Driving Home A Bargain
Personal Investment
Friday November 1, 1996
Emotion may drive a lot of luxury car buying decisions, but finance is the fuel that gets the deal on the road. Robin Bowerman reports on your options
Car buyers in Australia are now being offered a greater range of finance options than ever before, but the changes to luxury car financing in August's federal budget has made the financing decision for cars above the $55,134 depreciation limit even more complex.
A number of fundamental factors are now at work in the car financing market. In a low interest rate/low inflation environment, there is a much stronger argument for not owning a car - it is, after all, a depreciating asset - and as a result car companies are pushing hard the concept of individuals leasing cars with the option of giving them back at the end of the lease, changing into a new car after two years or buying the car at an agreed value. This of course challenges the traditional Australian sense of ownership.
Ford Credit's Red Carpet Options is acknowledged as leading the marketing charge. It is beginning to have a significant impact on the market thanks to a long-term training program that Ford Credit provides to participating dealers.
GM and major finance companies like Esanda and AGC offer similar products although with the independent finance companies you are not necessarily locked into the one brand.
"Our heritage has been 'thou shalt own'. I think that is changing and we are move more towards the US market where these type of products are common," Robinson says.
Esanda, the largest vehicle financier in Australia, moved into this market earlier this year. While Esanda's national general manager, dealer finance, Bob Maughan, believes the acceptance in the market of these products has a long way to go, Esanda now gives private buyers the option of:
* Making an upfront payment plus fixed monthly payments and at the end of the term - usually two or three years - swapping it for a new car, giving it back and walking away or buying the car at the price agreed when the contract was signed.
* Paying half the price of the car upfront with no monthly payments during the term and at the end either buy it, swap it or walk away.
* Paying half upfront and then build equity in the car by making monthly payments.
While the flexibility offered is a positive, the products are, by their nature, complex. Some have fees ($400 in one case) for handing the car back, all have penalties if the car exceeds the agreed kilometres and most require the next year's registration to be paid.
Leading Melbourne finance broker Michael Pratt says these types of packages are extremely popular in the US and expects other car companies to offer them.
Novated leases - essentially a three-party agreement between employer, employee and financier - are also worth considering where a total cost salary package is being structured.
There is no doubt that car companies are getting more hands-on in the finance business in Australia. BMW Australia led the way for the luxury importers when it established BMW Finance, but now Volvo, Mercedes-Benz, Toyota and Honda have all either established their own stand-alone operation or setup joint ventures with finance companies.
By controlling the financing, car companies also get more flexibility when providing discounts or incentives on specific models without having to drop prices and risk knocking down resale values. And with the increased competitiveness of the car sales market, financing offers a new revenue source. But it also provides them with the chance to "lock in" customers for multiple purchases and encourages buyers to change cars more frequently. General Motors' subsidiary in the UK, Vauxhall, financed 100,000 cars in the past two years.
Tony Robinson at Glass's Guide, the independent source of car resale values, sees a strong positive in the trend, particularly if it reduces the average age of cars on our roads. At the moment, this stands at 10.6 years.
For luxury cars, the news is not good. The impact of the Federal Government's changes to financing cars above the depreciation limit is now becoming clearer, with some people being up to $10,000 a year worse off on a $150,000 car.
The government's changes effectively closed a loophole and means that the amount financed above the $55,134 depreciation limit will be treated as a loan transaction between the lessor and lessee, so no tax deduction for depreciation will apply.
People on fixed salary packages who lease cars in the $90,000 to $150,000 range are likely to be the worst affected, according to Melbourne broker Michael Pratt, with companies looking to recover the extra costs by deducting it from the cash components of salary packages.
Pratt says there are two clear implications from the budget changes: commercial hire purchase is now clearly preferable to leasing for cars above the depreciation limit and that there is a threshold of pain around the $80,000 to $85,000 level.
"For cars that cost up to $85,000 the impact should be minimal, provided it is structured correctly. Over that, and the costs under the new rules just get worse," Pratt says. "For example take a car that costs $150,000 and is leased for four years with a 50 per cent residual. Under a pre-budget lease agreement, monthly payments would have been $2520 per month compared to $2460 on a commercial hire purchase contract today.
"At the end of two years the maximum tax deduction available would have been $60,480. Under the new rules, the maximum claim using a hire purchase contract is $43,523 - or $8478 less a year." Pratt believes a lot of people who have leased their car as part of their salary package and opted to use the statutory method of calculating fringe benefits tax rather than take the trouble to fill out a log book will now have to reconsider their approach.
Harley Cremer, managing director of Finance Finder, also believes that finance companies which have been arguing that the Federal Government changes will have minimal impact are not telling the full story. Cremer, whose company provides specialised software for accountants and their clients, prepared discounted cash flow charts for two cars - a Holden Caprice ($63,970) and a Mercedes-Benz E320 ($117,000). Two calculations were done for each car - a lease under pre-budget rules and a hire purchase under the new rules. Both assume full business use for the vehicles.
Cremer says this type of calculation identifies the real change to the cost of financing the vehicles although your own level of business usage and personal tax situation will have a significant impact on calculations like these. In our case studies, the Caprice cost $1323 more over a four year period and the E320 $11,166. On a yearly basis, the Caprice cost $330 more a year and the E320 $2791.
Clearly cars up to around $80,000 will be marginally affected and there is even a chance that by switching to a log book you could save money. However, once you are looking at cars or more then $100,000, the impact of the changes becomes significant and some careful salary packaging calculations need to be done.
Best lease rates
Lender Interest
rate %
Suncorp 8.90
Sanwa 8.90
Capital Commercial 8.95
Bank SA 8.95
St George 8.95
Metway 9.00
GIO 9.15
BWA 9.35
ORIX 9.40
Textron Financial 9.70
Lease vs hire purchase - Mercedes-Benz E320 Classic
Loan type: Lease Total value: $117,000.00 Term (mths): 48
Monthly rate: 9.100% Effective rate: 9.489% Nominal rate: 9.100%
Initial payment: Residual value: $46,800.00
Monthly payment: $2106 (Incl stamp duty: $16,992)
Paid in advance
Start date: 2/10//96 Fin year end: June 30 Borrowing cost:
$30,899.52
Tax rate: 36.00% Business usage: Full Deductibles:
Discount rate: 6.00% NPV: $58,710
Note: The goods are assumed to be sold at the residual value on the day this
value is paid.
Payments Tax saving Net cash flow Discount
cash flow
Grand totals $101,088 $36,391 $64,697 $58,710
Loan type: Hire purchase Total value: $117,000.00 Term (mths):
48
Monthly rate: 9.100% Effective rate: 9.489% Nominal rate: 9.100%
Initial payment: Balloon: $46,800.00
Monthly payment: $2106 Paid in advance
Start date: 2/10//96 Fin year end: June 30 Borrowing cost:
$30,899.52
Tax rate: 36.00% Business usage: Full Deductibles:
Deprec rate: 22.50% Deprec method: Declining value Lux vehicle limit:
$55,134.00
Discount rate: 6.00% NPV: $69,876
Note: The goods are assumed to be sold at the balloon value on the day this
value is paid.
Payments Interest Depreciation Tax saving
Net cash flow Discount cash flow
Grand totals $101,088 $30,899 $33,080 $23,033
$78,055 $69,876
Lease vs hire purchase - Holden Caprice
Loan type: Lease Total value: $63,970.00 Term (mths): 48
Monthly rate: 9.100% Effective rate: 9.489% Nominal rate: 9.100%
Initial payment: Residual value: $25,588.00
Monthly payment: $1152 (Incl stamp duty: $9.25) Paid in
advance
Start date: 2/10//96 Fin year end: June 30 Borrowing cost:
$16,894.32
Tax rate: 36.00% Business usage: Full Deductibles:
Discount rate: 6.00% NPV: $32,113
Note: The goods are assumed to be sold at the residual value on the day this
value is paid.
Payments Tax saving Net cash flow Discount cash flow
Grand totals $55,296 $19,907 $35,389 $32,113
Loan type: Hire purchase Total value: $63,970.00 Term (mths):
48
Monthly rate: 9.100% Effective rate: 9.489% Nominal rate: 9.100%
Initial payment: Balloon: $25,588.00
Monthly payment: $1152 Paid in advance
Start date: 2/10//96 Fin year end: June 30 Borrowing cost:
$16,894.32
Tax rate: 36.00% Business usage: Full Deductibles:
Deprec rate: 22.50% Deprec method: Declining value Lux vehicle limit:
$55,134.00
Discount rate: 6.00% NPV: $33,436
Note: The goods are assumed to be sold at the balloon value on the day this
value is paid.
Payments Interest Depreciation Tax saving Net cash
flow Discount cash flow
Grand totals $55,296 $16,893 $33,080 $17,991 $36,309
$33,436
© 1996 Personal Investment