Are you considering a car loan but finding the terminology a bit overwhelming? You're not alone. Car finance comes with its own set of jargon that can feel like deciphering a foreign language. Don't worry; we've got you covered. In this comprehensive glossary, we'll decode the essential terms you're likely to encounter when navigating the world of car loans in Australia.
- Amortisation: Amortisation refers to the gradual repayment of a loan through regular, equal instalments. These payments typically include both principal and interest.
- Balloon Payment: A balloon payment is a larger-than-usual payment due at the end of a loan term. It's often employed to reduce monthly payments but means a substantial sum is owed at the loan's conclusion.
- Comparison Rate: The comparison rate provides a more accurate picture of the loan's cost by incorporating both the interest rate and associated fees. It helps borrowers compare different loan offers.
- Credit Report: Your credit report is a detailed record of your credit history, including your borrowing and repayment activities. Lenders use this report to assess your creditworthiness.
- Credit Score: Your credit score is a numerical representation of your creditworthiness. Lenders use this score to evaluate your ability to repay a loan. The higher the score, the more favorable your loan terms are likely to be.
- Default: Default occurs when a borrower fails to make agreed-upon payments on their loan. This can result in the lender taking legal action to recover the outstanding amount.
- Depreciation: Depreciation is the decrease in a vehicle's value over time. It's a crucial factor to consider as it affects the car's worth over the course of your loan.
- Down Payment (Deposit): The down payment is the initial amount you pay for the car from your own funds. A larger down payment can lower your loan amount and, consequently, your monthly payments.
- Early Repayment Penalty Fee: This fee may be charged if you repay your loan earlier than the agreed-upon term. It's essential to understand this fee, as it can impact your decision to pay off the loan ahead of schedule.
- Early Termination Fee: An early termination fee is incurred when you end your loan agreement before its scheduled end date. It's essential to be aware of this fee, as it can be substantial.
- Establishment Fee: The establishment fee is a one-time charge by the lender to set up your loan. It's important to factor this fee into your loan calculations.
- Novated Lease: A novated lease is a car financing arrangement commonly used in Australia. It involves an agreement between an employer, employee, and a finance company, enabling the employee to lease a vehicle using pre-tax income.
- Pre-Approval: Pre-approval is the process of getting an initial green light from a lender before you start shopping for a car. It provides you with an idea of the loan amount you can secure.
- Refinance: Refinancing involves taking out a new loan to pay off the existing car loan, often to secure a lower interest rate or change loan terms.
- Secured Car Loan: A secured car loan is backed by collateral, typically the car itself. If the borrower defaults, the lender can repossess the vehicle.
- Unsecured Car Loan: An unsecured car loan doesn't require collateral. If the borrower defaults, the lender relies on legal means for repayment.
- Security (Collateral): Security, often referred to as collateral, is an asset or property used to secure a loan. In car finance, the vehicle being purchased serves as the collateral.
- Chattel Mortgage: A chattel mortgage is a type of car financing where the lender provides funds to purchase the vehicle, and the borrower takes ownership from day one while the lender takes a mortgage over the vehicle as security. For commercial/business purposes.
- Car Lease: Commercial/Business Purpose. The vehicle is secured by a lease with a set compulsory residual value. How the vehicle treated for tax purposes will be different to a Chattel Mortgage. Speak to your tax professional regarding your individual needs.
- Vehicle Identification Number (VIN): A VIN is a unique 17-character code that identifies a specific vehicle. It includes information about the car's make, model, year, and place of manufacture.
- Principal: The principal is the original loan amount before interest is added. It's the amount you need to repay.
- Lien: A lien is a legal claim by a lender on the car until the loan is fully repaid. It ensures that the lender has the right to repossess the vehicle if the borrower defaults.
- Equity: Equity represents the portion of your car's value that you own. It's the car's value minus the outstanding loan balance.
- Fixed Rate: A fixed-rate loan maintains a constant interest rate throughout its term, providing predictability in monthly payments.
- Variable Rate: Variable-rate loans have interest rates that can fluctuate over time, impacting monthly payments based on market conditions.
- Grace Period: A grace period is a set time after your due date when you can make a late payment without incurring penalties.
- Interest Rate: The interest rate is the cost of borrowing money, usually expressed as a percentage of the loan amount. It significantly influences the overall loan cost.
- Prepayment Penalty: A prepayment penalty is a fee charged for repaying the loan before the agreed-upon term. Some lenders impose this penalty to recoup interest payments.
- Term: The term refers to the length of the loan, typically expressed in months or years. Longer terms result in lower monthly payments but potentially higher overall interest costs.
Now that you're well-versed in the language of car finance in Australia, you're better prepared to make informed decisions when securing a car loan. Feel free to bookmark this glossary for easy reference on your car loan journey down under.