Many shoppers for finance these days are enticed to buy with an offer of less than 3% interest but does it really exist?
Does less than 3% car finance really exist? The direct answer to that question is simply NO!
You’re already thinking I have got you into this article under false pretences of offering less than 1% and then in the first line you have said NO!! What the…..?
I am not saying you can’t reduce the interest you are paying to less than 1%, I am only saying that a real interest rate of less than 3% on vehicles does not exist at this time. It’s like saying the tax you are expected to pay to the ATO is 25% or more but there are ways to reduce the amount of tax you pay.
The 0-3% Numbers Trick
First, let me explain how a vehicle manufacturer can offer 0-3% interest. It is called subvention and it can only be offered when the vehicle manufacturer is attached to a finance company. As an example, BMW can’t offer 1% interest on a Hyundai but they can on a BMW.
The reason for that is that someone has to pay the difference in interest, money is not actually lent at that rate. So BMW the car company wants to move some cars they find difficult to sell, or just want to have a sale that sounds different to a discount. The car company pays the finance company the difference in the interest and you the customer do not get the discount on the car, but you do get the discount on the finance and there can be conditions…read the fine print.
I am not saying that this can’t be good value, because it can if you really want the car they want you to buy and you really need to finance it.
The problem for the sales industry that is created is that the client then thinks that 0-3% is a real interest rate and they sometimes expect it on top of a vehicle discount and for any vehicle.
So how do we get to less than 1%?
No tricks here and you can do it on almost all cars and from a number of finance companies.
There is however a couple of requirements:
1. You are fulltime employed and paying tax through your employer
2. Your employer agrees to split your pay
a. To make your car payment direct
b. To pay the balance to you
The term used most commonly for this method of payment is Salary Packaging or Novated Lease. Immediately allot of people will think…’ that rules me out! I can’t salary package!’
What is not commonly known is that anyone who is fulltime employed and paying tax through their employer can have a novated lease or can salary package a car….anyone!
True, some salary packagers won’t deal with you if your employer is small to medium size business but there are plenty who do these days.
How does it work?
1. For maximum benefit and to lower your interest cost impact, bundle your running expenses with your vehicle finance payment (called fully serviced lease) – the more you include the more tax you save generally and you have to pay these expenses anyway.
2. When your employer makes your car and operating budget payment for you they can pay a portion pre-tax and this lowers your taxable income, lowering the amount of tax you pay. The salary packaging company works this all out for them and if they do it properly there is no FBT for your or the employer.
3. Your tax saving can be quite significant even on a smaller wage and smaller car. This saving is offset against your interest as follows:
(Car finance monthly payment) TIMES (Number of months (term)) PLUS (residual (balloon)) LESS (Tax saving over term) LESS (original cost of vehicle) EQUALS (THE NEW INTEREST YOU HAVE PAID FOR THE ENTIRE TERM)
In most cases this will equal 3-4% for an entire term and less than 1% per year but sometimes it can be even less and many times I have done the calculation and the client has paid less in the end (negative interest).
How do YOU get it?
Contact a Salary Packager with your vehicle price – or get them to get a vehicle price (but make sure you do both to compare), and get them to give you a quote showing all of the above elements of the equation.
They will be more than happy (if they deal with small employers) to show your employer how easy and obligation-free it is for them as well.
It is real and it is available to all employees paying tax each payday and I have never seen a cheaper way to finance a vehicle.
