Understanding Car Loan Jargon

  • Posted 04 Dec

Understanding Car Loan Jargon

How it all works “Car Finance Terminology”

In most cases, car loan specialists use terms that you may not understand. This can be dangerous as you may end up making the wrong decision when it comes to the type of loan you take out. Understanding what both dealers and lenders are referring to can speed up the car loan process as well as make your experience a pleasant one. This article will help you gain a good understanding of common car loan jargon and terminology used in the industry to ensure you make an informed decision when applying for your next car loan.

Car Loan Jargon Checklist:

  1. What is Loan Principal? – the actual cost of the vehicle. This is the amount that you would have paid if you were to buy the vehicle in cash.
  2. What is Interest? – the amount that you pay over and above the loan principal to get the car loan.
  3. What is a Payment Cap? – highest payment you can afford to repay per month, according to your debt to income ratio.
  4. What is a Repossession? – this means the finance company can take back the vehicle if you fail to make payments as required over a certain period of time.
  5. What is an Asset? – If you hear them say that your vehicle will be used as an asset, know that if you fail to repay on time, an asset becomes the lender’s property.
  6. What is a Chattel Mortgage? – is a commercial car product where you as the customer take ownership of the vehicle at the time of purchase, even though you have a loan to pay off.
  7. What is a Commercial Hire Purchase? – the term used if you hire a car from the financier for a fixed monthly payment over a given period of time – you won’t own the vehicle at the end of the term, it always remains the property of the financier.
  8. What is a Depreciation Limit? – the asset value the Australian tax office allows when depreciating a car. Depreciating value for 2013-2014 stands at $57,466.00.
  9. What is a Early Termination Fee? – this is a fee that is a fixed amount charged to you by some lenders if a car’s finance contract is repaid early.
  10. What is a Finance Lease? – term used if a lender purchases a vehicle on behalf of another, and then leases the vehicle back to the loan owner.
  11. What is a Novated Lease? – If an employee decides to lease a vehicle and their employer agrees to take on the obligations under the lease, this method of salary packaging is known as novated lease. You can use it to get a new car easily, without having to pay any tax.
  12. What is a Retained Interest? – if there are unpaid amounts still owing that have been included in the early payout figure, this can be termed as retained interest.
  13. What is a Rule of 78? – This rule amortises interest across all payments made and is used in all Australian vehicle finance loans. The rule states that: the interest component of the repayment is equal to the number of the remaining payments, divided by the sum of the sequence term between 0 and the sum of all payments, multiplied by total interest of the loan.

Using the above information, you can now understand the car loan jargon that some finance companies use when explaining finance options to you. You are no longer in the dark and can make a well informed decision.

If you require further clarification on specific terms used, please contact us for free advice and help when considering your car finance.

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