Finance glossary
Car loan terms, explained simply
Every term a lender, dealer or contract might throw at you, written in plain English. No jargon, no sales pitch.
A
- Amortisation
- The way a loan balance reduces over time as each repayment covers interest first and then principal. Early repayments are mostly interest, later repayments are mostly principal.
- Annual Percentage Rate (APR)
- The yearly interest rate charged on the loan balance, before fees. In Australia a car loan is usually quoted as an interest rate plus a separate comparison rate.
- Application fee
- A one-off fee some lenders charge to assess and set up your loan. It is often capitalised into the loan amount rather than paid upfront.
- Asset finance
- Finance used to buy a business asset such as a vehicle, trailer, truck or machine, where the asset itself is usually the security.
B
- Balloon payment
- A lump sum owing at the end of the loan term. It lowers your regular repayments but leaves a larger amount to pay, refinance or clear by selling the vehicle. Balloon payment car loans
- Bankruptcy
- A formal legal insolvency process. A discharged bankruptcy does not automatically rule out finance, but it narrows the number of lenders who will consider the application. Bad credit car loans
- Break cost
- A charge for ending a fixed rate loan early. It compensates the lender for interest it expected to earn over the remaining term.
- Broker
- A credit assistance provider who compares lenders on your behalf and submits the application. Brokers are paid a commission by the lender on settlement.
C
- Capitalised fees
- Fees added to the loan amount instead of being paid upfront. They increase the amount financed, so you pay interest on them too.
- Chattel mortgage
- A business finance structure where you own the asset from day one and the lender takes a registered interest over it. Often used by ABN holders for GST and depreciation reasons. Chattel mortgage
- Comparison rate
- A single rate that combines the interest rate with most standard fees, calculated on a set example loan. It is designed to make advertised loans easier to compare. Comparison rate warning
- Conditional approval
- An approval subject to conditions such as verifying income, confirming the vehicle, or supplying documents. It is not a guarantee the loan will settle.
- Credit enquiry
- A record on your credit file created when a lender assesses an application. Multiple enquiries in a short window can reduce your credit score.
- Credit file
- The record held by a credit reporting body showing your enquiries, repayment history, defaults and other credit information.
- Credit score
- A number derived from your credit file that lenders use as one input into their decision. Scores differ between the credit reporting bodies.
D
- Default
- A missed payment reported to a credit reporting body, usually after it is 60 days or more overdue and the required notices have been sent.
- Deposit
- Money you contribute towards the purchase price. A deposit reduces the amount financed, which can improve your approval odds and lower repayments. No deposit car loans
- Depreciation
- The reduction in a vehicle's value over time. Rapid depreciation is why some borrowers end up owing more than the vehicle is worth.
- Documentation fee (DOF)
- A fee charged for preparing and processing the loan documents. It must be disclosed to you before you sign.
E
- Early payout
- Paying the loan out before the end of the term. Depending on the loan type there may be a break cost or early termination fee. Car loan early payout
- Equity
- The difference between what a vehicle is worth and what you still owe on it. Positive equity can be used towards your next purchase.
F
- Fixed rate
- An interest rate locked for the full loan term, so your repayment amount does not change. Fixed rate car loans
G
- Guarantor
- A person who agrees to be legally responsible for the loan if the borrower cannot pay. Guarantors take on real financial and credit risk.
H
- Hardship
- A formal process where you ask a lender to vary your repayments because of illness, job loss or another change in circumstances. Financial hardship
- Hire purchase
- A structure where the lender buys the asset and hires it to you, with ownership transferring after the final payment. Hire purchase
I
- Interest rate
- The percentage charged on the outstanding loan balance, excluding fees. It is only part of the total cost of a loan.
L
- Loan term
- The length of the loan, usually one to seven years for a car loan. Longer terms lower repayments but increase total interest paid.
- Loan to value ratio (LVR)
- The loan amount as a percentage of the vehicle's value. A lower LVR usually means a stronger application.
- Low doc
- A loan assessed on alternative income evidence such as BAS or bank statements, rather than payslips and tax returns. Low doc car loans
N
- Novated lease
- A three-way arrangement between you, your employer and a financier where vehicle costs are paid from your salary, usually partly pre-tax. Novated lease
O
- Ongoing fee
- A recurring monthly or annual account keeping fee charged over the life of the loan.
P
- Part 9 debt agreement
- A formal arrangement under the Bankruptcy Act to repay creditors an agreed amount. It appears on your credit file and limits lender choice.
- Pre-approval
- An indicative approval up to a set amount before you have chosen a vehicle, so you can shop with a clear budget.
- Principal
- The amount borrowed, excluding interest and fees.
- PPSR
- The Personal Property Securities Register. It shows whether a vehicle has finance owing against it, which matters most in a private sale. Private sale car loans
R
- Redraw
- The ability to withdraw extra repayments you have already made. Common on variable rate loans, rare on fixed rate car loans.
- Refinance
- Replacing an existing loan with a new one, usually to reduce the rate, change the term or consolidate debt. Refinance car loan
- Residual value
- The value assumed to remain in an asset at the end of a lease or loan term. It sets the balloon or final payment.
- Responsible lending
- The legal obligation on credit providers and brokers to check a loan is not unsuitable for you and that you can repay it without substantial hardship.
S
- Secured loan
- A loan where the lender registers an interest over an asset, usually the vehicle. Secured loans normally price better than unsecured ones. Secured car loans
- Settlement
- The point where the lender pays the seller and the loan officially starts.
- Statement of financial position
- A summary of your assets, liabilities, income and expenses used by lenders to assess servicing capacity.
- Servicing
- A lender's assessment of whether your income can support the repayment after living expenses and other commitments.
T
- Trade-in
- Selling your current vehicle to the dealer as part of the new purchase. Any finance owing must be cleared at settlement. Trading in a car with finance
U
- Unsecured loan
- A loan with no asset security. Rates are usually higher, but the vehicle is not tied to the loan. Unsecured car loans
V
- Variable rate
- An interest rate that can move during the term, so repayments can rise or fall. Variable rate car loans
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