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Car allowances

Written by

Shaun McGowan

A car allowance - what is it? How do they work? What are my options?

A company car has traditionally been a sign of employee success - you’ve proven yourself in the business world and you get the perks of using a ‘free’ vehicle.

Times change, however, and both the business world and car finance are not what they used to be.

Company vehicles are major asset investments for a business and, for young companies or those still in a growth stage, financing a fleet of company vehicles can be a heavy strain on cash flow.

Furthermore, in our increasingly competitive world, if some employees are given perks while others are not, it can create ongoing tension in the workplace. This is where car allowance can be a major benefit to both employee and employer.

What is a car allowance?

Car allowance in Australia is a perk offered to employees by their employer instead of being given access to a company vehicle.

It is additional, extra income on top of your salary which can be used to finance anything related to the operation of a new or existing vehicle.

Car allowance covers repayments, fuel, repairs, maintenance and registration costs and anything else related to your vehicle.

How can I use it?

Your car allowance can be used to finance a new vehicle or to pay for operating your existing vehicle:

  • You and your employer agree on the car allowance in your employment contract
  • The additional car allowance is paid directly to your bank account
  • You choose how to spend it - on loan repayments for a new vehicle, or on fuel and servicing for your existing vehicle.

If you’re considering buying a new vehicle, you’ll want to make sure you properly calculate both your loan repayments and your estimated running costs (including fuel and servicing) to ensure you won’t be spending additional money that you don’t need to.

Below, we’ll look at your options for using your car allowance for a new or existing vehicle.

Financing your existing vehicle

Many employees will already own a vehicle, whether outright or through an existing finance arrangement. You are free to use your car allowance to make repayments on your existing car loan, or split the amount between payments and running costs.

Once you’ve finished repaying your vehicle, you can allocate your car allowance entirely toward operational costs of the vehicle, or you might consider trading it in and using your car allowance to finance a new, better vehicle.

Financing a new vehicle

Whether you’re financing a new vehicle or trading in your current vehicle, you’ll have a few options available when deciding on a new car finance arrangement.

Here are three of the most popular ways to finance a vehicle with a car allowance:

Novated Lease

A novated lease is a unique type of finance arrangement that uses your pre-tax salary to make payments on a vehicle and its running costs.

If your employer agrees to a novated lease and a car allowance, then you’ll be in one of the best positions for not only acquiring a personal vehicle at a lower price, but operating it with minimal costs.

There are certain requirements to qualifying for a novated lease, which you can learn more about here.

Chattel Mortgage

A chattel mortgage is often the gold-standard of business car finance in Australia, providing significant tax and GST savings for an individual while also offering greater flexibility in how the vehicle is used (provided the car is used for business purposes at least 51% of the time, you’ll be free to drive the car as a personal vehicle as you choose to).

A chattel mortgage is often better-suited to self-employed individuals, but there are certain advantages for all employees you can learn about here.

Car Loan

Lastly, you can always use your car allowance to make payments on a secured car loan. While this may not offer the same benefits as the two options above, it can still be a great way to finance a vehicle on a lower interest rate than an unsecured personal loan.

Learn more about how to choose a secured car loan here.

About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

About Money.com.au

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