5 important financial phrases you’ll want to know when getting a car loan

There’s a hell of a lot to consider when buying a new or used car, from the make and model to its age and distance travelled, horsepower, fuel efficiency, maintenance requirements and 99 other things you may know nothing about if you’re new to the world of motor vehicle ownership.

Not to mention the confusing financial jargon that comes along for the ride when you’re taking out a car loan for the first time. So, here are some no-frills definitions of financial lingo to look out for.

  • Fixed and variable rates

These terms relate to the car loan interest rate that will be charged if you’re taking out a loan instead of paying for the car outright.

You can lock in a fixed interest rate for the entire time you’re paying off the car, meaning your repayment commitments remain the same regardless of changes in the market. But it also means you may not benefit as much by paying off the loan sooner if you come into some extra cash, as fixed loans often come with a break cost fee (see point 4).

Variable interest ratescan change over the course of the loan depending on the market, so you’ll need to have more flexibility in your budget for this option. But on the plus side, variable loans generally allow extra repayments letting you pay off your debt sooner, which can result in savings.

  • Secured and unsecured loans

A secured loan requires borrowers to put up an asset, which will usually be the new car you’ve just purchased. While it comes with a lower interest rate, this gives the lender security, as they can seize these assets if in the unlikely situation you default on the loan.

For an unsecured loan, you don’t use assets (you may not have them or want to risk them), but rather your employment status and credit rating as proof of your reliability (see point 6). Since this is riskier business for the lender, unsecured loans generally come with a higher interest rate.          

  • Break cost fee

We mentioned this when we talked about fixed loans, as that’s when it usually applies. It’s a fee the lender can charge you for paying off your loan early, as doing so costs them money in the interest you would have continued to pay on the loan. And if you agreed to a fixed loan, you’re breaking that pay-back period promise, so you can get slapped with a fee. Avoid this by choosing the right loan term for your budget. If you need help to determine the right loan term, try a car loan repayment calculator that will quickly show you the change in repayment amount based on the frequency of repayments and duration of the loan term.

  • Redraw facility

If you’re in too deep and need some short-term cash flow, a redraw facility allows you to take money back from what you’ve paid on a loan if you’re ahead on repayments. Some lenders won’t allow this, will have limits on the amount you can reclaim, or will charge a fee to do so, while others offer it for free. This is a good perk for flexibility, so look out for it in the fine print.

  • Credit report

It’s report card time! As you might expect, your history with taking out and repaying loans and credit cards can impact how you’re perceived as a borrower. If you have any unpaid debt or loans, this can negatively impact your credit score and influence what car loan providers offer you – if they accept your application at all. Having no credit history can also make you look like a risky investment, as you can’t prove on paper how financially responsible you are. So, be sure you know the ins and outs of your credit report and are ready to defend it before the lenders investigate.

About the author: Olivia Gee

Mozo money writer Olivia Gee is dedicated to sharing her money-saving tips and personal finance knowledge so consumers can save big on the basics and splurge on the fun stuff.