loan terminology: Car loans 101
Car loans made Simple:
Purchasing a car can be a daunting task, especially for younger buyers who might require a particularly pricey set of wheels, but don’t yet have the funds to be able to afford one. Fortunately, there are a number of financial facilities which feature customisable terms along with flexible monthly amortisation for first-time vehicle owners.
A lot of the bank and loan terminology can sound like another language to those of us not working in finance. To clear things up, we have written up a quick and Simple guide that we like to call:
Car Loans 101
Let’s get started shall we?
- A loan is an arrangement between a borrower and a lender.
- The money given to the borrower by the lender is referred to as the principal.
- It’s the borrower’s responsibility to repay the principal balance (the funds borrowed) back to the lender in small amounts until it's repaid in full, plus interest.
- Interest is a fee paid by the borrower for the use of the lender's money.
- An amortisation rate is the amount a borrower repays on a regular basis.
A car loan is a specific type of loan that is usually secured against the car you buy:
- With a secured car loan, the lender uses the vehicle as a form of security (something of value that sits against the loan which can be sold if the borrower defaults on the loan).
- Defaulting on a loan occurs when the borrower is unable to make their repayments for whatever reason, resulting in the lender seizing the loan security and selling it to recoup their losses.
- Defaulting on a loan can have long term consequences on your credit rating and should be avoided at all costs.
- With a secured car loan, the lender holds the title to the vehicle until the borrower has repayed the lender in full.
- This allows the lender to give the borrower a reduced interest rate on the car loan, as compared to an unsecured personal loan.
- Typically, an interest rate is calculated as a percentage of money lent. For example, a loan with 5 % interest means that the borrower would pay an extra $5.00 per $100.00 lent.
- The term on a loan is how long it takes to repay it in full. Terms can vary in length, generally it’s somewhere between 12-60 months.
- A borrower can often get a lower monthly repayment rate by paying a month in advance as opposed to paying in arrears (late).
Okay so that covers the basics. Easy, right?
There are few options when it comes to car loans that can make choosing the right kind of finance a little confusing to a first-time buyer. So let’s delve a little deeper and check out some other loan types.
What other car finance options are available?
Unsecured Loans :
This type of loan is pretty much exactly what is sounds like: It’s identical to a secured car loan, except the loan is not secured against the vehicle. This means that the lender has no claim to the car, so the borrower doesn’t have to worry about losing their sweet ride if they can’t make their repayments. Keep in mind, some lenders only offer car loans that are secured.
Because there is no security involved, unsecured car loans attract higher interest rates and tougher lending criteria (it can be harder to get an unsecured car loan).
To qualify for an unsecured car loan, a borrower typically needs:
- Secure employment (not on probation and must have worked at the same place for at least six months).
- A good credit rating with good credit history
The other notable difference between secured and unsecured loans is that an unsecured loan can be used to used to buy pretty much anything from furniture to a vacation.
Bad Credit Car Loans:
This loan option is designed for those of us who have had some credit troubles in the past.
Anytime a borrower applies for a loan, or a line of credit for that matter, a lender will generally run a credit check to see if the borrower has defaulted on any loans in the past or had any other issues with repayments on things like credit cards.
Many lenders just won’t lend to anyone who they consider to be too risky to do business with. If a credit check comes back with too many red flags, chances are, most of the mainstream lenders will deny the application.
Luckily, there are a number of specialised lenders who focus on helping people who have credit problems. The interest rates are generally higher than that of a normal car loan due to the greater risk to the lender, having said that, bad credit car loans can be incredibly useful when you have no other choice.
After all, a few issues in the past shouldn’t necessarily mean that you have to put your life on hold.
A novated lease is an agreement entered into by a lender, a borrower and the borrower’s employer. Novated leases can look a little tricky on paper, but they are relatively straight forward.
How it works:
- The borrower picks the car they want.
- The lender and the borrower’s employer sign the novation agreement
- The employer agrees to take on the amortisation payments as long as the borrower is employed.
- The amortisation payments are taken out of your pre-tax income
A novated lease is one of the most tax and cost effective methods of purchasing a vehicle. With this finance option, the repayments and all of the associated on-road costs are taken directly from your pre-tax wages, leaving you with more after tax-income and allowing you to pay a lower rate of tax on vehicle maintenance.
A car lease (sometimes called a finance lease) is a loan option where the borrower has the use of a vehicle, with all the benefits of normal ownership, but the lender holds the actual title to the vehicle.
This means that the car doesn’t actually belong to you, but at the end of the term, you are given the option to take ownership, trade it in for another vehicle or refinance and continue the lease.
Some benefits of a car lease option:
- Fixed interest rate.
- Fixed monthly payment.
- Associated costs are known ahead of time.
- Tax deductions are available if the vehicle is mainly used for business purposes.
- The lease is secured against the vehicle which lowers the interest paid.
Car leasing is best suited to businesses and companies looking for a vehicle to be used predominantly for work purposes.
Low Doc Car Loans:
As you might have guessed, a low doc car loan is simply a car loan for self-employed people who might have some difficulty providing employment or earnings documentation. The majority of lenders can require up to 24 months of tax returns before they consider lending small businesses money for a vehicle.
Low doc loans can:
- Provide GST and Tax incentives
- Have flexible payment schemes
- Flexible loan terms
- Fixed interest rates
- Be used on new and used vehicles
Obviously, low doc car loans are best used by those who run their own business or are sub contracting.
Okay, so hopefully now that we have gone through some of the basic loan terminology and some common types of car loans, you are now prepared and have better idea of the type of vehicle finance that best suits you.
Simple Car Loans is here to answer any questions you might have, you can even apply online to compare a huge range of loan options with same day approval. Feel free to contact us today if you are interested in finding out more.