Buying a car with finance
Unless you are able to pay cash for a car you will need to borrow money to complete the purchase. This fact sheet explains some of the more common forms of credit that are available and what to watch for in making your choice.
First things first: do your financial homework
It is important to understand that borrowing money costs money. You pay interest, plus fees and charges. The exact cost will depend on the type of credit, who you borrow from and how long you take to pay it back.
The purchase price is not the only cost to consider. You also need to include the costs of registration and compulsory third party (personal injury) insurance. If you borrow to buy you almost certainly will be required to obtain comprehensive (damage, fire, theft) insurance.
Doing your financial homework will make it easier to resist sales pressure to buy something you can’t afford, or to accept finance that might be more expensive than you can get somewhere else.
Motor Dealers: know who you are dealing with
If you purchase your car from a motor dealer you may be offered credit to finance the purchase.
If you have done your financial homework you will be able to decide whether the credit being offered is the best for you.
A personal loan is the usual way to finance a car purchase. A personal loan can be secured or unsecured, with fixed or variable interest.
You can arrange a personal loan with a bank or credit union or sometimes through the motor dealer.
Secured Personal Loan
You may be asked to provide security for the loan. This will usually be the car you are buying, but may include other assets as well. If you provide an asset as security for the loan you give the credit provider the right to take (repossess) the asset if you default on the loan. The credit provide may not need to take you to court to take the asset. If the sale of the security does not pay out all that you owe you are still required to pay the shortfall.
Unsecured Personal Loan
The credit provider may offer you an unsecured personal loan if you are a good credit risk.
If you default on an unsecured personal loan the credit provider has no right to take the car that you bought with the borrowed money or any other assets without taking you to court.
Credit Code Protection
You If you decide to get a personal loan to finance your car the credit provider will have to comply with the National Consumer Credit Code (the Code) which provides important borrower safeguards.
you would be unable to meet the repayments or could meet the repayments but only with substantial hardship, or
the contract does not meet your requirements or objectives.
It is therefore important that you make a full disclosure of your financial position so that a proper assessment can be made. Failure to make a full disclosure may affect your rights under the Code.
Another important safeguard is the ability to apply for a variation on your loan should you encounter financial hardship.
If you are experiencing short term financial difficulty you may make an application to the lender to enter into a payment arrangement that could include such things as postponing your payments for some time or extending the term of your loan and reducing your payments. If you are having difficulty making your repayments you should contact your lender as soon as possible.
If your application to borrow money is successful and you decide to go ahead you will sign a ‘credit contract’. The credit contract must contain terms informing you about your loan agreement, such as the rate of interest you will pay and the rate of repayment.
A novated lease is a form of finance in which you ‘salary package’ lease payments on a car. You lease the car for your personal use and make the lease payments from your gross (pre-tax) income rather than your net or after-tax income.
It is important to note that you are leasing not buying the car and, like any rental agreement, you need to return the car at the end of the rental period.
How it works is that you find the car which is then bought by a fleet service company. You lease the car from the fleet service company and transfer (‘novate’) your contractual obligations for lease payments to your employer under the lease agreement. The lease payment can include the motor vehicle running expenses. Your employer then deducts the lease payments from your pre-tax salary and pays the fleet service company.
As part of the lease agreement you may guarantee a residual value for the car. This is sometimes referred to as a ‘balloon payment’. This is what you guarantee the car is worth at the end of the lease term.
If you have agreed a residual value then if at the end of the lease term the car is not worth that amount you may be liable for the difference. If you leave your employment the obligation to pay the lease payments will revert to you. You may be able to transfer the lease agreement to your new employer.
Importantly, you should note that the Code does not apply to novated leases. This means that safeguards such as the ability to apply for a hardship variation are not available.
The financial implications of a novated lease are complex and you should seek independent financial advice to help you to determine whether a novated lease is best for you.
Try to sort out any problems with the credit provider first. If you aren’t satisfied, take your complaint to your credit provider’s external dispute resolution provider. This will be wither the Financial Ombudsman Service (FOS) at www.fos.org.au or 1300 780 808 or the Credit Ombudsman Service Ltd (COSL) at www.cosl.com.au or 1800 138 422. These services are free. If you think that a credit provider has acted unlawfully or in a misleading way, you can complain to the Australian Securities Investment Commission (ASIC) online at www.asic.gov.au or call ASIC’s Infoline on 1300 300 630.
What happens if I miss any payments?
Can I get out of the contract early? What will it cost?
Are there any extra fees or charges and when are they payable?
Can I make extra repayments on the loan?
Who is your approved external dispute resolution provider (either FOS or COSL)?
Do your financial homework before you start looking. Use the budget planner and the Credit, Loans and Debt booklet at www.moneysmart.gov.au to see how much you can afford in repayments and to help choose the right credit product for you.
Don’t be rushed into signing a contract. You can take it away and read it in your own time.
Make sure you understand what you are signing. If you don’t understand, don’t sign!
Darwin Community Legal Service
Ph: 08 8982 1111
Australian Securities and Investments Commission
Ph: 1300 300 630
Financial Ombudsman Service (FOS)
Ph: 1300 780 808
Somerville Money Management
Financial counselling helpline
Freecall: 1800 007 007
Ph: 08 8944 2000
Ph: 08 8981 5994
Australian Red Cross
Ph: 08 8924 3946
Anglicare Financial Counselling
Ph: 08 8985 0000
Alice Springs Tangentyere Council Inc
Ph: 08 8953 5160
© Darwin Community Legal Service 2015: Non-profit community groups have permission to reproduce parts of this publication as long as the original meaning is retained, and proper credit is given to DCLS as the publisher.
Disclaimer: The information contained in this publication is a guide to the law in the Northern Territory. It is not a substitute for legal advice. You should talk to a lawyer about your particular legal issue. The information contained in this factsheet is current as at November 2014.