The complete guide to vehicle finance in Australia

Consumer finance versus commercial finance

The single biggest fork in the road is whether your finance is consumer or commercial, because it changes the products available, the protections you get, and how tax works. Finance is consumer when the vehicle is mainly for personal use, and it falls under the National Consumer Credit Protection Act (the NCCP Act). That means the lender and broker must assess the loan as suitable for you and unlikely to cause substantial hardship, and you receive disclosure and hardship protections.

Finance is commercial when the vehicle is used predominantly for business — generally more than half the time — and you have an ABN. Commercial finance sits outside the NCCP Act, which means fewer consumer protections but more structural flexibility and the ability to use the tax and GST treatments that businesses rely on. Neither is better in the abstract; the right one is simply the one that matches how you will use the vehicle.

The main products, and who owns the car

Most of the products differ along a single axis: who owns the vehicle during the term, and how GST and tax flow as a result.

A secured car loan is the standard consumer product. You own the car, the lender registers security over it, and you repay principal and interest over a fixed term. A chattel mortgage is its commercial cousin: you own the vehicle from day one, the lender takes a mortgage over it, and a GST-registered business typically claims the GST on the purchase up front and claims interest and depreciation over time.

A commercial hire purchase (CHP) flips ownership during the term — the lender owns the vehicle and hires it to you until the final payment transfers title. A finance lease also keeps the vehicle with the lender, who leases it to you; GST applies to the rentals and the payments are deductible. A novated lease is a three-way arrangement between you, your employer and a financier, where your employer makes the lease payments out of your salary package — it is an employee benefit rather than a standalone loan, and its value depends heavily on your personal tax position.

Interest rate versus comparison rate

On consumer loans you will see two rates. The interest rate is the cost of the money itself. The comparison rate bundles the interest rate together with most standard fees into a single figure, so you can compare loans on a more like-for-like basis. A loan with a low headline interest rate but heavy fees can have a much higher comparison rate — which is why comparing on the comparison rate, or better still on the total cost in dollars, beats reacting to the advertised rate.

On commercial finance, comparison rates are not required in the same way, so the discipline of looking at the total dollar cost matters even more. Two commercial offers with the same rate can cost very different amounts once fees and the balloon are accounted for.

Balloons and residuals

A balloon (or residual) is a lump sum left owing at the end of the term. It lowers your regular repayment because you finance a smaller balance over the term, but you still owe the balloon at the end and you pay more interest along the way, so the total cost rises. A balloon is a cash-flow tool, not a saving.

Used deliberately — by a business matching repayments to an asset's income, or a buyer who plans to trade or upgrade at the end of the term — a balloon is sensible. Used without a plan to clear the lump sum, it is risky: you may be forced to refinance at whatever rate is available then, or discover the vehicle is worth less than the balloon. Lenders cap the balloon based on the term and the asset's age, because an older asset will be worth less at the end.

Fees to watch

Fees are where a cheap-looking loan can quietly become expensive. The usual suspects are an establishment or application fee charged up front, a monthly or account-keeping fee that adds up over the term, an origination fee, and a private-sale fee if you are buying from a person rather than a dealer. Some loans also carry an early termination fee if you pay out a fixed-rate contract early.

None of these are necessarily unreasonable, but they have to be counted. A loan with a slightly higher rate and no monthly fee can easily beat a lower-rate loan that charges a monthly fee for five years. The only way to know is to compare the total dollar cost, which is exactly how we rank the lender panel.

New versus used, and the age trap

Lenders price newer vehicles more sharply because they are easier to value and hold their worth better as security. Used vehicles are readily financed, but the rate steps up with age, and there is a trap worth knowing: many lenders cap the vehicle's age at the end of the term, not the start. A seven-year loan on a five-year-old car can fall outside a lender's policy even though the car is perfectly fine today. Matching the term and the vehicle's age to a lender whose rules allow it is part of getting the deal approved cleanly.

How to apply without hurting your credit file

Every formal application to a lender leaves a credit enquiry on your file, and a cluster of enquiries in a short space looks like distress to the next lender. The way to avoid that is to compare your options before you apply — work out which lender actually fits your profile and the vehicle, then lodge a single application to that lender. Getting an indicative quote and comparing lenders does not involve a credit enquiry, so it costs your file nothing.

This is the core of what a broker does: hold the lender panel and their current policies, match you to the right lender first, and lodge one well-targeted application rather than several hopeful ones. The result is usually a better rate and a cleaner credit file.

A simple checklist before you sign

• Is this loan consumer or commercial, and is that the right fit for how I will use the vehicle?
• What is the total dollar cost over the full term, including all fees and any balloon?
• If there is a balloon, what is my plan to pay, refinance or trade out of it?
• Is the vehicle within the lender's age rule at the end of the term, not just the start?
• Are there early-payout costs if my circumstances change?
• Have I compared more than one lender before lodging an application?