Car Finance Glossary

Definitions for some common terms and words used in the car finance industry.

Annual Percentage Rate

An interest rate that attempts to reflect the true cost of a loan, including fees and charges. Annual Percentage Rate is an American term but is sometimes mis-used by Australian companies - the Australian equivilent is Comparison Rate.

APR

Acronym for Annual Percentage Rate. See Annual Percentage Rate.

Asset Lease

See Finance Lease.

Balloon

See Residual Value.

Car Finance

See Vehicle Finance.

Car Lease

See Finance Lease.

Car Loan

A personal finance product where the financier lends the customer funds for the purchase of a car or other vehicle, and secures the loan against that vehicle. Related reading: Car Loan

Chattel Mortgage

A commercial car finance product under which the customer takes ownership of the vehicle at the time of purchase, and the financier takes out a mortgage over the vehicle (chattel) as security. Related reading: Chattel Mortgage

CHP

Acronym for Commercial Hire Purchase. See Commercial Hire Purchase.

Commercial Hire Purchase

A commercial finance product where the customer hires a car or commercial vehicle from the financier for a fixed monthly repayment over a set period of time. Related reading: Commercial Hire Purchase

Comparison Rate

Also known as the true interest rate, a comparison rate is a tool to help consumers identify the true cost of a loan, including the interest rate and some fees and charges relating to a loan.

In Australia the term Comparison Rate is defined under law in the Consumer Credit Code, and includes the amount of the loan, the term of the loan, the repayment frequency, the interest rate and all fees and charges except government charges (such as stamp duty), fees which may or may not be charged (such as early payout fees) and fees not ascertainable at the time the comparison rate is provided. 

Comparison Rates are designed to provide an effective way to compare different loans as come close to reflecting the "real" interest rate of the loan, however it is important to remember that they do not include variable charges such as payout penalties and fees (which can be significant - see our Payout Penalties Calculator for an example).

Consumer Loan

See Car Loan.

Cost Price Depreciation Limit

See Depreciation Limit.

Depreciation Limit

The maximum asset value that is allowed by the Australian Tax Office when depreciating a motor vehicle. For the 2008-2009 financial year, this value stands at $57,180.00.

Early Termination Fee

A fixed dollar fee applied by some lenders if you payout (end) a vehicle finance contract early. An Early Termination Fee should not be confused with a Retained Interest Payout Penalty.

Effective Interest Rate

An interest rate that attemps to reflect the true cost of a loan, including all fees & charges. When we refer to an effective interest rate in an example loan scenario we calculate it by the same formula used for a Comparison Rate, but include any extra fees applicable only in the example. This is different to a Comparison Rate as Comparison Rates do not include fees that vary dependent on a specific loan scenario.

Finance

In the context of cars and vehicles, see Vehicle Finance.

Finance Lease

A commercial car finance product under which the financier purchases the vehicle on the customer's behalf, and then leases it back to them for a specified period of time. Related reading: Finance Lease

Hire Purchase

See Commercial Hire Purchase.

HP

Acronym for Hire Purchase. See Commercial Hire Purchase.

Interest Rate

The amount of interest charged on a loan, normally expressed as a percentage per annum.

LCT

Acronym for Luxury Car Tax. See Luxury Car Tax.

Luxury Car Tax

A tax paid on new passenger vehicles whose sale price exceeds the Luxury Car Tax Threshold. Luxury Car Tax is calculated as 33% of the GST exclusive portion of the vehicle's purchase price over the Luxury Car Tax Threshold. Related reading: : Luxury Car Tax Explained

Luxury Car Tax Limit

See Luxury Car Tax Threshold.

Luxury Car Tax Threshold

The minimum value (price) at which Luxury Car Tax must be paid on vehicles that meet Luxury Car Tax criteria. The Luxury Car Threshold is set at the same amount as the Depreciation Limit. For the 2008-2009 financial year, the threshold is $57,180.00. Related reading: Luxury Car Tax Explained

Novated Lease

A method of salary packaging a car or other vehicle, under which an employee leases a car and the employer agrees to take on the employee's obligations under the lease, paying the monthly lease rentals from the employee's pre-tax income. Related reading: Novated Lease

Offer To Hire

See Commercial Hire Purchase.

Payout Fee

See Early Termination Fee.

Payout Penalty

A monetary penalty for paying out (ending) a vehicle finance contract early. Technically a Payout Penalty is a retained interest penalty, but the term can sometimes be incorrectly used to refer to a Early Termination Fee. Related reading: Retained Interest & Payout Penalties Explained, Payout Penalty Calculator

Personal Loan

A personal finance product where the financier lends the customer funds which can be used to purchase a car or other vehicle, but does not hold any security over the loan. Related reading: Personal Loan

Residual Value

A lump sum owed to the financier at the end of a loan's term, expressed either as a dollar value or a percentage of the amount borrowed.

Retained Interest

Unpaid future interest included in an early payout figure. Also colloquially known as a Payout Penalty. Related reading: Retained Interest & Payout Penalties Explained

Rule of 78

A method of amortising interest across the payments made over the life of a loan, used by almost all Australia vehicle financiers for commercial car finance facilities.

Under the Rule of 78, the interest component of payment n is equal to the number of remaining payments (including payment n) divided by the sum of the sequence of terms between 0 and the total number of payments, multipled by the total interest for the loan.  

For example, with a 3 year loan paid monthly, there are 36 monthly payments. Therefore, the amount of interest applied in month 7 is equal to 30 (remaining months including current) divided by 666 (sum of the sequence of terms between 0 and 36), multipled by the total interest to be paid over the term of the loan.

The "78" in Rule of 78 comes from applying the above formula to a 1 year loan paid monthly, where the sum of the sequence of terms between 0 and 12 equals 78.

Salary Packaging

Incorporating a vehicle in an employee's renuumeration package, normally by way of a Novated Lease, Operating Lease or company car.

Secured Car Loan

See Car Loan.

Security

Property - the vehicle in the case of car finance - that a financier can claim in case a borrower defaults on their loan obligation.

TAP

Acronym for To Approved Purchasers. See To Approved Purchasers.

Term

The length of a loan, normally expressed in months or years.

To Approved Purchasers

A disclaimer indicating that an offer (often an advertised offer) is subject to approval (normally finance approval).

True Interest Rate

Normally synonomous with Comparison Rate

Unsecured Car Loan

See Personal Loan.

Vehicle Finance

A general term referring to borrowing money to purchase cars or other vehicles. Generally "car finance" (as opposed to "car loan") refers to commercial car finance, such as Car Lease (Finance Lease), Commercial Hire Purchase (CHP or HP), Chattel Mortgage and Novated Lease.

Vehicle Lease

See Finance Lease.

Disclaimer: While we make every attempt to give you the best possible information, Stratton Finance Pty Ltd, its agents, employees and accredited lenders will accept no responsibility for any loss that may arise.