Car loans may be an excellent choice for businesses looking to expand their existing fleet or add a commercial vehicle to their ranks. With travel back on the agenda and face-to-face interactions picking up, having the right vehicles at your disposal are as important as ever. At the same time, prices of both new and used cars are up, and so is the fuel needed to run them.
Balancing your business cash flows is an essential part of maintaining your financial health while taking advantage of opportunities that present themselves. Let’s take a deeper look into what exactly car loans are, how they work, the different options available and most importantly, how to calculate car loan interest and other costs associated with taking out a commercial vehicle financing solution.
Understanding car loans
When it comes to purchasing a car, or a larger fleet of commercial vehicles for your workforce, making use of finance makes a whole lot of sense from a cash flow point of view. There are also many other potential benefits depending on the vehicle you choose to finance and the type of product you pick.
At a simple level, cars require a lot of capital to purchase outright – particularly specialist equipment vehicles used for commercial activities, such as trucks, utes or boats. By using a car loan, your business can retain this working capital to fund other expenses instead of tying it up in expensive cars and other vehicles. You’ll pay a monthly fee, including interest, that will cover the vehicle lease or contribute to the eventual ownership of the vehicle, depending on the product.
Car loans can also help free up capital from vehicles you already own. A sale and leaseback agreement can provide additional funds without sacrificing your access to vehicles by having a lender purchase your existing business vehicles and leasing them back to you over a set period. Whatever you choose to do, you need to understand what you’re getting into, including how to calculate the car loan interest.
Types of fast car loans
There are four main types of car loans that come with different conditions, repayments and deal structures. Knowing which type of finance is best for your situation is part of getting a car loan fast; let’s have a brief look so you know what to consider when assessing a potential car loan.
Chattel mortgages are ideal if you want to take instant ownership of the car. The lender gives you the money, and the vehicle acts as security. When the loan is repaid, you own the vehicle. Novated leases are most commonly used to lease cars for employees from their before-tax salary. This is an efficient way to temporarily lease a vehicle without taking ownership. Finance leases are similar in that you don’t take ownership. When the repayments are finished, you can choose to pay off the remaining value and acquire ownership or refinance the lease.
How to calculate car loan interest
When it comes to budgeting your repayments and calculating the interest on your car loan, there are four main factors to consider. You’ll need to be clear on these details with the lender so you can calculate correctly with no hidden surprises.
- Vehicle cost: the more expensive the vehicle and the more you finance determines how much your repayments will be. If you finance more, you’ll pay more interest (all else equal).
- Car loan term: The longer the term, the longer interest has to apply and accumulate. If you want to minimise interest paid, reduce the term of the loan. This will also mean the amount of your repayments increases, though there will be less of them over the course of the loan.
- Residual value: How much is the vehicle worth at the end of the loan? The higher the residual value, the less you’ll need to finance and the less interest you’ll pay. It also means your balloon payment at the end of the loan is higher, should that apply to your deal.
- Interest rate: The most significant driver of interest is the rate itself. A higher rate means more interest is calculated and included in your payments on the loaned amount. Watch out for lenders that claim to not charge any interest!
To isolate car loan interest, take the amount financed and subtract it from the total agreed payments over the life of the agreement. This excess amount is the interest (and other potential fees) the lender is charging your business.
How to use a car loan calculator
A simple way to calculate your repayments is to use a pre-built calculator. Here is a car loan calculator you can have a go at now. Input the above information and press calculate. You’ll be given a monthly payment amount. It’s as simple as that!
Calculating your car loan interest is just one part of the car financing process. It’s well worth having an expert on your side. Capital Plus Finance is an experienced business loan broker that has your best interests at heart. Choosing the right car loan for your business is what we do, ensuring you receive flexibility, fast approval and excellent service. With a panel of many lenders, The Capital Plus Finance team will do everything we can to help you qualify for a suitable car loan for your business. Please give us a call anytime to find out more or to have an obligation-free chat about your situation.