Car Finance Glossary - Navigate Loan Terms with Ease
Explore our detailed Car Finance Glossary and learn key terms like loan security, interest rates and guarantor to confidently navigate car loan options.
Updated 18 February 2024
Summary
- Our comprehensive glossary is designed to demystify the car finance process, offering clear explanations of essential terms and costs associated with car loans.
- Our glossary provides a transparent breakdown of key financial terms and their implications on overall payments, empowering you with the knowledge to make well-informed decisions.
- Too many New Zealanders fail to understand their car loan contract - this glossary covers the terms you're signing up for.
Loan Terms and Costs
- Lender: The organisation providing the loan, like a bank or finance company. For instance, a bank might lend you $20,000 to buy a car.
- Interest Rate: This is the total cost of a loan over a year, including interest and fees, shown as a percentage. For example, if a $10,000 car loan has an interest rate of 15%, the annual cost of the loan is $1,500.
- Principal: The amount you borrow. If you take out a $20,000 car loan, the principal is $20,000.
- Finance Term: The length of your loan. For example, a common term for a car loan might be five years, but it may also be expressed in months.
- Fixed Interest Rate: An interest rate that doesn't change throughout the loan term. For instance, a 10% fixed rate means your interest rate will remain at 10% until the loan is paid off.
- Variable Interest Rate: An interest rate that can change during the loan term. For example, your interest rate might start at 11.50% p.a. but could increase to 12.50% p.a. or decrease to 10.50% p.a. over time.
- Zero-Interest Loan: A loan with no interest. This is often a promotion from car dealers, where you pay back only the amount you borrow with no extra cost for interest.
- Balloon Payment: A large payment due at the end of some car loans. For instance, on a $30,000 loan with a $20,000 balloon payment, you make regular payments of $10,000 and then a final payment of $20,000.
- Early Repayment Penalty: A fee some lenders charge if you pay off your loan early. For example, you might incur this penalty if you receive a windfall and decide to pay off your car loan ahead of schedule.
Loan Management and Procedures
- Car Finance Broker: A professional who helps you find a car loan. They work with various lenders to find a loan that suits your needs. For example, a broker might help you find a lender with lower interest rates or more flexible terms.
- Pre-Approval: A process where the lender evaluates your financial situation to determine how much they would be willing to lend you before you choose a car.
- Underwriting: The process lenders use to assess the lending risk to borrowers. This includes reviewing your credit report, income, and other financial details.
- Credit Enquiry: A check performed by a lender when you apply for credit. It looks into your credit history to assess your creditworthiness. For example, when you apply for a car loan, the lender will perform a credit enquiry.
- Refinancing: Getting a new loan to replace the current one. You might do this to get a lower interest rate.
- Amortisation: Paying off a loan over time through regular payments. Each payment includes both principal and interest. For example, with an amortised car loan, your payments gradually reduce the loan balance until it reaches zero.
Loan Security and Insurance
- Secured Loan: This is a loan where you offer something as security for the debt, like your car. The lender can take your car if you don't repay the loan.
- Unsecured Loan: A loan without collateral (e.g., the lender won't repossess your car if you don't repay the loan). Interest rates are usually higher because the lender has more risk.
- Guarantor: Someone who agrees to repay a loan if the primary borrower can't. For example, a parent might be a guarantor for their child's first car loan.
- Co-Borrower: A person who applies for a loan with you and shares the responsibility of repaying the loan. For example, a spouse might be a co-borrower on a car loan, which can sometimes help secure a larger loan or better terms.
- GAP (Guaranteed Asset Protection) Insurance: This insurance covers the difference between the insurance payout and the remaining loan balance if your car is written off or stolen. For example, if your car is written off and you still owe $15,000, but your insurer only pays out $10,000, GAP insurance would cover the remaining $5,000.
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MBI (Mechanical Breakdown Insurance): This policy covers the cost of certain mechanical repairs after the manufacturer's warranty expires. For example, if your car's transmission fails after the warranty period, MBI can help cover the repair costs.
Additional Terms
- Credit Report: A record of your borrowing and repayment history. Lenders use it to decide if you're a reliable borrower. For example, a good credit report might show a history of consistent loan repayments.
- Default: Failing to meet the legal obligations of a loan, usually by missing repayments. For example, if you stop making payments on your car loan, you would be in default.
- Depreciation: The decrease in a car's value over time. For example, a new car might lose 20% of its value in its first year. If you buy a car for $15,000 and then sell it for $10,000, the depreciation cost is $5,000.
- Equity: The value of the car minus the remaining loan amount. If your car is worth $15,000 and you owe $10,000, you have $5,000 in equity.
- Repossession: If you don't make loan repayments, the lender can take the car back. For example, if you default on your car loan, the lender might repossess your car.
- WoF (Warrant of Fitness): A periodic inspection to ensure the vehicle is safe to drive in New Zealand.
Frequently Asked Questions
What should I do if I don't understand a term in my loan agreement?
Always ask your lender for clarification on any term or condition you don't understand. It's essential to fully comprehend all aspects of your loan agreement before signing - they must explain the term or meaning to you, and you need to understand it before moving forward.
What should I do if I don't understand a term in my loan agreement?
Always ask your lender for clarification on any term or condition you don't understand. It's essential to fully comprehend all aspects of your loan agreement before signing - they must explain the term or meaning to you, and you need to understand it before moving forward.
How do I calculate the true cost of a car loan?
Use a car finance calculator to understand the ongoing costs. You'll also need to budget for insurance, maintenance, fuel, and other ongoing costs that need to be paid as urgently as your ongoing repayments. This will give you a realistic picture of the loan's total cost.
What steps can I take if I'm struggling with my car loan repayments?
First, assess your budget to see where adjustments can be made. Contact your lender to discuss hardship options. As a last resort, you might also consider refinancing or selling the car. Our guide to managing car finance has further details.
What happens if I default on my car loan?
Defaulting on your loan can have serious consequences, including damage to your credit history and potential repossession of your vehicle. If you're struggling to make payments, contact your lender immediately to discuss possible solutions. Our guide to managing car finance has further details and outlines your options.
You can seek advice from financial counselling services, such as those offered by the Citizens Advice Bureau or MoneyTalks. Online resources like MoneyHub's Debt Help and Sorted.org.nz also provide valuable tools and information.
How does my credit profile and history affect my car loan options?
Your credit profile is a key factor lenders consider when determining loan eligibility, interest rates, and affordability. The better your credit history and the more affordable a loan is, the better the loan terms, including lower interest rates.
Should I get a secured or unsecured loan for my car finance?
A secured loan typically has lower interest rates as it's less risky for lenders, but it means your car can be repossessed if you fail to make payments. An unsecured loan doesn't involve collateral, so your car isn't at risk, but interest rates are usually higher.
How does a co-borrower differ from a guarantor?
A co-borrower is jointly responsible for the loan and shares ownership of the car. A guarantor is someone who agrees to repay the loan if you default but doesn't have ownership rights to the vehicle.
The information presented in this guide serves solely for informational purposes and should not be considered financial advice. If you need assistance regarding the car finance options mentioned here, we recommend contacting your bank, lender or broker for expert guidance.
Car Loan Expert is not a lender but operates as an introducer to car loan brokers and lenders. To apply for a car loan, you must be a resident of New Zealand and aged 18 or older. Approval is contingent upon your affordability and eligibility.