Want to know more about the ins and outs of low doc car loans? This guide explains what a low doc car loan is, the documents you may be required to supply, how to qualify and who can apply for this type of loan.
The many benefits to business owners are also discussed, including tax breaks and how a balloon option works. Finally, find out how to choose a reputable broker to apply for this type of loan.
Business vehicle finance through an experienced broker will save you both time and money.
What is a Low Doc Car Loan?
A low doc car loan is a type of business loan. Business loans are also known as chattel mortgages. The chattel is the vehicle you are purchasing, and the mortgage is the loan contract outlining the repayments required to pay out the loan.
As the name suggests, low doc means low documentation. If you have been running a successful GST registered business, then lenders do not require full up-to-date financials such as a business tax return.
However, lenders still require some proof of income.
What documents are required for a Low Doc Car Loan?
Documentation may include a recent Business Activity Statement (BAS) or a Profit and Loss Statement from your bookkeeping software ie Xero or MYOB.
It may also be simply 3 months bank statements or an accountant’s letter declaring an estimate of gross turnover and net profit. Each lender has different requirements that are updated on a regular basis.
Having an experienced finance broker to navigate this minefield is a must.
What do you need to qualify for a Low Doc Car Loan?
There are 2 main criteria to meet to apply for a low doc car loan.
ABN – Firstly, you need to have a current ABN. Your business structure can range from being self-employed or a sole trader to a company or trust. As long as you have an ABN, you are a business in the eyes of the ATO and you can apply for a low doc car loan.
Each lender has different requirements for the length the ABN must be running for to qualify for business vehicle finance.
Most lenders require your ABN to be running for a minimum of 6 months, however, there are some smaller lenders who offer finance on ABN’s only 1 day old.
Business-related use – The second criterion relates to the use of the asset. The asset must be used predominately for business use. The tax office defines predominantly as greater than 50% business-related use.
There does need to be a suitable justification for using the vehicle for business.
To give some examples – a tradesperson using their Ute to transport tools to and from a job site is deemed business-related use. A person who is working remotely can justify accommodation in the form of a camper trailer or caravan.
This would include a fencing contractor working on large properties in the middle of Australia or a carpenter helping to rebuild homes in a recently flooded area. An excavator driver may need a motorbike as transport to and from a work site.
Discussing your unique situation with either your accountant or an experienced finance broker can help determine if your purchase would qualify as business-related use.
What are the benefits of a Low Doc Vehicle Loan?
No financials, no worries! This type of loan cuts through the red tape and excess documentation requirements that traditional lending requires. You do not need to supply an up-to-date tax return.
Depending on what documentation you are willing to supply will determine which lenders can provide finance.
Tax breaks. The interest paid on a Chattel Mortgage or low doc vehicle loan is fully tax-deductible. Additionality the GST on the purchase price of the car is claimable for GST registered businesses.
As an incentive for business owners to invest in their own business, the government introduced the instant asset write-off a few years ago. The amount that businesses can write off has been increased and the incentive extended to 30 June 2023.
Eligible assets valued up to $150,000 can be immediately written off. This includes vehicles!
Terms up to 7 years. As you increase the term of your loan the monthly repayment amount decreases. You can have the ultimate business vehicle and have ample cash flow to run your business.
Include accessories. Decking out your vehicle so that it is ‘Fit for Purpose’ can improve workplace efficiencies. A trade person’s ute, delivery trucks, and coffee vans can have modifications and accessories added at the time of ordering.
The cost of these can be included in the purchase amount. Canopies, tow bars, bull bars, ladder racks, and so on can be included in your low doc loan amount.
Balloon payment option. By including a balloon payment in your loan contract, you can reduce the regular monthly repayment amount. This can free up cash flow for the day-to-day running of your business.
At the end of the loan term a lump sum payment, aka the balloon, is due. Balloon payments can range from 10% to 50% of the vehicle purchase price.
Keep up to date fleet. By financing your vehicles, you can regularly update to the latest and greatest vehicle to suit your business needs. Many business owners use the balloon payment option to reduce their loan repayments.
At the end of the loan term, they sell the vehicle and use these funds to pay out the balloon. They then purchase a new vehicle under finance and repeat the process, tapping into tax breaks along the way.
How a balloon options works
Basically, your loan is split into two amounts. The first amount is paid back via regular monthly repayments over the term of the loan, usually 5 years. The second amount is paid as a lump sum or ‘balloon’ at the end of the loan term.
Your monthly regular repayments are reduced as they are calculated only on the first amount, not the balloon.
Using an online car loan calculator with a balloon payment option allows you to adjust the percentage of the balloon to see how this will affect the monthly loan repayment.