The Basics
There are a few words that you will find in most contracts, or you may be asked about when talking to your broker or car dealer.
Collateral
It is the object of value that can be taken away by the lender if you do not meet the terms of the contract.
In an auto loan, the vehicle is usually the collateral.
Credit Check
Most lenders will carry out a credit check. This is an inquiry to find out your credit score.
Credit Report
A report containing your credit-related activities. It details all loans, payments, late payments, and even how often you inquire about credit.
Credit Score
Everyone who applies for credit is given a three-digit score, relating to the credit report.
The higher the score, the better as it will usually mean lenders are happier to provide a loan. You might also expect lower interest rates.
Creditor
This is the organization lending you the money.
It can be a bank, finance company, car dealership, or even a friend who’s lending you the money.
Debtor
The debtor is the person who owes the money. It is usually the person who signs the loan paperwork.
Default
If you don’t pay the agreed amount when you are obliged to in the loan contract. This can also apply to only making a part-payment.
Down Payment
A down payment is a sum of money that you pay up-front for the car. It lowers the amount outstanding and will usually mean you are offered a lower interest rate on the loan.
Loans
You can find different types of these to meet your needs. Here are some standard terms you may come across when deciding on the loan that best fits your needs.
Dealer Financing
The car dealer can arrange to finance your purchase.
The advantage is that much of the information gathering has already been done for you. They will be able to give you details of terms, interest rates, down payments, and total price immediately.
Direct Financing
Once you agree to buy the car, you will find a lender to provide the finance. This way, you may find a loan at a cheaper rate. You will, however, need to put in the work to find it.
Early Loan Repayment
You may decide to repay the outstanding amount before the end of the agreed term. Some loans may not allow this, so if it’s essential, check carefully.
Extra Loan Repayment
If you have some spare cash, you may choose to make an additional payment to your lender.
Loan Repayment
This is the regular amount you will pay until the end of the contract, as agreed. It will usually be fixed on a specific date each month.
Loan Term
The length of time over which you have borrowed the financing. This is often measured in months. At the end of the loan term, you will have repaid all the money you owe.
Secured Loan
The car acts as security for the financing. If you don’t repay the money as agreed, the lender can seize the vehicle. Most auto loans are secured against the vehicle.
Unsecured Loan
There is no collateral for the loan. If you fall behind on the payments, the lender cannot take the vehicle.
As this type of finance is riskier, it is unusual in auto loans and has a higher interest rate.
Rates
A rate is the amount of extra money you will pay the lender for the financing. It is usually given as a percentage number.
Annual Percentage Rate (APR)
This is the annual interest you will pay on your loan.
Fixed Interest Rate
If the interest rate is fixed, it will not change during the term of the agreement.
Interest Rate
The interest rate is the cost of borrowing money.
The lender will set this rate depending on the amount you borrow, the term of the loan, whether there is collateral and your credit score.
Variable Interest Rate
If the rate is variable, it can change over time. It is often linked to the central bank lending rate. It may go up or down.
Fees
Fees are the additional costs that may be associated with your financing option.
Early Repayment Fee
If you wish to pay off the borrowed money before the agreed end date of your contract, you may need to pay a penalty to the lender.
Establishment Fee
This is a charge your lender may make to set up the loan.
Late Fee
If you don’t make repayments as agreed in the contract, your lender may impose a charge. These can be high, so it pays to check this out.
Ongoing Fees
These are unusual in short-term financing agreements, but if your loan is a longer one, you may be required to pay a periodic fee to the lender over the term of the contract.
The Verdict
Taking out an auto loan is a significant commitment. Often the paperwork can be lengthy and written in a confusing manner for the average buyer to understand.
As with any contract, however, you should be sure you understand it before you sign it.
If you are in any doubt, take the contract away with you and have it checked out by another person.
Don’t be afraid to ask questions if there is anything you don’t fully understand. Take your time and make sure that the offer is the right one for you.
Once you’ve agreed to the loan and have the keys to your new vehicle, go and enjoy it!
