APR stands for Annual Percentage Rate, and it’s a calculation of the full amount you pay for a loan each year to borrow money, including the interest rate and fees, expressed as a percentage. Most loans last for more than a year, so the total interest and fees to be paid are added up and averaged out to provide an average figure. The higher the APR, the more you’ll pay over the life of the loan.
The balance is the amount owing to be paid. The balance is reduced each time a repayment is made.
A balloon is a large lump sum final payment made at the end of a loan term. It can be quantified as either a dollar value or a percentage of the amount borrowed. Balloons are most commonly used with business loans, but can be used in personal loans. Options to pay out a balloon at the end of the term include: refinancing the balloon over a new loan term; paying the balloon out in cash; trading in the vehicle to pay out the balloon.
BILL OF SALE
A document prepared by the seller or dealership to record the details of a vehicle sale.
Car Finance usually refers to commercial car finance, as opposed to personal car loans, and encompasses instruments such as a Car Lease, Commercial Hire Purchase (CHP or HP), Chattel Mortgage and Novated Lease.
Under a commercial lease, the customer doesn’t own the car; they pay a monthly fee to use the car. The car is purchased by the financier, and the financier then leases the car to the customer. The car is returned at the end of the lease with nothing more to pay.
A car loan is a personal loan established specifically to fund the purchase of a new car. An agreed amount of money is borrowed, and then paid back in an agreed period of time. The loan is secured against the vehicle that the customer purchases. Terms can vary between 12 months and 5 years.
When a car is purchased under a Chattel Mortgage, the customer takes ownership of the car at the time of purchase. The financier then places a mortgage over the vehicle, and makes the car a security against the loan. Often security backed finance such as Chattel Mortgages can feature lower interest rates. For the record, ‘Chattel’ means ‘an item of movable personal property’. In this case, the ‘Chattel’ is the car.
CHP (COMMERCIAL HIRE PURCHASE)
As the name suggests, under a Hire Purchase agreement, the customer hires the car from the financier, and pays regular payments over an agreed amount of time. The period normally ranges from three to five years. Upon making the final payment, the customer then owns the car. With Hire Purchase, you have the option to have a balloon or not.
The comparison rate combines the nominal interest rate of a loan with fees (such as establishment and ongoing fees) and charges to provide a clear picture of the true cost of a loan over the life of the loan. A comparison rate helps customers to compare car loans against another on a pure cost basis. Customers should also consider other features of a loan such as portability, flexibility and exit fees when comparing a loan.
A record of your financial performance and relationships with financiers that allows lenders to determine your ability to repay loans.
The reduction of an asset’s value over its lifetime.
Money paid to reduce the initial amount financed on an auto loan.
EARLY TERMINATION FEE
A fee that may be charged if you pay off your loan before the agreed end date of the term of the loan.
The initial cost incurred to set up the loan.
A commercial financial instrument that enables a customer to purchase a car without making an initial, large lump sum payment of the total value. The purchaser makes monthly payments, followed by the residual value, and owns the vehicle at the end of the lease.
FRINGE BENEFITS TAX (FBT)
FBT is an Australian Government Tax Office Tax that is applied when a customer uses a salary package arrangement to purchase their vehicle. Their employer usually will be responsible for paying the applicable FBT, but employers will typically recover the FBT costs from their employee by charging it back them. The FBT amount is calculated annually.
This is the rate at which you’re charged for borrowing money. The rate is normally stated as a percentage per annum.
LCT (LUXURY CAR TAX)
The LCT is an Australian Government tax placed upon imported cars over a certain value. When a car’s sale price exceeds the LCT threshold, it is subject to a tax of 33 per cent. The tax is applied only to the portion of the price that exceeds the threshold. The tax is applied to the seller and is usually passed on to the customer.
A Novated lease is a three-way agreement between an employee, an employer and a financier. The employer leases the car from the financier on the employee’s behalf, and makes the repayments from their pre-tax salary. This method of salary packaging can reduce an employee’s taxable salary, which means they may pay less tax.
NPV (NET PRESENT VALUE)
Today’s value of a future amount, before interest is earned or charged.
If a vehicle finance contract is paid out early, a monetary penalty may be applied. A Payout Penalty refers to the retained interest, ie unpaid future interest.
Portability is a loan feature that allows you to transfer your car loan from one security or institution to another.
A redraw facility allows customers to withdraw money that has already been paid against a loan.
The minimum agreed amount to be paid at the agreed frequency, as outlined in your contract.
Otherwise known as a balloon, the Residual Value is a lump sum owed at the end of a loan’s term. This is the amount you pay if you wish to own the car at the end of the lease. The residual value amount agreed to at the outset of the lease directly affects the monthly payment amount.
Unpaid future interest included in an early payout figure.
RULE OF 78
This is a method used to allocate the interest charge on a loan across its payment periods. When this formula is used, periods are weighted by comparing their numerical values to the sum of all the digits of the periods. The weights are applied in reverse, applying large weights to early periods.
Salary packaging is an arrangement between you and your employer whereby you pay for your car straight from your pre-tax salary. This can reduce your taxable income and save you money. Salary packaging is normally arranged by the company by way of a Novated Lease, Operating Lease or company car.
To protect financiers against defaults, the car you purchase becomes security against the loan. The financier can seize a car if a borrower defaults on their loan obligation.
Stamp duty is a tax levied by state governments on official documents. It is generally payable on the purchase of a car.
TAP (TO APPROVED PURCHASERS)
The acronym TAP is used as a disclaimer, and it simply indicates that the offer is subject to the customer’s finance approval.
This is the length of the loan, usually stated in months or years. Most frequently, the terms for car loans and leases are 36, 48 or 60 months.
UNSECURED CAR LOAN
A personal loan where there isn’t a car securing the loan.