Novated Lease

More borrowing and lending terms for absolute beginners

Wednesday, 26 October 2011 06:57

In the last post, we introduced beginners to the world of car finance to a few of the terms that get used when you start looking for a loan to buy your car.  After all, those who are looking for their first car are quite likely to need a loan to purchase that car – usually so they can go to work to earn the money that will be needed to pay off the car (and hopefully have a bit left over to pay for other expenses).  Here’s a few more borrowing and lending terms explained for those new to the process (Those who know how it works but need a loan to get a new car because their old one has blown up can skip this post and get on with the job of applying for a loan and finding a new car.)

Loan Calculator:  These are handy little gadgets provided by many lending companies to help you work out whether you can pay off the loan comfortably or not.  It’s a sort of budgeting tool, and it takes the number-crunching burden off your back – just in case you can’t remember how compound interest works even though you know you had to calculate it in class, or if you’ve handed that scientific calculator you used for doing these sums to your little sister.  With a loan calculator, you can work out what the repayments will be like (and therefore whether you can manage them) with various interest rates, terms (see below for a definition of this) and amounts to be borrowed.  You can get started by trying out our loan calculator here. 

Deposit:  This is the amount you pay up front towards the cost of the car.  If you read the last post about interest rates, you probably have realised that the more you can pay towards the car outright at the start, the better, as this will mean that you pay less interest, because you won’t have to borrow as much.  The exact amount that you need for a deposit varies.  Some lending companies will approve your loan with no deposit or only a tiny deposit, while other companies prefer you to pay a bit more up front.  Naturally, this will affect the interest rates they will offer you, so be aware. 

Term:  Term refers to how long you will be paying off the loan and the interest – the amount of time it will take until it’s all settled and the car is 100% yours.  The term is usually something that can be negotiated with the finance company, but the general rule of thumb is the longer the term, the lower the monthly repayments.  However, with a longer term, you will also pay more interest overall, so it’s a juggling act.  A short term, less interest and a large monthly repayment?  Or a longer term, more interest and more manageable monthly repayments?  It will really depend on your circumstances.  Also be aware that most car finance companies won’t accept terms longer than ten years, given the way that cars deteriorate and lose their value over time.

Repayments:  This is the amount that you will be forking out every month or every fortnight.  How often you want to make the repayments is something you will have to negotiate with the finance company, but most companies are usually OK with either monthly or fortnightly repayments.  You could try doing weekly repayments, but this will depend on your budget and how you get paid.  Regarding repayments, one thing that it pays to ask when you’re applying for the loan is whether you can make additional payments on top of the regular repayment amount so you can pay the loan off sooner, and whether there’s any fee for early repayments.

If you have any other questions about loans and car finance, don’t hesitate to ask us.  It’s important that you understand what you’re letting yourself in for when you take out a loan, so don’t feel like a twit if you ask questions.  That’s one of the things we’re here for.