Business Car Loan Guide
If you’re looking for a business car loan, you have plenty of options. This guide answers the most common questions that our expert finance brokers get at Auto Car Loans. It also provides handy tips and advice so you can get the best car finance deal!
What is a business car loan?
A business car loan involves borrowing to buy a vehicle that you’ll use at least 50% of the time for business purposes. You can do this if you own a business, you are self employed, AND if you are an employee who uses their car for business purposes.
There are different ways to take out a business car loan. They include taking out a chattel mortgage (a secured loan) or an unsecured business loan.
We’ll explain the pros and cons of both these options a little later. First, we’ll outline the benefits of borrowing to buy a car for your business.
Business car loan benefits
Business car loan benefits include:
- Lower rates
- tax benefits.
- Less documentation
- allowing you to buy the car you need (or want) straight away.
- the ability to have repayments that suit your business’ cash flow.
- you can make modifications to the vehicle if you want.
- you can choose your own car insurance.
- you can drive the vehicle as much (or as little) as you want.
- leasing is an ongoing cost.
- A chattel mortgage has a lower interest rate than an unsecured business car loan.
- You can usually borrow more by taking out a chattel mortgage than an unsecured car loan. This means you can buy a more expensive vehicle.
- A lender can legally repossess and sell your car if you don’t make your repayments.
- The lender’s interest in the vehicle will be registered on the Personal Properties Securities Register. This can make it more difficult for you to sell the vehicle until the loan is paid off.
- A lender can’t legally repossess and sell your car if you don’t make your loan repayments.
- The lender’s interest in the vehicle won’t be registered on the PPSR. This will make it easier for you to sell the car even if you haven’t paid off your unsecured loan.
- An unsecured business car loan has a much higher interest rate than a chattel mortgage.
- You can’t usually borrow as much with an unsecured loan than you could with a secured loan.
- providing your Australian Business Number (ABN) and proof that it is registered for GST.
- showing evidence of your Australian citizenship or permanent residency.
- showing proof of business income (for example, recent BAS statements, tax returns and bank statements). Some lenders will require your business to have been operating for a minimum period to qualify. This timeframe could range from 6 months to 2 years.
- providing your business’ recent financial statements (for example, your balance sheet and income/profit and loss statements. Ideally, these statements should have been prepared by an accountant. Your balance sheet should show details of your business assets and liabilities).
- a business budget. This budget should show that your business cash flow will allow you to make your regular car loan repayments.
Business loans attract lower interest rates than ‘consumer loans’ for personal use, meaning you can save significant amounts on finance.
If you take out a business car loan and your business is registered for GST, you can claim the car’s GST on your business activity statement (BAS). You’ll have to pay less GST on your other business transactions as a result.
When financing you are also eligible to take on other tax benefits like claiming the full vehicle cost under Temporary Full Expensing and to make deductions for fuel, insurance, maintenance etc.
If you have been registered for GST for 2 years, there are plenty of ‘low doc’ options which allow you to self declare your income and asset base, rather than have to provide evidence of income (payslips, bank statements, financials, tax returns, etc.) under a full assessment loan.
If you can’t afford to pay the full price for the vehicle you need or want, a business car loan can help you to get it now. All you need to do is be able to afford regular repayments, rather than coming up with the full price of the car upfront.
A business car loan gives you flexible repayment options. You can usually choose structured repayments to suit your business’ seasonal cash flow. For example, to have higher repayments in ‘good’ cash flow months for your business.
You can also choose a loan term and repayments that you can afford. Business car loan terms usually range from 1 to 7 years. If you want to lower your repayments, you can choose a longer loan term. You can also lower your repayments by including one large balloon payment at the end of your term.
Taking out a loan to buy a car gives you ownership straight away, even though you have to pay your loan off. You (or your business) will be the registered owner of the vehicle from day one.
Leasing on the other hand is like renting a car for a set period. You never own it during the lease term. Ownership is in the finance company’s name. Depending on the terms of your lease, you might have the option to buy it at the end of the lease.
You can’t do that if you lease a car unless you get the leasing company’s permission.
If you lease your car, you usually can’t do this and are locked into the leasing’s company’s insurer. This may not be the best deal available and could result in you paying more for insurance than you need to.
When you buy your car with a car loan, there are no driving requirements or restrictions. But there often is when you lease a car. For example, you might be restricted to driving only a set number of kilometres without incurring extra costs.
It’s also important to understand that if you lease a car and you don’t do the number of kilometres specified in your lease, you’re still paying for the expected wear and tear as if you did drive those kilometres.
Continually leasing one or more vehicles for your business is an ongoing cost. Taking out a loan gives you the opportunity to pay the vehicle off earlier (subject to possible early termination fees). It will then become an asset on your balance sheet, adding value to your business.
Can a business get a car loan?
You can get a business car loan either in your individual name or in your business name. Either way, it’s important to have a good credit score to get the best deal. Lenders check your credit score when you make a loan application. If you have a good credit score, it’s easier to get approved. If you don’t, you’ll either get declined or you’ll be charged a higher interest rate.
You can have both an individual and a business credit score. Your individual score will be based on your repayment record for any credit you’ve ever taken out. This includes loans, credit cards, mobile phone plans and utility services like gas and electricity accounts. If you have a good record of making your repayments on time, you’ll have a good credit score. If you don’t, you won’t. Your repayment record is compiled by credit reporting agencies in Australia.
You’ll have a business credit score if you’ve ever borrowed or taken out credit in your business’ name.
You can check both your individual and business credit scores online for free with Australia’s major credit reporting agencies. They include illion, Experian and Equifax.
How do I finance my car through my business?
The major options for financing your car through your business are taking out a loan or leasing.
If you take out a car loan, your regular repayments cover how much you borrow plus interest and any lender fees.
If you lease a vehicle, you simply take possession of it for the term of the lease. You have to make regular repayments for the term of the lease. Those repayments usually include the running costs of the car. Depending on the terms of the lease, they may also include other hidden costs.
The best way to finance a car through a business
The best way to finance your car through your business depends on your individual situation. Your business cash flow should be a major consideration. Whether you take out a car loan or a lease, you need to be able to afford your repayments. You should talk to a car finance broker to discuss your situation and the options available to you.
Below are the pros and cons of secured business car loans (called chattel mortgages) and unsecured business car loans.
The pros of chattel mortgages
The cons of chattel mortgages
The pros of unsecured business car loans
The cons of unsecured business car loans
What other types of business car loans are available?
Besides chattel mortgages and unsecured business car loans, other types of business car finance include hire purchase agreements and lines of credit.
A hire purchase agreement is similar to leasing except you own the car at the end of the term. Your repayments are likely to be higher accordingly.
A business line of credit lets you continually borrow up to a pre-set amount. It’s like a credit card. Lines of credit can be secured or unsecured. Unsecured lines of credit have higher interest rates.
How to get a business auto loan
It’s crucial to do your research to get a business car loan. First, you need to research to get the right vehicle for your business needs. That’s the exciting part.
Second, you need to research the vehicle finance market. This is far less exciting, but it can save you a lot of money. There’s a huge range of car finance lenders and products out there. If you don’t have the time or the expertise to explore your options, get a broker to do it for you. This will save you a lot of time, hassle and money. A good car finance broker will give you independent advice and be able to answer any questions you have.
Get this research done before you waste time applying for a loan. When you or your broker are comparing options, always look at the total repayments rather than just the interest rate. Lender fees can add up over the loan term so these need to be accounted for.
Interest rates matter.
For example, If you borrow $40,000 over a 7 year loan term:
-at 3% interest you pay $44,397 in total.
-at 5% interest you pay $47,490 in total.
It obviously makes good financial sense to get the lowest rate that you can! Don’t pay any more to your lender than you have to.
Avoid dealer-arranged finance at all costs. Dealers usually have arrangements with finance companies that benefit them more than you. They also often include add-on insurance, optional accessories and warranties with their finance deals. All of these things will make the finance more expensive.
Business car loan requirements
Different lenders will have different requirements for approving a business car loan. All will have a maximum loan to value ratio (LVR) that they will be prepared to accept. The LVR is simply the amount you’re applying to borrow as a percentage of the value of the vehicle you want to buy. Often, the higher the LVR, the higher the interest rate that the lender will charge.
If you want to borrow the full value of your vehicle, your LVR will be 100%.
If you can come up with a deposit, your LVR will be less than 100%. For example, if you can come up with a deposit of $5,000 to buy a vehicle worth $50,000, your LVR will be 90%.
It’s important to understand that the LVR can be higher than the value of the vehicle. For example, if you also need to pay for dealer delivery and on-road costs like insurance and registration.
Some lenders will charge a loan establishment fee if your loan application is approved, while other lenders won’t. Similarly, some will charge ongoing fees, while others won’t. Make sure you understand any lender fees before you sign up for any car loan.
Business car loan application
The main thing is to show the lender that you can afford your repayments and that you’re a low credit risk. You can do this by:
If you can’t provide all of this information, don’t give up. You still might qualify for a ‘low doc’ or ‘no doc’ business car loan. ‘Low doc’ is an abbreviation for ‘low documentation’. ‘No doc’ is an abbreviation for no documentation. It’s important to understand that not all lenders offer ‘low doc’ or ‘no doc’ loans.
If you’re in this situation (or if you have a bad credit score), talk to a car finance broker before you do anything. They’ll know which lenders might approve your application. If you apply for finance and get rejected, it will negatively affect your credit score.
How we can help
If you’re looking to buy a new or used vehicle and you need finance, talk to us at Auto Car Loans. We’re finance brokers and we can make sure you get a great deal.
Don't use dealer-arranged finance or try to arrange a car loan yourself. If you do, you’ll probably end up paying a lot more. We arrange vehicle finance for a living. We work for our clients, not for lenders.
Call 1300 301 051 during business hours to speak with one of our expert brokers. We’ll be happy to discuss your needs and answer any questions you have.
DISCLAIMER : The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.