Alternative Ways to Buy

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Alternative Ways to Buy

There’s lots of choice when it comes to buying and financing your purchase. In this section we look at the different options available:

Borrowing vs Cash – We all know that borrowing is going to cost you money but can the benefits outweigh the costs for you?

Lease vs Loan – If you’re financing is a lease or a loan the best way to go for you?

Banks vs Finance Brokers – What’s the best way to organise your finance?

Using your mortgage or credit card as a way of financing your car or another asset – Is your mortgage or credit card a smart way to finance your next big purchase?

0% and Low Rate Finance – Is it all its cracked up to be?

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Borrowing vs Cash

We all know that borrowing is going to cost you money but can the benefits outweigh the costs for you?

Benefits of Borrowing

Buy now & use now – Borrowing can enable you to have the asset that you want or need now and have all the usage benefits instead of having to wait to save to accumulate enough cash to purchase outright.
Buy at today prices – Borrowing enables you to buy at today’s prices. If you need to save for a period of time prices may go up with inflation which would mean you having to pay more.
Potential additional protection – There can be additional protection available if you use finance that uses the asset as security. If you have issues with the quality of the asset you may be able to get some assistance from the lender in the event of a dispute with the supplier.
Don’t lose investments returns – If you use your own cash then you need to consider the return that you lose when you withdraw your cash from where it’s invested and use it to buy an asset. Often the interest you pay compared to the compound interest that you’d generate by keeping the cash invested is minimal.
Potential tax benefits* – If you are using the asset for business purposes there are various tax benefits potentially available to you in relation to the interest charges that you pay.
Shop like a cash buyer – With pre-approved finance you can shop around for the best deal with your money already pre-arranged.

Benefits of Cash

No interest or fees – When you use your own cash there’s $0 interest or fees to pay.
Complete ownership – Unlike with some types of finance where ownership of the asset is transferred to you after the final payment is made and where there is the possibility of repossession if you miss payments when you buy with cash the asset is yours from day one.
Easy re-sale – If you want to sell the asset it’s a simple process as you don’t need to worry about having to organise for any outstanding finance to be paid out.
Strong negotiating position – With your funds already in place you’re in a position to buy immediately which can put you in a strong bargaining position with the seller.

Lease vs Loan

If you’re financing is a lease or a loan the best way to go for you?

Benefits of leases

Low repayments – By financing the GST exclusive price and including a residual value (balloon payment) and offsetting an amount until the end of the lease this reduces your repayment and frees up more cash.
Change more often – By making repayments on a lower amount leasing can give you the option of a shorter term and changing your asset more often.
Low capital outlay – You can get the asset that you want with zero or minimal outlay, so any capital that you do have can be used for other things.
Potential tax benefits* – If you are using the asset for business purposes there are various tax benefits potentially available to you in relation to the lease payments that you pay.
Effective budgeting – With a maintained lease you can opt to include all scheduled servicing and maintenance costs, such as repairs, registration renewal and tyres in your lease, which can assist you to budget costs more effectively.
Pay from pre-tax income – With a novated lease you can pay your lease and maintenance costs out of your pre-tax income.

Benefits of loans

Equity – Loans can be much more effective for building equity, which means that once it is fully paid you have value in the asset.
Additional payments – Generally, loans give you more flexibility to make additional payments and pay off early.
Multi-purpose – With an unsecured loan you can use the loan amount for more than one purpose.
Financing minus equity – if you are trading in an asset which is financed and you owe more on the outstanding loan than the asset is worth you may be able to include this minus equity amount in with the loan for the asset that you’re buying.
Potential tax benefits* – If you are using the asset for business purposes there are various tax benefits potentially available to you in relation to the interest charges that you pay.

For more information on the different types of leases and loans click here.

Banks v Finance Brokers

What’s the best way to organise your finance?

Benefits of Banks

Deal direct – When organising your loan or lease through a bank you are dealing directly with the lender.
Relationship – If you have other dealings with the bank you may be able to leverage this relationship to negotiate a better deal.
Trust factor – We all know who they are and where they are and most have been around forever so they’ve got our trust.

Benefits of Finance Brokers

Someone in your corner – Brokers are not lenders, they act as an intermediary between you and the banks and finance companies to help you find the best deal.
Choice – Access a range of different banks and finance companies through one point of contact.
Buying power –Benefit from the buying power that Brokers gain with lenders by putting large volumes of business through them.
Tailored solutions – Work with experts and utilise their industry knowledge to get personalised options based on your individual circumstances.
Application assistance – Brokers can take you through the application process step by step as they know what is needed and who the best lenders are for your situation.
Specialist lenders – Get options from specialist lenders who only operate through brokers and do not market themselves direct to customers.

For more information on the main players in the Australian finance industry click here.

Using your mortgage or credit card as a way of financing your car or another asset

Is your mortgage or credit card a smart way to finance your next big purchase?

Using your mortgage

If you have equity in your home or if you’re ahead on your home loan repayments you might be considering a redraw or refinance to cover the cost of your car, motorbike or boat, for example. Before you do anything it’s worth weighing up the pros and cons?

Pros

Low rates – Mortgage rates are generally lower so that can be a potential money saver for you.
Affordability – As mortgages normally run over a 20 to 30 year term the monthly outlay can be reduced as the cost is spread over a long term.
Convenience – By rolling your asset purchase in with your mortgage you can have just one repayment coming out of your bank account.
Possible better deal – By refinancing you may be able to switch to a better deal than was available when you originally took out your mortgage.

Cons

Total interest payable – Lower repayments can be achieved through financing over a longer term but with a longer term comes more interest.
Reduction in equity – Redrawing or refinancing your mortgage will eat into the equity that you have built in your home.
Speed – Whilst an application to finance an asset such as a car can be approved and organised within hours a redraw or refinance can take days or even longer to be finalised.
Fees – You may incur fees for redrawing or refinancing.
Variable interest rate – With fixed rate terms limited to relatively short periods on mortgages the likelihood is that using your mortgage will result in you paying a variable rate of interest, which means your repayments can vary in line with changes to the lending rates. Most car and asset loans are based on fixed rate loans and fixed repayments. So you have the same amount to budget for the term of the loan.
Buying again – If you’ve already used your mortgage to finance a purchase once what do you do when you want to change or upgrade? If you do it again it could result in you paying for something that you no longer own.

Using your credit card

Does it make sense to use your credit card to buy that big ticket item that you’ve been thinking about? Consider the pros and cons of using your credit card to purchase your car, ute or jet ski, for example.

Pros

No application – If you have a credit card already with a credit limit in place you don’t need to apply for finance.
Shop like a cash buyer – With your credit card in place you can shop around for the best deal with your access to money already organised.
Low rate offers – If you have a low rate offer on your credit card it can reduce your interest repayments.
Small loans – Most lenders have a minimum loan amount of $5,000 to $10,000, so if you’re looking to borrow a relatively small amount then a credit card could be a good option for you.
Reward points – If your credit card account pays you reward points for purchases made using the card you could benefit when making a big purchase.

Cons

Larger purchases – Credit cards can be unsuitable for larger purchases as the amount required could well be higher than your limit on the card.
Interest rate – The interest rate on your credit card is usually higher than the rate that you could get on a loan or a lease. The rate on your credit card is also variable so is subject to change.
Minimum repayment – If you only make the minimum repayment, which is normally set at 3% of the outstanding balance, you could be paying off the credit card for a very long time!
Surcharges – The retailer has to pay a fee if you make a purchase using a credit card. For lower value purchases retailers normally absorb this amount but when the purchases get in to the thousands they often pass the surcharge on to you. Depending on the type of card the surcharge fee can be from 1.5% to 3% of the total purchase. For example, on a $20,000 purchase the fee that you have to pay could be up to $600.
Cash advance fees – Using your credit card to withdraw cash from your credit account will result in cash advance fees which are charged at a similar rate to surcharges.
Higher interest rates for cash advances – Some credit cards charge a higher rate for cash advances than they do for purchases, which makes borrowing using your credit card even more expensive.
Using up your credit limit – Using your credit card to make a large purchase could use up your entire limit. If that’s the case you need to ask yourself can you cope without having access to a credit card.
Balance transfer offers – If you decide to take advantage of a credit card balance transfer offer be aware that the attractive low rate only applies to amounts being transferred from other credit cards and is generally only for a limited period, normally 6 to 12 months.

0% and Low Rate Finance

Check the terms and conditions – We sometimes see this being offered on new assets such as cars. It can look like a great deal but always check the terms and conditions. To qualify you may require a large deposit or the offer may only be available over a short term which could make the repayments too high to be affordable.

Who’s paying for it? – Also, you’ve got to ask how is the below market rate finance being paid for. Effectively the retailer pays the bank or finance company the interest on the buyer’s behalf and then the price that is being charged for the asset is inflated to cover these financing costs. So while you may be getting a great deal on the loan you may be paying over the odds for the asset.

Marketing budget – When it comes to big ticket items such as cars, boats, motorbikes etc. manufacturers and retailers are constantly trying different ways to market their products in an attempt to make them stand out from their competition. They can use their allocated marketing budget in various different ways. Sometimes we see it used as a discount off the recommended retail price, other times it is used as a free fuel or free servicing offer, and at other times we see it being used to cover the cost of 0% or low rate finance.

*We strongly recommend that you consult your accountant or tax advisor to confirm the tax benefits available to you prior to entering into any finance agreement. The information provided is for product description purposes and is not intended to be used as taxation, financial or legal advice.