How to Save Money on Car Finance

Business car finance is a vital resource for companies of all sizes, offering the necessary funds to acquire vehicles for various operational needs. Similar to other forms of financing, business car loans entail various costs such as interest, fees, and related charges. Although these expenses are an inherent part of acquiring a vehicle through finance, there are strategies to effectively reduce them, thereby aiding businesses in conserving financial resources and enhancing their fiscal well-being.

This guide delves into the key strategies for getting the best value out of business car finance. It includes practical tips on selecting the most suitable finance option, effectively managing repayments, minimising interest costs, and tax optimisation.

1. Talk to an Expert

Business car finance, with their myriad of rates, terms and conditions and complex structures, can be daunting for even the most astute business owners. Particularly those who are time poor, and can't spend hours digging through different fine print.

A Finance Broker, equipped with a deep understanding of the financial market and a keen eye for detail, can offer personalised advice tailored to your specific business needs and financial situation. They possess the acumen to compare various finance options, identify hidden fees, and negotiate better terms, potentially leading to significant cost savings.

Their expertise in understanding your business's unique financial health can guide you in choosing car finance that not only meets your immediate needs but also aligns with your long-term financial goals.

If you want to save time and money, chat to one of our Emu Money Brokers, who can help you compare over 100+ products from over 50+ lenders in just a few minutes. Simply complete the get started form, and someone will be in contact with you shortly.

2. Consider the Right Product for Your Needs

There are several types of car finance in Australia that can benefit businesses in different ways. Whether you want to own the car outright, lease or rent it, you have many choices to consider. Each of these loan types has its unique features, advantages, and potential disadvantages. Selecting the wrong product may result in higher costs, or may be less tax efficient for your business, so it's essential to understand the nuances of each option to choose the most suitable one.

3. Consider if a Balloon Payment is Right for You

When calculating your repayments, you should carefully evaluate the suitability of a balloon payment, a large final payment due at the end of the loan term. The allure of a balloon payment lies in its ability to reduce monthly repayment amounts, making it an attractive option for businesses seeking to manage their short-term cash flow more effectively.

By deferring a significant portion of the loan to the end of the term, businesses can free up capital for immediate operational needs or investments. This can be particularly beneficial for companies that anticipate higher revenue in the future or those that prefer to allocate funds to other growth-driving activities in the short term.

However, opting for a balloon payment also entails certain risks and considerations. The most notable is the large sum that becomes due at the end of the loan period, which requires careful financial planning and budgeting. Businesses must ensure they have a strategy in place to manage this lump sum payment, whether it's through future cash reserves, refinancing options, or the sale of the vehicle.

Additionally, a balloon payment structure may lead to paying more in total interest over the life of the loan compared to a traditional loan without a balloon payment. Therefore, it's important for to weigh the immediate cash flow benefits against the long-term financial implications and ensure that the decision aligns with their overall financial strategy and capabilities.

Here's an example of the difference in repayments on car finance, with and without a balloon (residual) payment. Although a balloon payment could make the car more affordable in the short term, you would pay an additional $1,832 in interest:

	with Balloon	without Balloon
Purchase price	$50,000	$50,000
Loan term	5	5
Interest rate	7.99%	7.99%
Repayment frequency	Monthly	Monthly
Balloon (Residual payment)	20%	0%
Monthly repayments	$877	$1,014
Total repayments	$52,647	$60,815
Remaining debt	$10,000	$-
Total interest paid	$12,647	$10,815

4. Pay a Deposit

Another great way to reduce your borrowing costs is to consider paying a deposit. A substantial upfront payment can significantly reduce the borrowed amount, leading to lower monthly repayments and potentially less interest paid over the life of the loan. This immediate equity in the vehicle also reduces the lender's risk, which might result in more favourable loan terms or interest rates.

Additionally, a deposit can offset the rapid depreciation that new vehicles typically experience, helping to avoid a scenario where the car is worth less than the outstanding loan balance (negative equity). For businesses with available capital, paying a deposit is a strategic move that can enhance financial flexibility, reduce long-term debt obligations, and align the financing more closely with the business's overall fiscal management and budgeting strategies.

Here's an example of the difference in repayments on car finance, with and without a deposit. Using a deposit could save you $2,163 in interest, over the lifetime of the loan:

	with Deposit	without Deposit
Purchase price	$50,000	$50,000
Loan term	5	5
Interest rate	7.99%	7.99%
Repayment frequency	Monthly	Monthly
Deposit	20%	0%
Monthly repayments	$811	$1,014
Total repayments	$48,652	$60,815
Total interest paid	$12,647	$10,815

5. Manage Your Credit Score

A strong credit score is a pivotal factor in the car finance application process, acting as a testament to your financial responsibility and creditworthiness. Lenders heavily rely on this score to assess the risk involved in lending to your business. A higher credit score not only increases your chances of loan approval but also positions you to secure more favourable loan terms, such as lower interest rates and better repayment schedules.

Essentially, a good credit score reflects a history of timely payments and responsible credit management, which reassures lenders that the risk of default is minimal. In contrast, a lower score can result from late payments, high credit utilisation, or a lack of credit history, making lenders wary and potentially leading to higher interest rates or outright loan denial.

Improving your credit score before applying for car finance can be a good move, especially if you are planning ahead. Start by regularly reviewing your credit reports to ensure accuracy and promptly address any errors or discrepancies. Consistently paying your bills on time is crucial, as payment history is a significant component of your credit score.

If possible, reduce your credit utilisation ratio, which is the amount of credit you're using compared to your available credit limit. Building a strong credit history takes time, so it's advisable to start these practices well in advance of applying for a loan. By proactively managing your credit score, you enhance your financial profile, paving the way for more favourable loan terms and a smoother financing process.

6. Manage Your Cash Flow

Effective cash flow management is a critical aspect that lenders scrutinise when evaluating a car finance application. Lenders delve into your business's cash flow trends to gauge its financial health and sustainability. Steady or growing cash flow is often seen as a sign of a robust, well-managed business, indicating a consistent ability to generate revenue and meet financial obligations. This positive trend can significantly bolster your loan application, as it suggests a lower risk of default from the lender's perspective.

On the other hand, if your cash flow records exhibit sudden gaps, erratic patterns, or downward trends, it can raise red flags for lenders. These patterns may be interpreted as signs of financial instability or poor financial management, potentially leading to concerns about your business's ability to repay the loan. Therefore, demonstrating a stable or upward trend in cash flow can be a key factor in not only securing a loan but also obtaining favourable terms.

To manage your cash flow effectively, it's essential to implement robust financial planning and monitoring. Regularly analyse your business's cash flow statements to identify trends, potential shortfalls, or areas for improvement. Strategies such as optimising your accounts receivables, managing inventory efficiently, and controlling overhead costs can help maintain a healthy cash flow.

Additionally, preparing for seasonal fluctuations or unexpected expenses by setting aside reserves can demonstrate financial prudence to lenders. Prior to applying for a loan, consider presenting a clear, well-documented cash flow forecast that showcases your business's financial trajectory and stability. This proactive approach not only aids in securing financing but also plays a vital role in the overall financial health and growth potential of your business.

7. Reduce Your Loan Term

One key factor to consider when trying to minimise costs is the loan term. Typically, a shorter loan term means higher repayment instalments but less interest paid over the life of the loan. For businesses with consistent cash flow that can handle larger repayments, opting for a shorter term can lead to significant savings in interest costs.

Conversely, a longer loan term often results in smaller, more manageable repayment instalments, which might be preferable for businesses wanting to maintain liquidity. However, it's essential to note that, over time, the total interest accrued on a longer-term loan can be considerably higher. Thus, while longer terms provide immediate relief in terms of cash flow, they might lead to higher overall costs in the long run.

Here's an example of how you could save $8,624 by picking a 12 month term over a 60 month term, on a $50,000 loan with a 7.99% interest rate:

Term	Repayment Amount	Total Amount to Repay
12 months	$4,349	$52,190
24 months	$2,261	$54,267
36 months	$1,566	$56,397
48 months	$1,220	$58,579
60 months	$1,013	$60,814

8. Alter Payment Frequency

Choosing the right payment frequency for your car finance repayments — be it weekly, fortnightly, or monthly — can impact the total amount repaid over the loan's term. Opting for more frequent repayments, such as weekly or fortnightly, can lead to interest savings, as the principal amount reduces faster, thereby decreasing the interest accrued over time. This strategy can be particularly effective for businesses with consistent cash flow, allowing them to manage repayments efficiently without straining their financial resources.

However, it's crucial for businesses to balance these potential savings with their cash flow realities. Frequent repayments might not be feasible for businesses with irregular income streams or those that operate seasonally. In such cases, less frequent repayment options, like monthly payments, might align better with their cash flow patterns, ensuring that loan obligations do not disrupt their operational stability. Therefore, while altering payment frequency can be a smart move to reduce overall costs, it should be carefully considered in the context of the business's financial rhythm and capacity to sustain regular payments.

9. Be Mindful of Fees

It's important to be vigilant about the various fees that can accompany the principal and interest rates, as these can significantly affect the overall cost of the loan. Monthly service fees, for instance, can add a considerable amount over the loan's lifespan. Direct debit fees, charged for processing each payment, may seem small individually but can accumulate to a substantial sum, especially with more frequent repayments. Additionally, early termination fees are particularly important to consider if you plan to pay off the loan ahead of schedule; these fees can negate some of the interest savings gained from early repayment.

Not all lenders charge these fees always, so it's essential to thoroughly review and understand all the associated fees, not just the interest rate, when comparing loan options. This comprehensive approach ensures you have a clear picture of the total cost of the loan, enabling you to make a more informed financial decision that aligns with your business's needs and capabilities.

10. Consider Refinancing

Considering refinancing your existing car finance can be a solid move to capitalise on better loan terms and rates available in the market. Your business may have changed since you last applied for a loan, so you may now be able to get a better deal.

Refinancing involves replacing your current loan with a new one, typically with more favourable conditions, such as a lower interest rate, different loan term, or more suitable repayment structure. This can lead to significant cost savings over time, reduce monthly payments, or align the loan more closely with your business's evolving financial situation.

However, it's not just about finding a lower interest rate; refinancing can also offer the flexibility to adjust the loan structure to better suit your current business needs, such as extending the loan term to lower payments or consolidating multiple debts for easier management.

The decision to refinance should be approached with caution and thorough analysis. One critical factor to consider is the potential cost of early termination fees associated with your existing loan. These fees can sometimes be substantial, and it's essential to calculate whether the savings from refinancing outweigh these costs. Additionally, the refinancing process itself might involve application fees, legal costs, and other charges, which need to be factored into your decision.

Seeking professional financial advice can be invaluable in this process. An Emu Money Broker can help you navigate the complexities of refinancing, compare different loan products, and calculate the overall financial impact, ensuring that you make an informed decision. They can also assist in understanding the fine print and long-term implications of the new loan agreement, ensuring that your decision to refinance is aligned with both your immediate financial goals and long-term business strategy.