Car finance is both simple and complex. It’s simple to find and simple to access but involves complex contracts and occasionally, confusing terms.
We can help manage the contract by walking you through the entire process. We hope this list of five common car finance terms can help with the other confusion!
Car finance terms explained
An informed customer is a happy customer. Knowing exactly what you’re getting into, exactly what you’re getting and what your responsibilities are can be a deciding factor in how happy you are with your loan.
We hope this glossary helps with that.
Annual Percentage Rate (APR)
It’s vital that you know what APR is and what it means. APR means the cost of interest rate and any charges payable over the year. This has a direct correlation to the overall cost of your loan.
Interest rates are calculated daily, weekly or annually depending on your loan. So even though you’re paying an annual percentage rate, that rate is calculated much more often than that.
Lower is generally better with APR.
Bad credit is an umbrella term used to describe anyone with a less than ideal credit score. There is no concrete definition of what a bad credit score is because lenders and credit reference agencies all have different ideas about what it means.
What is important to understand is that you can still access car finance with bad credit and it does not carry anything like the stigma it once did. People find themselves with bad credit for all kinds of reasons and everyone understands that now.
Debt to Income Ratio
Your debt to income ratio is a calculation of how much you have borrowed compared to your annual or monthly income. The more of your income is taken up servicing debt, the higher your debt to income ratio is.
Lenders consider your debt to income ratio when assessing your application. The lower your ratio, the higher chance you have of being accepted for the loan.
Depreciation refers to the car and not the loan but is part of a loan calculation. Your car is worth a set amount while on the forecourt and will gradually lose value while you own it. Value can be lost through age, mileage, condition and all manner of things.
Depreciation is used by a lender to calculate how much they could recoup should you default on the loan. It is actually more important for you to know the level of depreciation so you can calculate potential resale value.
A lien is a contractual term. It means the right of a lender to repossess the car in order to pay off the outstanding amount. This is usually a move of last resort but something most lenders build into the contract.
A lien does not mean the lender owns the car. It just means they have the right to repossess it should you default on the loan.
We are sure there are many more car finance terms out there that confuse people. We will cover more in another post.