Are you thinking about taking out a loan to help you buy your next car?
If you are starting to test the waters of car finance, you might have come across a few bits of terminology that seem a little confusing.
Don’t worry – we’re here to help you decode it.
Understanding the details, and what all that car finance terminology means, can be really helpful when it comes to finding the right loan for you. That’s because being informed the outset can make the whole process a lot more seamless and save you money and stress along the way.
Here’s our essential guide to auto finance terminology, to help Kiwi drivers like you make informed decisions.
Let’s get right back to basics – a car loan is money that you borrow to purchase a vehicle.
It’s often secured against the car. That means if you stop making payments for whatever reason, the lender may repossess the vehicle and sell it to clear the money you owe.
Unsecured loans are also available, but these may have higher interest rates because there is more risk for the lender. (There’s no car there as security to sell if things go bad.)
People use auto finance to buy new cars and second-hand ones.
If you’re delving into the world of auto loan terminology, there are a few terms you might need to familiarise yourself with. Here’s our car finance 101 to get you up to speed.
Principal: This is the initial amount that you borrow to buy the car. When you make a repayment, some of it will go to repaying the principal, and some will cover the interest.
Interest rate: This is what you pay the lender for the money you borrow. It is expressed as a percentage of the loan, usually per year (or annum). If your interest rate is 15 percent, for example, you’ll pay 15 percent of the amount owing in interest each year.
Fixed versus variable rates: Some interest rates are fixed for the term of a loan while others (described as variable or floating rates) can change.
Loan term: This is how long you have to pay back the loan. The shorter your loan term, the larger your repayments will be. But if you have a longer term, you’re likely to pay more in interest overall.
Residual or balloon payment: This is a large final payment that can be associated with some car finance loans from dealers. When you have a loan with a balloon payment built in, the idea is that you have lower repayments at the beginning of the loan but then face a bigger payment towards the end, to pay the loan off in full.
Deposit: The upfront payment you might make when you purchase a car and you can then finance the rest of the sale price.
Credit score: Everyone has a credit score, which is a reflection of their creditworthiness. A lender will look at this as part of its checks of how likely you are to meet your repayments.
Preapproval: Some lenders will approve a loan in theory up to a certain amount, which gives you the freedom to go and look for a car, knowing the maximum you could spend. A lender might give you preapproval for $25,000, for example, so you know you can look for cars selling for up to that price (or lower of course if you find one that suits your needs and objectives).
Default: If you don’t make the payments on your loan when they fall due, you may default on your loan. This means you’ve not met your obligations and the lender may take action to recover what it is owed (which may also incur additional fees).
Refinancing: Sometimes it’s possible to alter your loan terms after the original agreement, whether that’s with the same lender you initially borrowed from or by moving the loan to a new lender.
When it comes to finding the right car loan, there will be a few things to think about to find one that’s a good fit for your needs.
Loan affordability: Top of your list is likely to be how much a loan is going to cost you. It’s really important to only take out a loan that fits within your budget. You’ll need to think about what sort of repayments you can manage, and whether your circumstances might change in the future. It’s often helpful to factor in some breathing room, just in case. It’s generally not a good idea to have every spare dollar in your budget committed!
Before you sign on to a car loan, look at the options available. Consider the terms you’re offered lending over, too. If being able to make extra repayments from time to time is important, will a lender let you do that? Is there good support available if you have questions about your loan?
The right fit for another borrower may not be best for you, so take the time to think about how finance options you’re looking at fit your circumstances, and the car you’re looking to buy.
The total cost: Look beyond the interest rate and repayment amounts. What sort of fees and charges apply to the car loan you’re considering? Some lenders charge annual fees, or monthly fees, and there might be administrative fees to consider too. It makes sense to compare the total cost of borrowing. Try to get an overall picture of the cost of the loan.
Borrowing money isn’t always plain sailing. There are some common pitfalls that catch borrowers out.
Here are a few to swerve.
Signing without understanding the terms: Buying a new car is a really exciting time, but don’t rush into your car loan decisions. Take your time to fully understand what you are agreeing to, to be sure that you’re getting a suitable car finance option.
Ignoring hidden fees: Hidden fees can add up and can make your loan more expensive, and may also mean you’re stuck paying it off longer than you might have with a lender charging lower fees. Lenders need to disclose their fees, so take the time to fully understand what you will be charged.
Underestimating the impact of balloon payments: Balloon payments can catch people out, because they push the bulk of the payments to the end of the loan. Your income might change between the time you took out the loan and when the balloon payment falls due, or you might find it’s just not as easy to pay as you had expected. To make a balloon payment work, you’ll need to know that you have the money easily available to cover the payment. You could also apply to refinance the loan with another lender but this can add a level of stress if you’re not certain that you’ll get a loan with good terms.
What is the difference between an unsecured and secured car loan?
A loan is secured when the lender has an asset as security – in this case, your car – that it can sell and repay the loan and accrued interest and charges, if you stop making payments. When a loan is unsecured, the lender has none of this protection and may charge you a higher interest rate.
Can I get a car loan with bad credit in New Zealand?
Probably. You may have fewer options in terms of lenders, but at better finance™️ we have helped many Kiwis who have hit a ‘credit record snag’. Just get in touch.
What happens if I miss a car loan payment?
If you miss a car loan payment, the most important thing to do is to communicate, fast. Contact the lender, let them know what happened and discuss next steps.
How can I work out how much I can afford to borrow?
It might be a good idea to do a budget, including all your normal outgoings and bills, to work out what sort of surplus you have left over each month. This will give you an idea of how much you can afford in repayments for your car loan. And of course, lenders have a range of tools to determine how much you can afford to borrow, as well as an obligation to lend responsibly.
How does preapproval work for car loans?
A preapproval will give you an idea of the amount a lender might be willing to offer you to buy a car, based on your current income and financial commitments. This means you can start looking for a car knowing the price range that you can afford.
Do I need to buy a car from a dealer to get finance?
No, you can get finance to buy a car from another individual, too.
Do I ned to have insurance on my car?
Yes, if your loan is secured against your car, you’ll be required to have insurance on the vehicle.
How long might my loan term be?
Car loan terms can vary. Anything from one year to five years is common.
It pays to take your time over big financial decisions such as buying a car.
Here are a few things that might help as you weigh up your options.
When it comes to taking out a car loan, it makes sense to take a bit of time at the beginning, investigating your options.
Car loan terminology might be new to you, but by going through any agreement carefully, and asking for help when you need it, you may be able to save yourself hassles down the track.
If you’re ready to take the next step in your car finance journey, get in touch with your trusted car loan provider, or even check out an online calculator. Then get ready to go car shopping!
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.