As a trusted car loan specialist, we always take the time to ensure you fully understand our offers and contracts. However, getting to know some of the common loan document language in advance can make it easier for you to ask questions and compare different offers. There are also some terms you’re likely to hear in conversations about car loans in general. To get you up-to-speed quickly, here’s a short guide to car loan jargon.
Interest rate
When you get a car loan, you agree to pay the money back plus some extra, known as interest. This is how the lender makes their money as a business. Interest is calculated as a percentage of the amount you still owe (the principal). The interest rate will depend on market rates when you apply for the loan and how much risk there is that the lender might not get their money back if things go wrong. With a car loan, your agreed interest rate is usually the same (fixed) for the life of the loan.
Loan term
This is the time you have to repay the loan in full. You can usually choose anything from six months to five years. Choosing a longer term will spread your payments out, so they’ll be smaller each time. However, you’ll pay interest for longer, which means you’ll end up paying more over the life of the loan. Also, your car will usually have less resale value by the time it’s paid off.
Deposit
Loan payment
To make budgeting easier, your weekly, fortnightly or monthly car loan payments are normally calculated to be the same each time. At the beginning of your loan, each payment is mostly made up of the interest owing. As you gradually repay the loan, your regular payments include less interest and repay more of the amount you owe (the principal).
It’s often a good idea to choose a loan payment frequency that matches your pay cycle. That way your loan payment will be one of the first things you cover, i.e. there’s less chance of accidentally over-spending and having to miss a payment.
Total cost of finance
This is how much the loan will cost you overall. It includes the loan amount, the total interest you’ll end up paying over the life of the loan and all standard fees the lender intends to charge. It’s a very important number to consider when comparing loan options.
The lender will normally state the total cost of the loan in their written offer. If they don’t, be sure to ask for it in writing.
Early repayment charges
With some car loans, if you make extra payments or pay your loan off in full before the agreed term ends, you’ll be charged an early repayment fee. Other car loans don’t come with early repayment fees. They’ll let you make extra payments or repay your loan earlier without any penalties.
Be sure to ask about early repayment charges when comparing loan offers. If you get the chance to repay your loan sooner, without paying a penalty, it can significantly reduce the interest you pay over the life of the loan.
Other fees and charges
Most lenders charge administration fees to set-up, operate, change and close-out a car loan. Some will be standard fees that apply to every loan they provide, such as a set-up or establishment fee. Others will only be charged if you request or trigger a particular process, such as changing your payment schedule or increasing the amount you’ve borrowed. The standard fees should be included in the total cost of finance your lender provides. But it’s important to ask for a list of all fees, so you know what you might be charged if things change.
Interest-free and no repayments periods
Default interest rate
If you miss a payment or fall behind in your repayment schedule, you’ll be charged extra interest on the outstanding amount (arrears) until your balance is back to where it should be. The extra interest is charged at a default interest rate, which should be specified in your loan document or contract. It’s usually something like the loan’s interest rate plus 5%.
Default interest only applies to the amount that’s in arrears (behind schedule). It’s usually calculated daily using the annual default interest rate divided by 365. The daily interest charges are added to your loan balance, usually each month. This can put you further into arrears if you haven’t caught up yet.
If you think you might miss a payment it’s important to contact your lender beforehand. They may be able to offer a solution that avoids paying default interest.
Secured loan
Comprehensive car insurance
Payment protection insurance (PPI)
This optional type of insurance covers your loan payments if you can’t work due to specified events, such as redundancy, illness or injury. These policies usually have an adjustable wait period before cover payments start, as well as an agreed maximum time the loan payments will continue. Loan protection insurance is similar, but it’s designed to repay the loan in full in certain circumstances. Income protection insurance is another option; it pays out to you, rather than the lender.
Having your payments protected in some way by insurance is not compulsory. While it might reduce your loan’s interest rate and give you more peace of mind, there’s a cost involved. It pays to carefully consider whether the potential benefits outweigh the added cost.
If a lender offers to add the cost of insurance to your loan, remember that you’ll pay interest on that amount for the entire life of the loan.
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Next steps
Now that you have a deeper understanding of car loan language, it’s time to find the right loan for your needs. Whether you’re just getting started or you’ve already found a suitable car, Auto Finance Direct is ready to help. We make it quick and easy to get a quote and apply for your loan. You can do this through many vehicle dealerships in New Zealand or apply online now.
