For those of us that don’t spend all our days in car dealerships or researching car loans (the lucky ones), we’re here to help de-mystify the car finance process.
As former customers of traditional lenders and brokers, we get that the car finance process is complex. We think this is in fact a tactic by some lenders out there to try and confuse customers and hide the true rate and cost of loans. Driva is here to help simplify and bring transparency to the car financing process. Below we break down the key terms you may see as you go through a car loan quoting and application process, and explain how each of these impact the rates you get back from lenders.
- What it is: this is the money you pay on the day you pick up your car
- What it means for you: the more you pay today, the lower your loan value will be. This means less interest paid over the life of the loan, and therefore lower monthly repayments
- What it is: this is the final amount you pay at the end of your loan, normally expressed as a percentage (%) of your loan value
- What it means for you: the higher your balloon payment, the more interest you pay but the lower your monthly repayments. This is because you are delaying payment of this “balloon” amount until the end of your loan, so interest is accruing until this day. If you believe that your likely car value at the day your loan ends is worth more than your balloon payment PLUS any interest that accrues, then it may make sense to have a balloon payment to decrease your monthly repayment - but otherwise, we suggest avoiding balloon payments if you can. Lenders often cap what the maximum balloon payment is for this reason also.
- What it is: this is the length of your loan and how long you will be making monthly repayments for
- What it means for you: the longer your loan term, the more interest that will be accruing but the lower your repayment each month. To minimise your interest cost, we suggest making your loan term as short as you can afford (depending on your circumstances). Loan terms vary by lender, with terms typically ranging from 1 year to 7 years.
- What it is: this is the lender quoted annual percentage rate (excluding all fees and charges) that you will be charged on your loan amount
- What it means for you: be careful of relying on APRs - they can often be misleading as they do not include the fees and charges that you will be charged. Comparison rates and monthly repayments are often a better way to compare lenders
- What it is: a comparison rate is a rate you can use to help work out the true cost of a loan. While it doesn’t include fees such as stamp duty, it does include most (if not all) of the key fees and charges that lenders will charge you
- What it means for you: this is the key metric to keep an eye out for when comparing your car loan quotes from Driva. Driva clearly specifies the comparison rate of every quote we provide to you so you can quickly see which loan will cost you less. That being said, the lowest comparison rate doesn’t always mean its the right loan for you - if you’re looking for low monthly repayments, you may choose a longer term loan with a higher comparison rate, ahead of a lower comparison rate loan over a shorter loan term.
- What it is: this is the fee lenders charge to set up your loan
- What it means for you: most lenders include the establishment fee as part of your loan amount, so you pay nothing on the day your take out your loan, and you instead pay the fee as part of your monthly repayments. Establishment fees (and what they’re called) vary by lender, but almost always exist in some form.
Other upfront fees
- What it is: these are other fees included in your loan value, and can include origination fees, brokerage fees, account set-up fees, etc.
- What it means for you: as with establishment fees, these fees are typically included in your loan amount and therefore you simply pay these as part of your monthly repayments. These fees also vary by lender.
- What it is: this is a monthly account keeping fee (or similar) some lenders charge on top of your monthly repayment
- What it means for you: these fees are normally small (~$10 per month), but keep an eye out for them to see if they are included in your quoted monthly payment. At Driva, we break these fees out so it’s clear to you.
Late payment / default fee
- What it is: this is the fee charged by lenders when you are late in making a payment when it is due
- What it means for you: these fees can vary significantly by lender, so will be important to keep in mind as your consider your loan alternatives
These are only a handful of some of the more common key terms you’ll see out there as you go through the car financing process. If we’ve missed something or you have any questions, please reach out to our knowledgeable loan consultants at any time on firstname.lastname@example.org or call us on 1300 755 494.