Don't get flattered by high octane sales talk when choosing a car loan. If you want to save a motza, shop around. Ian Hamilton gets into gear.

When interest rates are low and competition between car manufacturers is fierce, it's tempting to upgrade your banger for a late model car and bid farewell to your mechanic.

There are close to 11 million passenger vehicles on Australian roads, with 65,000 new cars - including the ubiquitous four-wheel drives - hitting the roads each month, thanks to our healthy economy.

While buyers will automatically bargain over a car's price tag, they are less inclined to shop around for the lowest available finance.

Banks, credit unions, and specialist lending and leasing companies are clamouring for business. That has forced the cost of borrowing down, but it has also inspired more innovative ways of persuading motorists to sign on the dotted line - usually with plenty more to pay.

Rev up your savings
Motorists spend a lot of time trying to decide whether to get a lease, loan or hire purchase. But experts say that for most people there is no cost advantage in one type over another.

Rather it's the interest rate, fees and penalties charged by the financier that are the key to the best deal.

"Car buyers should worry less about the finance method and just concentrate on getting the cheapest finance possible," says Matthew Gardner, a business services partner at HLB Mann Judd.

Going back a step, consumer groups strongly recommend that you use as much of your own money as possible to reduce the overall cost of borrowing.

The challenge, then, is to determine the true cost of the multitude of different offers and compare them on an apples-to-apples basis.

"Do the finance shopping before you go to the car yard," suggests Carolyn Bond, the manager of the Consumer Credit Legal Centre of Victoria. She says you should get a feel for what's available before hearing the hard sell from dealers on their own funding packages.

"People do a lot of shopping around to get the best price on the car, but if they don't shop around for finance then they may be wasting their time. Sometimes a dealer makes more on the finance than they do on the car," says Bond.

Dealer finance
Providers of car finance often don't like to talk interest rates, preferring to sell their product on the basis of what monthly payments the buyer can afford.

This could mask an expensive loan or lease, so make sure of the underlying interest rate and compare alternatives on that basis.

The manager of motoring information services at the NRMA in NSW, Brad O'Hara, advises consumers to treat the negotiations on the price of the car and any trade-in separately from the finance. "You want to lock in the price of the car before you do the finance itself," he says.

Always compare that offer with those of your bank and other credit providers. Dealer finance may be more convenient - it's tempting to sign up and drive away immediately - but it can result in buyers paying thousands of dollars more or facing restrictive terms and conditions on the loans.

However, General Motors Acceptance Corporation (GMAC), which provides the finance for Holden, Saab and Subaru dealers, says that in such a crowded finance market its offers have to be competitive.
"And if the buyer isn't comfortable, they don't have to say yes on the spot," says GMAC's national communications manager, Brad Nagle.

Dealer finance often comes with other offers: car insurance, extended warranties, fixed-price service contracts, or loan car arrangements while your car is being fixed.

With all these services bundled together, it can be hard to determine the true cost of each and do comparisons. Doing so, however, is a must.
Beware particularly of "gap" insurance offered by dealers, Bond warns.

This covers you for any shortfall between what the insurance company pays out and what you owe on the car, should it be stolen or written off.
In many cases the benefits of this insurance are small and the premiums much more than it is worth, she says.

O'Hara says to check the fine print of fixed-price service contracts before accepting them. Often they don't cover the costs of replacing wear-and-tear items such as brake pads or batteries.

Loan comparisons
Whether it's a lease, personal loan or a dealer's hire purchase, there can be great variations in interest rates within each type of financing method.

The range of interest rates on personal loans is big - ranging from 7 per cent up to 14 per cent. On a $20,000 loan over four years, that's a difference of $3235 in total interest paid.

Much depends on the security that is offered.

You get higher rates if no security is provided; lower rates if the car itself is secured against the loan; and lower rates still if other assets are put up.

But a lot also depends on how competitive the lender is.
Credit unions have long been active providers of personal loans for all sorts of purposes, including cars.

Market comparisons by research house InfoChoice show that smaller institutions such as credit unions often have the cheapest rates. As the table shows, the best rates come from credit unions, which beat the big banks hands-down.

Credit union personal and car loan rates start at 7.2 per cent, while the major banks' rates start at about 10 per cent. You should, however, also check the fees of any options you consider.
"Understand the terms of the finance fully," advises the general manager of

InfoChoice, Denis Orrock. "Is the rate fixed or variable? What upfront and ongoing fees apply? Will you pay penalty charges if you want to pay out your loan early?"

Borrowing against the equity in your home has become a popular alternative in recent years, and a contributing factor to the record levels of household debt.

As house prices have boomed, home owners' equity - on paper, at least - has jumped, increasing their sense of wealth.

Lenders have capitalised on it, pushing home equity and line-of-credit loans at low rates to finance cars, holidays and major household items, such as must-have plasma TVs.

These are not investments but consumption goods, which fall in value from the moment they're bought.

Using home equity to fund depreciating assets is a questionable strategy, says Gardner. Your home is the security and borrowers should make sure they don't overcommit and risk losing it.

"It's better to use home equity to fund appreciating assets, [for] a healthy diversification," he says.

Orrock says taking advantage of cheaper borrowings makes sense, as long as you do it sensibly. "Make repayments to pay off the car borrowings in your home loan in three or four years, just as you would on a personal loan."

Otherwise, paying it off over 20 years or so will mean incurring two or three times the price of the car in interest.
"You'll still be paying for the car long after you've sold it," Orrock says.

Home equity loan rates are cheaper, but they are variable. Personal loans can be either fixed or variable. Lease and hire purchase interest rates are usually fixed so that car buyers have certainty over their payments for the full term.

Home equity borrowers generally won't have that certainty, and there is the likelihood of further interest rate rises.

The latest monetary policy statement from the Reserve Bank reaffirms warnings that growing inflation pressures are likely to cause official interest rates to rise sooner or later. Economists believe this is likely to happen early next year.

Which method?
The big question for many buying a new car is: "How do I buy one through my business or my employer and make it tax-deductible?"

"It's the classic dinner party question," says Gardner. "Everyone thinks that putting a car purchase through a business opens up big tax deductions."

Those deductions are determined on the use of the car, not the ownership, he warns.

If the car is for private use, which includes the daily drive between home and work, there is no great tax benefit to be gained whether you are self-employed or an employee.

If purchasing a vehicle through your business, ask yourself the hard questions about just what benefit the asset produces for the business, Gardner says. Often it is very little.

"People tend to buy a car as a lifestyle choice - as a want, not a need," he says.

Leasing has become a very popular method of car financing but, again, any tax benefits are for those using their car for business purposes. Even then, there is no significant tax advantage over other finance methods.

The tax deduction works in a different way for leasing or hire purchase. A lease is like a rental agreement, with the lease payments and the GST claimable.

With hire purchase, you own the car and claim depreciation costs, loan interest and GST.

But both options work out to a similar financial result in the long run. It's the timing of the tax benefits - up front or along the way - that differs, Gardner says.

Consequently, car buyers should worry less about the finance method and concentrate on getting the cheapest finance possible, whether lease, loan or dealer finance.

Arranging with the boss to finance a car through a salary packaging arrangement has become very popular. Generally, the ability to purchase the car with pre-tax dollars is the advantage salary packaging offers.

Under novated leases, the benefits increase the more kilometres driven, and the higher the proportion of work use.

"There is only a marginal benefit in salary packaging a car if it's for 100 per cent private use," Gardner says.
GMAC and other financiers now offer leases to consumers, lowering monthly payments in return for paying a residual at the end.

This "rental" approach suits many young car buyers who want to upgrade every few years, Nagle says.

A lease allows the buyer to set lower payments in return for an end-of-term residual payment that reflects what the car is likely to be worth at the time.

It doesn't make the car cheaper but does give car buyers certainty over what will be owed at upgrade time, Nagle says.

"There isn't one method that is necessarily cheaper than the others, just a matter of what suits different people."

Green machine
Lara Romanovich, 31, of Glen Roy in Melbourne, likes to do things thoroughly. First she shopped around for a good deal on a new car, then she shopped around for finance. In both cases the young administrative worker ensured she didn't pay any more than she had to.

Romanovich settled on a Holden Barina because she got it at a good price. Its safety features were also appealing - central locking with an option to lock and unlock the driver's door only, and sound system controls operated from the steering wheel. With her $3300 trade-in, the new car came to $13,700.

Then came finance. "I have a friend who is very savvy and he told me what questions to ask the lenders. I shopped around and MECU had the lowest rate."

She has a seven-year fixed goGreen loan from MECU at 7.24 per cent, which costs her $96 a fortnight. The more environmentally efficient the car, the more favourable the rate. MECU offsets the car's greenhouse gas emissions by planting trees in the Murray-Darling basin.

"The Holden dealer offered to match the rate with a five-year fixed loan.

They worked hard to convince me of the benefits," she says. "But it wasn't what I wanted and I liked the fact that some of my money goes to improving the environment."

The dealer also argued the benefits of an extended warranty and recommended tinted windows and paint protection. She took the last two after knocking the price down substantially.

She was astonished at how persistent the dealer was when it came to add-ons - "No one warned me," she says - but is pleased she stood her ground.

Second-hand tips
When buying a used car:

• Set a sensible budget and don't over-commit
• Shop widely, including on the internet, and seek independent advice
• Check the kilometres travelled
• Look for a fully documented service history
• Don't inspect at night or in the rain, as this will hide defects
• Look for rust on the doors, doorsills, body, boot, under the floor covering
• Road test the car to check its performance
• Get a pre-purchase vehicle inspection to identify faults that may be difficult to find
• If buying privately, contact the Register of Encumbered Vehicles (REVS) to check if the car has money owing on it. Visit www.revs.nsw.gov.au
• If buying from a dealer, check the car's warranty conditions
• Get insurance quotes before buying, and insure the car before taking delivery
  Source: RACV, NRMA Motoring Services