Articles

Beware of Long Term Vehicle Loans

Wednesday, June 18, 2014

As the end of the financial year approaches, you might be considering purchasing or upgrading your work vehicles, so it’s timely to focus on several automaker financiers which seek to lure car buyers with 72 and 84 month loans.

Even luxury vehicle financiers have their own ways of enticing buyers with less cash funds on hand, by offering longer terms and higher balloons/residual payments.

Borrowers must consider the overall cost before committing to a lease contract. Why pay thousands of dollars more in interest than necessary and potentially face a situation of having paid more than the car’s worth at the end of the term?

We recently lost a transaction to a dealer who offered the client a 7 year lease term. Upon further investigation (after settlement had taken place and it was too late to assist), it was brought to our attention that the client was charged a higher rate for the ‘privilege’ of taking out a longer term. This is very common and often not disclosed to the client who believes the rate applicable is the same as the standard term of 5 years or under.

The two tables that follow outline the higher interest component applicable on longer term contracts. By simply adding a balloon of 20%, you will see how the interest sky-rockets.

By signing up for these extended repayment periods, is it really worth it for borrowers?

What happens when the vehicle needs to be upgraded due to high kilometers or a contract has to be paid out earlier? What happens when depreciation begins to drop at year 4? The dealer doesn’t have to offer the borrower the balloon value agreed in the contract; it is a future amount that is not guaranteed and often set outside standard lender guidelines.

It is therefore important that your clients are offered a structure that best suits their needs whilst at the same time, saving them money.

Finance Amount
& Effective Rate
Balloon
Value
Term Monthly Instalment Amount Interest
Charged
$35,000.00
6.30%
0%
$0.00
60 months $677.98 $5,678.91
$35,000.00
7.30%
0%
$0.00
72 months $598.13 $8,0658.45
$35,000.00
7.30%
0%
$0.00
84 months $530.17 $9,115.14

 

Finance Amount
& Effective Rate
Balloon
Value
Term Monthly Instalment Amount Interest
Charged
$35,000.00
6.30%
20%
$7,000.00
60 months $578.95 $6,736.61
$35,000.00
7.30%
20%
$7,000.00
72 months $520.83 $9,499.82
$35,000.00
7.30%
20%
$7,000.00
84 months $466.46 $11,182.55

For more information on how we can assist, please contact Guilia Polizzi on
03 9854 3556 or giulia@acceptancefinance.com.au.