When applying for a car loan in Australia, understanding the terminology used by lenders is essential. Car loans can be complex, but familiarising yourself with the key terms can help you navigate the process with confidence. Here’s a guide to the most common car loan terms explained in simple language.
- Principal
The principal is the amount of money you borrow from the lender to finance the purchase of your car. For example, if you buy a car for $30,000 and make a $5,000 deposit, your principal will be $25,000. This is the starting amount on which interest will be calculated throughout the loan period.
- Interest Rate
The interest rate is the percentage that the lender charges on the principal over the loan term. This can be either fixed or variable:
- A fixed interest rate remains the same throughout the term of the loan, providing predictable repayments.
- A variable interest rate may change over time, meaning your repayments could increase or decrease depending on market conditions.
Interest rates for car loans in Australia typically range between 5% and 9% per annum, with secured loans generally offering lower rates than unsecured ones.
- Loan Term
The loan term refers to the length of time over which you’ll repay the car loan. Car loan terms in Australia usually range from 1 to 7 years. A shorter loan term means higher monthly repayments but lower overall interest costs. A longer loan term results in lower monthly payments but increases the total interest paid over the life of the loan.
- Repayments
Repayments are the amounts you pay back to the lender on a regular basis, usually monthly. The amount you pay is determined by the loan amount (principal), the interest rate, and the loan term. Some loans offer flexibility, allowing you to make extra repayments to reduce your debt more quickly and save on interest.
- Secured Loan
A secured loan is a type of car loan where the vehicle itself acts as collateral. This means that if you fail to make repayments, the lender has the right to repossess the car to recover the loan amount. Because the lender has security over the asset, secured loans usually have lower interest rates compared to unsecured loans.
- Unsecured Loan
An unsecured loan does not require collateral. While this type of loan doesn’t involve the risk of repossession, it is generally more expensive, with higher interest rates. This is because the lender assumes greater risk in the event of loan default.
- Deposit
A deposit is an upfront payment made towards the purchase price of the car. In Australia, a deposit typically ranges from 10-20% of the car’s value. Making a deposit can reduce the total loan amount, which may lead to lower monthly repayments and potentially better loan terms.
- Loan-to-Value Ratio (LVR)
The Loan-to-Value Ratio (LVR) is the ratio of the loan amount to the car’s value. A lower LVR indicates a lower risk for the lender, which may help you secure a better interest rate. For example, if you buy a $30,000 car with a $5,000 deposit, your LVR is 83% (the loan amount of $25,000 divided by the car’s value).
- Early Repayment Fees
Some car loans in Australia may have early repayment fees if you pay off your loan ahead of schedule. Lenders may charge this fee to recover potential interest income lost due to early repayment. It’s important to check the terms of your loan agreement to understand any penalties.
Conclusion
Understanding car loan terminology is crucial when applying for finance in Australia. Terms like principal, interest rates, loan term, and secured vs. unsecured loans can affect the cost and structure of your car loan. By familiarising yourself with these key terms, you can make better decisions, ensuring that you choose the car loan that best suits your financial situation and goals.
DISCLAIMER
The information provided on this website is general in nature only and has been prepared without considering your financial needs, circumstances and objectives and should NOT be construed as financial, taxation or legal advice. For more information, get in touch with our experienced partner brokers today.
