The world of finance can be full of confusing terminology. Car finance is no exception. And while we try to be jargon-free, we recognise that there are words that are used across the industry that can be difficult to understand.
With that in mind we’ve produced this straightforward list of terms, so that you can make sure you’re in the know when it comes to your car loan. You can use this guide to find the definitions of specific terms you’ve come across in your car loan shopping; or read the complete list to get comfortable with car loan and finance terminology before talking to lenders.
Is the contract that is set up by the finance company to include all the terms and conditions of borrowing, including details of all fees and charges. The loan agreement is signed by the lender and the individual.
Finance companies charge you to borrow money by applying interest to your debt. The interest is charged as a percentage of the total debt. For example, if the interest rate is 1% on $100, the finance company will charge you $1 to borrow $100. Interest is applied on a regular basis as defined in a car loan agreement. This could be daily, weekly, monthly or annually.
An upfront or initial payment on your car loan. A deposit reduces the size of the principle borrowed.
The principle of the loan is the amount that has been borrowed. Interest is calculated on the principle.
The term of the loan is the length of time that the loan agreement lasts.
A regular payment that is calculated to reduce the size of your loan over a fixed term until it is fully repaid. Repayments are usually made in weekly, fortnightly or monthly installments.
An establishment fee is a fee that is charged to set up your loan. This covers costs like getting paperwork set up and securing funds.
PPSR is the Personal Property Securities Register. If your loan is secured against an asset then that will be recorded in the PPSR. This fee covers the cost of registering the security.
Secured or Unsecured
Secured and unsecured are two different types of lending.
Secured lending uses an asset belonging to the individual who is applying for finance as security against the loan. That means that if the individual is unable to repay the debt the finance company has the right to seize the asset and use it to recover outstanding debt.
Unsecured lending occurs when an individual borrows money without offering an asset as security. Traditionally unsecured lending has higher interest rates as the risk to the borrower in increased.
A finance company can offer a secured or unsecured loan. If the loan is secured then an asset of equal or greater value is offered as security against the debt. This means that the individual agrees that the finance company can recover its funds by taking possession of the asset(s) should the customer be unable to repay the loan. The asset used as security in car loans tends to be the vehicle that the car loan has purchased.
Everyone has his or her borrowing behaviour tracked in order to identify if they are likely or unlikely to repay their debt. The credit score or credit rating is calculated based on a person’s historical credit behaviour. If a customer has failed to comply with the repayment conditions of a loan or financial contract (such as mobile phone contract) they may have a lower credit score.
The credit record includes the credit score and information about a person’s current and historical borrowing.
Lenders use a person’s credit history or credit record to assess whether he or she can be trusted to repay the debt. If the credit history is poor then finance companies may choose to either decline an application for finance or to increase the individual’s cost of borrowing through a higher interest rate, in order to cover the cost of the increased risk.
Is the reduction in value of an asset over time, usually due to wear and tear and ageing.
Equity or Negative Equity
Equity is the value that is represented by an asset. Negative equity occurs when the value of an asset is less than the debt that is owed against it. For instance, if a car depreciates in value faster than its owner repays the car loan, then it would be possible to get into a position of negative equity.
Pre-approval is approval of a loan in principle and usually includes specific conditions. To process a loan to the pre-approval stage finance companies will carry out credit checks and complete most, if not all, of the application process.