How do business car loans work?
One of the most common ways to secure a care for a business is to take out a business car loan. As the name suggests, it’s a loan you take out for a car that will be used for business purposes.
A business car loan works in a similar way to most other car loans: you enter into a loan to access a lump sum of money to purchase a car, and you’re required to repay the money via regular repayments. Like most business loans, the loan term for a vehicle loan, typically ranges anywhere from one year right up to seven years, and may include the option of choosing a balloon payment (which is a residual amount to be paid at the end of your loan term).
Generally speaking, a business car loan is a secured car loan, meaning that the lender can repossess the car if you fall into default and can’t repay the loan. These types of loans are often called a chattel mortgage. Interest rates for a chattel mortgage can be lower than unsecured business loans because you’re able to offer up the car as security against the loan.
Below is some general advice to think about when considering purchasing your business vehicle.
Potential tax benefits
If you’ve been looking into buying a car for your business, then you’re probably aware that there could be some potential benefits to be had when it comes to tax. For example, if you are using your car for business purposes and your business is registered for GST, you might be able to claim the car’s GST on your BAS (Business Activity Statement).
Some of the other tax deductions that may be available could include:
- Oil and fuel that you use
- The premiums for your vehicle insurance policy
- The interest that you pay on your business car loan
- Your registration costs
- Any depreciation (which is the drop in the value of a business asset, such as a car)
To understand the tax deductions available for your business, or if you have any questions about your business loan and its tax deductibility, you should obtain professional advice from a registered tax agent, or check out what the ATO has to say about business car loans and small business vehicle expenses.
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- Chattel mortgage
As we mentioned above, a chattel mortgage is essentially a secured car loan for a commercial vehicle. Their benefits include a lower interest rate, and you own the asset once the loan is repaid.
- Unsecured Car Loan
An unsecured business car loan involves a lender lending you funds that aren’t secured against an asset. For this reason, interest rates can be higher with unsecured loans as compared to secured loans.
- Finance Leases
Vehicle financing can also be done through a finance lease. This is where the lender owns the car, and you pay regular lease payments to the financier. At the end of the lease term, you may be given the option to extend the lease. There are some downsides to finance leases, such as not owning the car and possibly higher insurance premiums.
- Commercial hire purchase
A hire purchase arrangement is similar to a finance lease, but at the end of the term, you have the option of purchasing the vehicle, and therefore, you generally own the vehicle at the end of the agreement term.
Tips on getting a business vehicle loan
Know your budget
Understand your credit score
Seek professional advice
Comparing business car loans
Lending criteria apply for every lender with an Australian Credit Licence
The lending criteria for a business vehicle loan will vary between each lender. They may restrict eligibility based on whether you’re using the vehicle solely for business purposes or not, your credit rating, or how long you’ve held your Australian Business Number (ABN).
