Car loan terms

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Agreed Value

Agreed value is an amount the insurer and the customer agree to for a specific asset for a specified period of time, generally 12 months. Agreed value does generally payout more than a market value policy, but that privilege comes with an increased cost to your annual premium. Be sure to do your research before taking out any comprehensive insurance policy to ensure it best fits your needs.

Application Fee

This is a fee sometimes charged by lenders at the start of the finance agreement to cover their administrative costs.

Approved in principle

This means we’ve accepted you for finance but at the point when you’re ready to go ahead and purchase your chosen car, we just have to dot the ‘i’s and cross the ‘t’s, to fully secure your finance.

Broker

A broker is a middleman between you and a lender, who searches for products on your behalf and sets up the contract.

Balance Sheet

A commonly requested document for business owners applying for finance. A balance sheet provides a summary of a company’s assets, liabilities and shareholders’ equity at a specific point in time. This information helps assessing what a company owns and owes.

Balloon Payment

A balloon payment is a lump sum payment due at the end of your loan term. A balloon is optional and can be used to assist in achieving a repayment budget. Balloon amounts vary depending on age of the asset and loan term.

Chattel mortgage

A Chattel Mortgage is a business finance product where the purchaser takes ownership of the Motor Vehicle at the time of purchase. The customer retains the title of the goods, however, the financier holds a charge (encumbrance) over the goods (same as a bank takes a mortgage over a property, hence the name ) The encumbrance is lifted once the final payment is received. A chattel mortgage should be considered by those who use their vehicle predominately for business purposes.

Commercial hire purchase (CHP)

A type of finance product where the customer can obtain goods by hiring them over a repayment term. The financier is the owner of the goods for the term of the agreement. Ownership is then automatically transferred to the customer (hirer) when the final payment is received. In practice, however, the motor vehicle/equipment is registered in the purchaser’s name and for all tense and purposes is regarded as an asset of the purchaser with all the relevant tax.

Comparison Rate

A comparison rate is the rate that includes the rate, fees and charges to determine the true cost of a loan.

Consumer loan

The vehicle is owned by the customer and the financier takes an interest in the vehicle as security for the loan. Once the contract is complete, the financier removes (lifts) their interest in the vehicle passing clear title to the customer.

Credit agreement

This is the agreement between you and the company who is lending you the money.

Credit referencing agency

This is a company who gathers all the information about your credit history. The role of a credit reference agency is to make it possible for lenders to quickly make fair, consistent, responsible and profitable lending decisions.

Credit score

This is a score given to you based on your history of paying back previous and existing debts and is an assessment of how likely you are to repay debts.

Credit search

When you apply for credit the finance broker or lender will do a search of the information held by the Credit Reference Agencies to view your credit history and assess the likelihood of you repaying the debt.

Creditor

This is the company who provides the finance to you.

Debtor

A person or company who owes money to someone else.

Default interest

If you miss a payment, the lender may charge default interest. Default interest is charged on the amount of arrears until you make up your payments.

Default notice

A default notice is a formal letter, sent by a lender (“creditor”), telling you how much you need to pay to bring your account up to date. Your creditor will usually send you a default notice when you’ve missed 3 to 6 payments. You’ll be given at least 14 days to pay the amount stated on the notice.

Deposit

This is a cash amount that you can put down on your car. This will be deducted from the amount that you borrow to pay for the vehicle.

Depreciation

As your car ages, it loses value, depreciation is the difference between what you paid for it and what it is now worth.

Documentation fee

This is a fee sometimes charged by a lender to cover the costs of drawing up agreements and documents.

Early Termination Fee

A fee applied to a loan or finance agreement by some lending intuitions if the contract is paid out before the loan maturity (end). Early Termination Fee can be a flat fee or pro-rata (decreases the longer the term runs).

Effective Interest Rate

An effective interest rate calculates the true cost of a loan, including all fees & charges throughout the life of the loan. An effective interest rate differs from a comparison rate as comparison rates do not take into account future actions on the loan, such as a paying out early.

Factoring

Factoring is sometimes referred to as invoice finance. It is a loan facility that involves a business selling their accounts receivables to a financial institution in exchange for a cash flow loan. Businesses can borrow up to 80% of their accounts receivable in some instances.

Finance lease

The vehicle is owned by the customer and the financier takes an interest in the vehicle as security for the loan. Once the contract is complete, the financier removes (lifts) their interest in the vehicle passing clear title to the customer.

Fixed rate

This is when the interest rate charged on your loan or finance is set in advance and will stay the same throughout the term of the agreement.

GAP insurance

Pays the difference between the payment from your comprehensive insurer and your finance loan balance should your vehicle be declared a total loss due to theft or damage. Also covers additional costs that arise from replacing your asset such as new registration and stamp duty.

Grey Import

Grey imports are vehicles (includes motorbikes) which are imported from another country. These vehicles are usually not available in all regions, so private individuals and businesses make their own arrangements to import these vehicles outside the maker’s standard distribution. Common Grey Imports include the Nissan Skyline, Toyota Supra and Nissan Elgrand.

Guarantor

A guarantor co-signs a loan or finance agreement to say that if the primary borrower cannot keep up the repayments they will repay it. It is mostly used for businesses (director offers guarantee) and a parent for a child with minimal credit history.

Home Loan

A loan used to purchase a property, land, unit or apartment which can be used as a dwelling or investment. A mortgage can be sourced from a bank, credit union or private mortgage provider. Interest rates can be fixed or variable, with loan terms generally between 25-30 years.

Hardship

Hardship occurs when a customer is unable repay a debt as set out in their contract agreement. This commonly occurs when a major unexpected event takes place, such as a family illness or loss of employment.

Impaired Credit

Credit impairment refers to customers who have had or are currently experiencing credit issues. This includes defaults, court judgments, bankruptcy or debt agreements (Part 9) and payday lenders.

Input Tax Credit

Input tax credits (ITC) can be claimed by appropriately GST registered entities for purchases and operating expenses related to their business activities. Speak to your accountant to find out more.

Interest rate

When you borrow money from a bank or finance company the lender charges you interest. It is charged on top of the amount you borrowed and is expressed as a percentage.

Intermediary

This is a firm or person (such as a broker or consultant) who acts as a mediator or a link between the person searching for finance and the financial institution.

Joint Applicant

A secondary applicant who is equally responsible for loan and its repayment. Joint applicants must reside at the same address and have direct relationship with the primary applicant (spouse or parent / child) plus equal access to the asset which is funded (exception for marine assets – speak to your ACFC broker for clarification). Commonly referred to as a co-borrower.

Know your Client (KYC)

Know Your Customer means every ACFC broker must take reasonable steps to understand an applicant’s needs, motivation and means to repay their loan or financial agreement. This involves collecting information relating to identity, financial position and regular expenses.

Living Expenses

Expenses that occur regularly and consistently for an applicant. Includes but not limited to groceries, utility bills, entertainment, dining out, school fees, insurances and travel expenses.

Loan Protection Insurance

Protects against the risk of being unable to meet repayments obligations as a result of disability (illness or injury) or involuntary unemployment.

Maintained Lease

A novated lease that is maintained takes the vehicle price plus all running costs, including fuel, insurance, registration fees, tyres, maintenance costs into and bundles it into one repayment. Not all your deductions are made from your pre-tax salary, post-tax deductions are commonly used to offset any FBT (Fringe Benefit Tax) costs.

Market Value

The price an asset would be expected to fetch in the marketplace. Commonly used by insurance providers when determining premiums and claims.

Mirco Loan

A loan amount up to $8,000. Can be suitable for applicants with impaired credit and some pension types do qualify for these loans.

Negative equity

This is when property which you have purchased with a loan or finance (like a car) loses value and is worth less than the amount you still owe to the lender.

Net Amount Financed

Is the total amount borrowed, considers the asset cost, plus all fees, charges and any capitalised insurance products.

Novated lease

A Novated Lease is a three-way agreement between, the finance provider, an employer, and an employee. Under a Novated Lease, the employer pays the monthly lease payments on behalf of the employee as part of their salary packaging arrangement for the term of employment or when the novated lease contract is finalised. Under a salary packaging arrangement, an employee agrees to forego a portion of their salary or wages in return for benefits equal to that amount. If employment ceases for any reason, the employer’s obligations revert back to the employee.

Operating Lease

This type of lease allows businesses to keep assets off balance sheet. An Operating Lease essentially allows a business to rent an asset (commonly vehicles or equipment) for usage in business activities and claim depreciation over the asset’s life.

Principle

The amount borrowed or the amount still owed on a loan or financial agreement, separate from interest.

Purchase Price

The final amount an asset costs to buy.

Profit and Loss statement

A profit and loss (P&L) summarizes a business’s sales and revenues, plus incurred costs and expenses during a specific period, usually over 12 months. This statement is commonly requested for self-employed applicants.

Quote

An initial offering to a customer that includes estimated repayments, loan terms and features.

Real Time Gross Settlement

Refers to a disbursement of funds immediately after a contract has been settled. Commonly in financial transactions funds are transferred overnight to the seller or vendor.

Retained Interest

Unpaid future interest that may be included into a payout figure if the loan is to be terminated prior to maturity (end of loan).

Repossession

When you buy a vehicle using finance it is the property of the lender until you have made all the required repayments. If you fail to repay the finance the lender can take the car away from you. However, before a lender can take any further action, you must be served with a Default Notice. Once the Default Notice has been served, the lender can then apply to the court for a repossession order. If you have paid less than one third of the value you borrowed the lender can repossess your goods without a court order.

Residual value

This is the value of your car at the end of your loan or finance agreement.

Salary Sacrifice

This arrangement allows certain employees (check with your employer) to pay for services from your pre-tax income. Novated leases are a commonly associated with salary sacrifice and can reduce your taxable income.

Secured loan

A secured loan is a credit agreement that is backed using the equity in an asset owned by the borrower. Car finance is secured on the value of the car, and if you do not keep up repayments then the lender might be able to take the car from you.

Self-Maintained Novated Lease

Self-Maintained Novated leases only include financing the vehicle price. The employee is responsible for any further running costs such as fuel, insurance, maintenance and any FBT (Fringe Tax Benefit) liability. These running costs will be paid for out of the employee’s post-tax income.

Subvention Rate

Is a common marketing tactic used by car dealers, ever see 0% finance, sounds too good to be true right? Well it is! What occurs with subvention is the lender will still charge their standard rate, and the difference between this rate and the advertised rate is paid by the dealer to the lender. The dealer needs to account for this cost, so they do not offer any discounts on the vehicle, usually this type of finance cost you more than if you negotiated a good vehicle price and took a standard finance package.

Take home pay

Sometimes referred to as net pay or after-tax income. The amount remaining each pay cycle after the appropriate tax has been withdrawn by your employer.

Terms and Conditions

The rules by which the customer must agree to abide by during their loan term.

Total repayable

This is the total amount you will repay to the lender. It includes the original loan amount and the total cost of credit, including the interest and any fees charged.

Trade in value

This is how much a car is worth within the car trade. It is usually less than the amount that the vehicle would be sold for to a customer.

Unsecured Loan

An unsecured loan does not require anything of value to be used as collateral against the loan.

Valuation

This is a professional market based estimate of what your car is worth at this point in time. It will be used in various situations, for example, if you claim insurance.

Variable Interest Rate

An interest rate that fluctuates over the course of a loan.

Vendor

The seller of goods involved in a private sale transaction.

Warranty

When you buy a product, the seller will usually offer a warranty. This is a guarantee that if something goes wrong with the product in a set time period the seller will fix the problem.

Write-Off

If you’ve been involved in an accident or had your vehicle stolen the insurance company may declare your vehicle is a ‘write-off’. This basically means that the cost to repair or replace your car outweighs its value. The owner will usually receive cash settlement for the loss.

Xero

Xero is a cloud-based accounting software for small and medium-sized businesses. Information from Xero is useful in making assessments for businesses seeking unsecured and secured finance.

Year To Date Income

The running total for an employee’s earnings for the current financial year.

Yellow Goods

Yellow goods is a common term used to classify equipment used for construction, earth moving and agricultural purposes.

Zero Balance

When nothing further is owed to the lender for your loan.

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Car loan basics

The numbers

  • The total amount you pay back includes the cost of interest and any fees as well as the cost of the vehicle.
  • The longer the repayment period, the more you pay in total but the less you pay each month.
  • The shorter the repayment period, the less you pay in total but the more you pay each month.
  • You can cut both monthly repayment amounts and the total cost of interest by paying a bigger deposit.
  • The better your credit rating, the lower the interest rates you’ll be offered.

Repayments

  • When you buy a car on finance, you commit to making regular monthly repayments. This means it’s important to work out what you can afford before you go ahead. People sometimes think you can just hand the car back if you can’t afford it. It’s not that simple.
  • If you miss payments, you’ll hurt your credit score. This can make it harder for you to get finance of any sort in future. It’s down to you to insure and maintain the car. Make sure you allow for these costs, too.
  • If you’re concerned about affordability, it’s a good idea to take independent financial advice. There’s also a useful article on understanding car affordability in our Car Buying Guide.

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