Car loan and car finance terms and definitions

A balloon payment is a lump sum amount owed at the end of a loan term/lease contract, after all regular monthly repayments have been made. For example, you may borrow $50,000 but only pay $30,000 over a three-year loan term and have one final payment of $20,000. Effectively you are only repaying part of the principal of your loan over the term, reducing your monthly repayments in exchange for owing the lender a lump sum at the end of the loan term.

Calculated using income or revenue, expenses and other existing borrowing obligations, this is the amount of money an individual or business can borrow. Borrowing power may also depend on the value of any asset the loan is secured against.

Used for comparing loans of different structures, the comparison rate factors in all fees and charges incurred during the life of a loan, as well as the actual interest rate. This is useful for borrowers as comparing interest rates alone can be misleading if there is a substantial difference in the structure of the loan or other fees incurred.

This is a history of your repayments and other credit-related factors which is available to many lending institutions. The report details if you have previously made timely or late repayments or missed a payment. Late or missed payments can affect your credit score. Payment default information and repayment history information can remain available for many years.

Compiled by credit bureaus, your credit score (usually out of 1000) is an indication of how creditworthy you are. It is based on an analysis of your history as provided by past creditors such as banks and credit card providers.

The most common meaning relates to the amount of money you put down towards the cost of a vehicle or other purchase. If the total cost of a car is $50,000 and you make a down payment of $10,000 the amount you finance will be $40,000. The value of your trade-in vehicle could also be considered a deposit – assuming there are no outstanding borrowings on that vehicle.

Depreciation is the difference between the value of a car when you sell it compared to when you purchased it. If the purchase price of a car is $50,000 and three years later it is worth $30,000, then it has depreciated $20,000. Depreciation also has particular meanings and applications when talking about taxation and other subjects beyond the scope of this article.

These are additional payments imposed by a lender over and above your principal and interest repayments. Examples include establishment fees, account keeping fees and more.

Everything you need to know about car finance

This is a term which has a specific legal meaning for ASIC purposes, but generally relates to accredited companies or individuals that provide a range of financial services ranging from investing to borrowing to superannuation.

This is a loan type where the interest rate is a fixed number and doesn’t fluctuate (up or down) during the term of the loan.

A guarantor is a person who guarantees to pay a borrower’s debt in the event the borrower defaults on a loan obligation.

This is the rate at which you’re charged for borrowing money. (See also Fixed rate, Variable rate and Comparison rate)

This is the person or organisation from which you are borrowing money. It may be a bank or credit union or another form of financial service provider (see also Financial service provider). In the case of car dealer financing, in most cases the dealer is not the lender but rather acting as an agent for a lender such as a finance company, bank or even the vehicle manufacturer. Ultimately, the lender is the institution which loans you the money, and to which you are indebted.

The first step to getting a loan is normally completing and submitting an application that requires you to identify yourself and detail your financial position such as earnings, assets, debts and expenses. You will also usually have to sign a declaration that the information is accurate and current, and provide supporting documentation. You may also need documentation to confirm where you live, as well as any property or share ownership.

The formal contract between you and the lender that details the terms and conditions of the loan including any fees, how interest is calculated and each party’s obligations.

The period of time detailed in the loan contract for the borrower to repay the amount owing to the lender. Usually detailed as weekly, every two weeks or monthly, and including part principal and part interest.

Although the calculations behind a novated lease can be complex, defining it is simpler. Essentially, it is a finance arrangement used with salary packaging via which your employer pays for your car lease and car running costs out of your salary package through a combination of pre-tax and post-tax salary deductions.

A conditional approval process that is undertaken prior to confirming a loan. It is usually not binding on you or the lender and helps provide an indication of how much you’re able to borrow. It may also speed up the actual loan processing time.

The amount borrowed to be repaid. (See also Deposit)

This is a legal requirement under Australian consumer laws. It is a document provided to you which contains details of the financial product as required by legislation. It is important to read this before signing up.

A feature that allows a borrower to withdraw funds that have been paid towards a loan that are in excess to the scheduled repayments. This is often a feature of home loans.

A term which describes the process via which you take an existing loan commitment and transfer it to a new lender. This usually requires a new loan application process and can involve substantial fees including in some cases early repayment fees charged by the original lender. Refinancing may be undertaken when the value of an asset such as a home has increased, and the borrowers want to convert equity into funds. It may also be undertaken to take advantage of better interest rates or borrowing conditions.

If you borrow money, it needs to be paid back, and the frequency of repayments are set as part of the initial loan application. Repayments can be weekly, every two weeks, monthly or, uncommonly, set to other periods. Repayments are usually made up of principal repayment, interest charges and fees.

This term is normally related to leasing and it is the agreed value of the vehicle at the end of the lease term, usually expressed as a percentage of the purchase price. For example, a $100,000 luxury car might be leased for a three-year period with a 50% residual. At the end of the lease the nominal value is $50,000. In most cases you would have the option of paying the $50,000 and keeping the car. If, however, you chose to hand the car back to the lease company and it was only worth, say, $40,000, you could be liable for the $10,000 shortfall.

This is a loan where collateral (eg the vehicle being purchased or other assets) are listed as security for the loan. Many car loans are secured loans. This means the car may be repossessed by the lender if you fail to honour the loan contract. It also means the borrower will usually require proof of comprehensive insurance for the vehicle, etc.

Also known as collateral. An asset which a borrower uses to secure funding from a lender. In the event that the borrower cannot repay their debt, this asset can be taken by the lender and/or sold to recover monies and fees owing.

This is a loan where no collateral or assets are listed as security for the loan. Although the car or asset may not be subject to repossession, lenders can still take legal action if you default on your loan. Unsecured loans often have higher interest rates than secured loans.

This means the interest rate fluctuates with market forces, often in response to changes to the official cash rate.

DISCLAIMER: This car finance information is general in nature and should not be relied upon as legal advice. Each of these options may be subject to exclusions and limitations and you should always read the terms of any finance deal before agreeing. carsales.com Limited does not warrant the accuracy, timeliness or completeness of any representations made in the document or that the material is suitable for any purpose. Opinions expressed within carsales’ editorial material are those of the writer and not necessarily of carsales.

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