Financing Options for a Car and Motorbike

[jmillar]

Hi all,

This question is obviously better directed to my accountant (once I find one worth talking to) but would be happy to hear your opinions on what options I should explore in my situation.

I'm 21, I work as a sales rep on the road (approx. $40k base + comms), I do about 30,000kms + per year, and my current car is 6 years old but has 200,000kms already and is soon going to get expensive to maintain. It would be worth say $8k if I sold it privately now.

My car is probably about 70% business use but I have never kept a log book before. I think this is something I should probably be doing as well?

At the end of the year I will have about $10k cash to spend (+ extra for insurance etc), and I want to buy a motorbike worth $8k and upgrade my car. I don't need anything flash, just something reliable but with less kms.

So if I sell my car I'll have say $18k and I want to buy an $8k bike and $15k car.

I have never had debt until purchasing my 2 IPs, and have always been of the mindset to only have debt to purchase assets which appreciate in value and self-service. I was going to buy a bike at the end of the year, and then when I can afford it, sell my car and buy a new one in cash.

However, I was speaking to an acquaintance today who used to be an Accountant and he suggested due to the amount of kms I do, I may be better to look at leasing a car for 2-3 years in an arrangement whereby I do not own the car at the end. I suppose this would increase my tax deductions, increase my cash at bank, void the high depreciation of my vehicles due to the high kms I do etc. but will increase my debt and I will have repayments to worry about. Might also affect my borrowing capacity for purchasing property?

Can anyone point me in the right direction for who would finance such an arrangement so I can try run some numbers to see if this is a better option for me?

Any suggestions on what other options I should consider would be appreciated.

Many thanks.

 

[Shaneelastic]

what sort of commission $$ do you get, that will also play a factor

 

[jmillar]

Hi mate,
Thanks for your response. Commission is only starting to pick up lately. This quarter should be around $5-7k, next quarter anywhere between $10k-15k.

How does that play a factor, Shane?

Cheers

 

[Shaneelastic]

Hi mate,
Thanks for your response. Commission is only starting to pick up lately. This quarter should be around $5-7k, next quarter anywhere between $10k-15k.

How does that play a factor, Shane?

Cheers

Because
1) at 40K no commission your on a low wage and shouldnt be borrowing for a car for work purposes, it would be going backwards at those KMS, as your real wage would be like 32K after car costs, depreciation etc.
2) THe higher the tax rate the better the deductions

It may be better to fully borrow for the car, and put the sale funds into the offset account on your loan. Car rates are cheap ATM, mid 5s i believe for that type of vehicle

The brother Aaron C may have a similar opinion on this, he always has good financing ideas

 

[Terry_w]

Consider the effect on future borrowing capacity.

 

[jmillar]

Thanks Shane.

Terry, I assume having more cash at bank but extra debt would be less desirable for getting finance for an IP than having less cash at bank but owning a vehicle?

Cheers

 

[Terry_w]

Thanks Shane.

Terry, I assume having more cash at bank but extra debt would be less desirable for getting finance for an IP than having less cash at bank but owning a vehicle?

Cheers

It all depends...

If you had a high income and low cash it may be the way to go (at this point in time).

Having a car loan or lease hurts serviceability a fair bit because the repayments tend to be high.

 

[Paul@PFI]

The deductible use of the vehicle needs to be better planned.

First. Is it deductible ?? Your employer has an expectation of you using your vehicle to generate income I assume. If so, its probably deductible. There are four methods:
1. cents per km ...Capped at 5,000km per vehicle you own ie 5,000 x.75 = $3,750 for one car. Tip : Can you double dip this deduction ?? Own two cars and your max deduction is now $7500 pa. Own 3 over the year and travel 15,000km+ and its $11,250.... Compare it with the logbook ?
2. 12% of cost method. Good for really old fully depreciated cars but terrible for new cars when you do the maths. This method doesnt work well for $$$ repair bills or high cost vehicle operation eg 4WD though sinceeration costs are basically ignored. This method is for those too lazy to do a logbook in my view.
3. 1/3rd of expenses. But you must do 5,000km+ for business. Seems likely. This option should be avoided if you consider you do 70%+ for busienss...You would be losing of the available 40% deduction. The catch is you must prepare a logbook and access option 4....
4. Logbook for 12weeks - Buy one at office works etc. This will max your deductions. Seriously buy a cheap bike BEFORE you do the logbook and plan to replace it later ?? That way your pte use might actually be very very low for the car. Thats how the logbook mtd works. Be smart.

Best part is you can choose the method and can change at any time !! ie pro-rata days etc Costs which will factor into Opt 4 include interest, depreciation (work on 20% pa) and all running costs incl repairs, rego, insurance etc.

Do some numbers in excel and work out the daily vehicle "cost" ie deduction. That should also guide your decision.

Personally I would spend more on the car and a lot less on a cheap bike so that you can increase business % in logbook.

 

[jmillar]

Seriously buy a cheap bike BEFORE you do the logbook and plan to replace it later ?? That way your pte use might actually be very very low for the car. Thats how the logbook mtd works. Be smart.

Personally I would spend more on the car and a lot less on a cheap bike so that you can increase business % in logbook.

Hi Paul,

Thanks for your response. I will be doing a log book starting next year (xmas is not a great period as my business use will be low).

Also, why do you recommend spending more on the car and less on the bike?

Cheers
PS: I've done some research and purchasing outright is my best option in my current circumstances, for both the car and bike. Once my income is higher I will reassess.