Glossary of Car Loan Terms
Some of the language used by your car loan broker or lender might sound strange. When you take out a car loan, you might hear words you hadn't heard before, or some words might mean something a little different to what you'd expected.
Here's a breakdown of words that you might hear or see used in your car loan contract:
Car Loan Glossary
This is a fee charged by the lender to look after your car loan account. Not all lender's will charge an account fee.
How much is still owing on the car loan.
When you apply for car finance, you'll need to provide bank statements. This shows your income and expenses, as well as verifying your account number for the purpose of fraud prevention.
If you run a business that's GST registered, you're required by the Australian Tax Office to lodge a quarterly Business Activity Statement. It contains information about your income, GST, PAYG withholding tax, fringe benefits and other business finance matters.
Lenders may require your past BAS when granting a business car loan.
A contract to borrow a sum to purchase a car, which is subject to particular repayment terms and conditions.
Your capacity is your ability to meet car loan repayments while continuing to pay your ordinary living expenses, as well as any other financial obligations you have.
A type of secured business car loan that often has a lower interest rate and tax benefits. To take out a chattel mortgage, the vehicle must be used more than 50% for business. Find out more about chattel mortgages.
How much the car is worth, taking into account depreciation for a used car. Lenders will often use a Redbook valuation to determine how much they will lend you for a secured car loan.
A rate required by the government to enhance transparency in advertising. It includes interest and account fees to allow you to accurately compare the costs of different car loans.
Comprehensive car insurance
All secured car loans will require you to have comprehensive car insurance in case the car is written off in an accident. Rather than being stuck with a car loan for a car you can no longer use, you can use the insurance payout to finalise your car loan.
The National Consumer Credit Protection Act 2009 regulates all consumer credit contracts, including car loans. You'll receive some documents when your car loan has been pre-approved which outline your rights and obligations under the credit contract.
A Co-borrower is someone who is responsible for the loan contract. This means they benefit from the loan, and they are responsible for making the loan payments.
A co-signer is also known as a guarantor. A co-signer is not responsible for making regular loan payments. As a guarantor for the primary loan holder, the co-signer can help a family member or partner to get their first loan, or qualify for a loan when they otherwise might not.
If the primary loan applicant defaults on the loan, the lender may look to the co-signer for payment of the remaining loan balance.
Defaulting on a loan payment means that you've missed a loan payment by 14 days. This will be recorded in your credit file. If you realise you won't be able to meet a loan repayment, contact the lender before the payment is due.
A deposit is a cash sum that you put towards the purchase of your car. You can also trade in the car that you currently own to reduce the amount you need to borrow.
When you buy a car, it's value will decrease the longer you own it. This reduction in value is called 'depreciation'. You can claim this loss through tax if you have a vehicle you use in your business.
A direct debit payment occurs when you authorise a lender to deduct payments from your transactional account. You'll need to make sure that there are funds in this account when your direct debits are due to avoid a late payment fee.
An 'encumbrance' describes a right that someone else has over your property. When you take out a secured car loan, an encumbrance is placed over your car for the duration of the car loan by registration of the lender's interest in your vehicle on the PPSR. The encumbrance is removed at the end of your car loan, and then you are free to sell the vehicle.
Early termination fee
If you need to pay out your car loan before the agreed loan term you might be required to pay an early termination fee. This will apply whether you are refinancing the loan, or paying it out with cash.
This is the initial fee charged by the lender to set up your loan account.
Fixed interest rate
Car loans will usually have a fixed interest rate. This means that for the duration of the loan term the interest rate will not change. This interest rate will be charged daily to your remaining loan balance.
Gap insurance is a type of loan insurance that provides for potential depreciation of your car. If your car's value is less than the remaining loan balance when you need to terminate the car loan, then Gap insurance will pay the difference.
The interest rate is a set percentage charged to your loan balance in return for access to the borrowed funds. It's calculated based on risk, taking into account factors like your credit rating, job stability, and the car you purchase.
A lender is an institution that loans you the funds for the car loan. A lender can be a bank, credit union, peer-to-peer lender, or another type of non-bank lender.
Loan to value ratio
Your loan to value ratio or LVR is the figure that shows how the value of the car compares to the amount owing on your car loan. A high LVR means that you might owe more on the car loan than your car is currently worth, meaning the loan is 'upside down'. You can reduce your LVR by putting a deposit on your car loan.
The 'Manufacturer's Suggested Retail Price' is a value that car dealerships use to set their prices. It's basically the price the manufacturer suggests the car should be sold for.
Negative equity is what occurs when your loan to value ratio is greater than 100 per cent. It means you owe more on your car loan than the car is worth.
A novated lease is a three-way agreement between a PAYG employee, their employer, and the lender that allows an individual to purchase a car and pay back the car loan using pre-tax income. There's a full discussion of how it works, including the benefits and downsides here: What is a novated lease?
Personal Property Securities Register (PPSR)
The PPSR is a national register that records a list of valuable personal property. It keeps track of who owns items, when they are bought and sold, to prevent theft and other fraudulent behaviours. Checking the PPSR will tell you who owns a vehicle, and if there is any finance owing on it.
If you use a secured car loan to buy a car, your lender registers their interest in your vehicle on the PPSR until the loan is repaid in full.
A pre-approval is when you get a car loan approval before you find the car that you want to buy. It gives you a clear budget to shop within and allows you the freedom of arranging your car finance separately to the car purchase.
When you get a car loan pre-approval you'll usually find a better deal on your car loan because you're focused on the car loan contract, and not distracted by the car you really want to buy.
The principal of a car loan is the amount that you've borrowed. It doesn't include any fees or the interest.
Proof of income
When you apply for a car loan you'll need to show the lender how you are going to pay for it. This will usually mean that you provide your PAYG payslips. You can also provide:
- Tax Return
- Bank Statements
- BAS statements
The 'Redbook value' of a car represents the market price you can expect when you resell the car. If you're buying secondhand or trading in your car, the lender and dealer might look to the Redbook value to get an idea of what your car is worth.
To refinance a car loan means that you close and pay out the remaining balance of the loan that you have, with funds that you get by borrowing the loan balance under a new loan contract, which might be with a different lender.
The residual value or 'balloon' of a car loan is a lump sum payment that's due at the end of the loan term. A residual value is often included in car loan contracts like chattel mortgages or novated leases.
This term is more likely to appear on your comprehensive insurance policy than in your loan contract. The 'sum insured' is the maximum value that the insurer agrees to pay if an asset is destroyed. Ideally, this amount will be equal to the balance of your car loan.
'Security' refers to a valuable asset that's included in the loan contract and provides an avenue for the lender to recover the loan amount, by possessing and selling the asset.
A 'secured loan' gives you a lower interest rate, but gives the lender the right to possess and sell the secured asset, usually a car, if you default on the loan payments.
You 'service' for a loan when a bank determines that you can meet the loan payments, based on your current spending (visible on your bank statements) and your income, which is verified with your payslips or other proof of income.
The invoice for the purchase of the car. It indicates how much GST is included in the purchase price.
A statement from the Australian Tax Office which shows your annual income and tax paid.
The length of time over which you will repay the full loan amount.
If you own a car already, you can trade it and put this value towards the purchase of your new car, just like a car loan deposit.
Vehicle Identification Number, usually found stamped on the chassis of your car. This number is required in your loan documents to identify the car that you have purchased.
Get started with your car loan
Now that you know all the terms and definitions you need, you're ready for the next steps. You can start your car loan application and get pre-approval today.