Purchasing a new or used vehicle is a large investment and depending on your financial situation you can either pay for it outright in cash or obtain finance through a lender.
Every year Australians access billions of dollars in finance for their car purchases with 90% of all vehicle sales arranged through finance and the average car loan size in 2020 being $31,738.40. With obtaining finance being the clear preferred option for Aussies that’s not to say paying cash doesn’t have its pros and cons. This includes a simpler process and greater flexibility over ownership but also comes with drawbacks such as limited vehicle choice (due to budget restraints) and depleted savings for other investments (or emergencies).
So which is right for your unique situation, pay for a car with cash or obtain finance? We’re here to help, so let’s delve into the six key benefits of buying a car on finance to assist you in your decision-making process.
6 Benefits Of Buying A Car On Finance
1. You can borrow the full amount of the car’s purchase price
If you need a car quickly, a vehicle loan means that you don’t have to wait until you’ve saved all or even part of the money. If the monthly finance repayment is manageable, then car finance is a good option. You can also reduce your monthly repayments by extending your loan term (although this does mean that you’ll end up paying more over the life of the loan). You can drive off in your new car within the time it takes to obtain finance pre-approval and the dealer to prepare your vehicle.
2. Expanded choice of vehicles
You may be tempted to purchase a used vehicle simply to avoid having to take out a loan. But in the long run, this isn’t always the most cost-effective option. Used cars tend to break down more often, sometimes requiring costly repairs and more frequent maintenance.
A car loan can help you buy a more expensive vehicle than you might not be able to afford upfront with cash or even a brand new car that is far less likely to require costly services/repairs. Not to mention, many newer cars, in particular with electric/hybrid technology can lead to large fuel savings over the long-term.
3. Car finance can be tax deductible
Vehicle-related expenses account for roughly 40% of all work-related tax deductions and if you purchase a new car with finance this comes with additional perks. For example with a chattel mortgage, you may be able to claim the interest payments as a tax deduction. Similarly with a finance lease option tax deductions are available for the lease rental payments.
In addition to this you may be eligible for the Australian Federal Government’s instant asset write-off scheme, which applies to both new and second-hand equipment under $150,000 and allows you to claim an immediate deduction for the business portion of the asset.
You can read more about the various car finance options available and the tax implications of each in our blogs, ‘A Quick Guide On The Most Tax Effective Way To Buy A Car' and 'Buying A Vehicle For Your Small Business - 4 Important Things To Consider'.
4. It helps you establish a positive credit rating
When you borrow money for any circumstance, including a car loan, the lender will check your credit history. A successful loan application and responsibly paying back the money borrowed over the loan term demonstrates to lenders that you’re relatively low risk and can improve your likelihood of being approved for credit in the future at a better rate.
This is more apparent in recent times with comprehensive credit reporting rolled out nationally. Previously, your credit report only showed your ‘bad’ credit behaviour such as defaults and other credit infringements and bankruptcies. Today’s lenders look at your comprehensive credit report that also includes positive information like your repayment history. So if your credit report or credit history shows that you manage your debt well, (e.g. with a successfully repaid car loan) it can assist in building your credit rating. This is particularly helpful for those with thin credit files (young people or those still living at home) or those with a damaged credit history.
Improving your credit rating means that it will be easier to get approved for future loans, whether that’s for a car or a house, and often at a lower interest rate.
5. Benefit from market competition
Another advantage of obtaining car finance is that there are numerous lenders in the market, each vying for your business. Whereas it can sometimes be difficult to source a small business or personal loan, car finance leasing or business car loans are a much more competitive industry and allows you to obtain a loan with interest rates and loan terms that work for your particular financial situation. If you’d like to find out more on the various lenders in the market and options available you can check out our lenders overview page here.
Driva works with a panel of over 30 lenders to give you as many options as possible and ensure that you’re getting the most competitive interest rate and loan conditions that you can! When pricing your loan there are a number of factors that they’ll consider. The main one is usually your credit score (the higher your score, the lower the interest rate you’ll be able to access), but many lenders also consider factors like your employment status, the type of car you’re looking to buy and your living situation.
6. Frees up business cash flow
If you’re purchasing a vehicle for your business another benefit of obtaining car finance is it can help you maintain much needed liquidity, especially if you’re just starting out. Most business owners face significant cash flow problems whilst starting up, and these limitations can make it very difficult to purchase a car outright with a lump sum cash payment. By choosing to apply for a business car loan, you can enjoy the benefits that come with owning a car whilst simultaneously spreading out the cost of that vehicle over several years.
If you’re buying a car for business purposes, there are a number of finance options available to you. One of these is a hire purchase agreement, which is where you pay the car off in installments, and by the end of the repayment period you’ll have total ownership of the car. Generally, you’ll make an initial deposit payment which is then followed by regular, often fixed monthly payments.
Another popular option is a chattel mortgage which works in a very similar way to a fixed-rate traditional mortgage, so your car will be used as security against the loan.
Learn more: Hire Purchase vs Lease - Which Is Right For You?
Got more questions?
What are the advantages of financing a car?
You can borrow 100% of the purchase price (without waiting to save all or even part of the money), expanded choice of vehicles, tax benefits, helps to establish a positive credit rating and free up business cash flow.
Is it worth buying a car on finance?
Buying a car on finance is a great way to purchase a car immediately, even if you don’t have all (or even part!) of the money saved up to do so. You’ll have an expanded choice of vehicles and be able to experience all of the benefits of market competition with so many lenders out there.
Is buying a car on finance good for credit?
If you buy a car on finance and meet all of your repayment obligations, by making your monthly payments in full and on time, this will improve your credit rating. An improved credit rating makes it easier to obtain finance in the future, whether that’s for a house or another car.
Buying a car is incredibly exciting, but it can also be very expensive! If you don’t have the cash on hand to buy a vehicle outright, there are a number of car finance options available to you (and a number of benefits that come with them!). From hire purchase to personal loan, we have the perfect finance option for a wide range of personal and financial requirements and are excited to help you purchase your dream car!