Business car financing options
There are three main options when financing a car for your business:
Basically what most people think of when thinking of a ‘car loan’, a chattel mortgage is a fancy way to describe a car loan for your business. You own the vehicle and pay back the loan amount, usually from a period of two to seven years.
Pros of a chattel mortgage include lower interest rates because the loan is secured; you own the vehicle; interest rates are usually fixed anywhere from two to five years.
Cons of a chattel mortgage include penalties if you end the loan early, and loans are recorded on your balance sheet, reducing capacity to borrow further.
Under a business lease, the lender purchases the vehicle at your request and rents it to you for an agreed period. Under a lease, the car must have residual value.
When the lease ends you’ll have the option to buy it by paying the residual, or upgrade by taking out a new lease and starting over.
Pros of a lease include no debt recorded on your balance sheet; flexibility to upgrade after a short period; tax deductibility of payments; maintenance cost is often included in the repayments.
Cons of leases include higher repayments; not actually owning the vehicle; you can’t modify the car; some leases also have restrictions on how you use the car and how far you can drive it.
Under a hire purchase scheme, the lender purchases the vehicle at your request and you then pay off the car in instalments until ownership is transferred to you. Under such a plan, you have the option to have a balloon payment which can reduce repayments.
Pros of a hire purchase scheme include claiming depreciation and interest charges on tax; repayments are GST-free; repayments are flexible and fixed; and when the hire purchase scheme is finished, ownership of the vehicle is automatically transferred to you.
Cons include likely needing to pay an upfront deposit; the car is owned by the financier until the end of the contract; early termination fees may apply; can be more expensive than a regular car loan; you’ll have to pay for servicing and repairs on a car you don’t own.
Tax and GST benefits of business car loans
Having a car loan under your business can present a few benefits at tax time.
On many types of car financing options, you can claim interest against taxable income. You can also claim the full input tax credit, and claim tax back on depreciation up to the depreciation limit. Given cars can depreciate anywhere from 25% to more than a third in about five years, this could be a significant sum.
In addition, you can also usually claim GST paid on the price of the vehicle back at tax time. For commercial hire schemes, repayments are also usually GST-free.
Business car loan eligibility
To be eligible for a business car loan you usually need to satisfy these two criteria:
Be a tax resident of Australia, based, registered and operating in Australia
Vehicle will be used fully or mostly for business purposes
In addition, many of the most competitive car loans require two years of business activity statements (BAS) on your Australian Business Number (ABN). If you don’t have such activity, you’ll still qualify for many ‘low doc’ car loans, but the interest rate could be higher.
How to find the best business car loan finance rates
No matter where you’re at on your business journey, carloans.com.au can find the right financing option for you. We work with a panel of nearly thirty lenders, which can offer competitive car loans, including for those that are low doc or with poorer credit history.