortnightly or monthly repayment is fixed for the term of the loan. If you’re looking for a lower monthly repayment, a final balloon payment can be applied to the contract. At the end of the loan you can refinance this amount, trade the asset in on a new one or simply pay it out of your cash flow – the choice is yours!
Not all of these finance options are suitable to everybody so it is important that you discuss your options with an expert in this field.
Credit Card Purchase
This option can be fraught with danger! It probably sounds the most attractive in the fact that you will receive reward points but you will need to ask:
· Is the interest rate fixed or variable?
· Are there any other surcharges or fees payable?
· Will the dealer charge you a merchant fee? (This could be between 1% & 3%!)
You would also need to remember with this that your credit card will only have a minimum monthly repayment and if you stick to paying this amount it could take you 30+ years to pay the credit card off.
Home Loan Drawdown
Using equity in your home loan can also be seen as an attractive alternative to purchase your car or piece of equipment. If your mortgage has the flexible options to allow you to redraw on your equity there are some points to consider:-
· Are there any redraw fees incurred?
· If the car or equipment purchase costs are blended into the outstanding balance of your home loan then you will be paying this purchase off for the remaining period of your home loan so the purchase price of your car or piece of equipment could double or treble over the term of the loan;
· If it’s a separate line of credit are you disciplined enough to make regular payments at a level sufficient to finalise the purchase over 3, 4 or 5 years?
Often the attraction to using your home loan is that you will not be making substantially higher repayments as you would be with a separate car or equipment loan. The biggest attraction would be that mortgage interest rates, albeit variable, are generally lower than car or equipment finance rates.
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Please note that this is general advice only and should not be taken as advice specific to your circumstances. You should consider whether the information is appropriate for your needs and where appropriate, we recommend you seek professional advice.
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