For so many people, the process of buying a car is daunting. When you feel quite baffled by the range of complex and unfamiliar terms that are relevant to car finance, the whole experience can be quite scary.
However, if you seek the services of an experienced and reputable car loan organisation, such as Dreamloans , that will support you to find the best loan for your situation and fully appreciate all of its features and conditions, you can rightfully feel confident.
No matter how you go about finding and signing up for a car loan, it’s important to understand key terms that are applicable to car loans.
As with other loans, equity is the difference between the worth of your asset and how much you owe. For example, if you have a car that is worth $15,000 but you owe $12,000, you have $3000 equity. Because most cars quite quickly depreciate in value, it’s also useful to understand negative equity or ‘being upside down’. You may owe $8,000 but have a car that is worth only $6,000. You then have $2,000 in negative equity.
2. Interest rates
When taking out a car loan, or any other type of loan, it is pivotal to have an understanding of interest rates and how they move. Essentially, lenders charge fees (interest) to anyone who borrows from them. As you make payments on your car loan each month, interest is usually included and the interest rate at the time determines the value of the interest charged.
You may find that car dealers and lenders refer to the interest as APR (annual percentage rate). If you have good credit, you are more likely to get a good interest rate and pay a reduced fee than others who have a worse credit rating. From the point of view of the lender, this makes sense as greater risks come with lending money to those with a bad credit history.
3. Car finance
Essentially, car finance means that you have borrowed money to buy a car. When the term of the loan is finished (and assuming the required payments have been made), you are officially the owner of the car. Car financing is distinct from car leasing which can more accurately be compared to ‘renting’ a car. When the term of the lease expires, the car is handed back.
A deposit or down payment is the amount of money that you are able to spend upfront. For example, if a car costs $25,000 and you are able to pay $12,000 at the time of purchase and repay the rest later, then that $12,000 is your deposit.
5. Principal amount
Before interest is charged, the total amount that you owe on a car is the principal amount of the loan. By way of example, if you pay a deposit of $12,000 and the car costs $25,000, the principal amount of your loan is $13,000.
When you enter into a loan arrangement, it’s important to understand the terms used and the conditions in place. While some car loan terms are not immediately clear and part of the vernacular, there is great value in being informed and only signing up to a loan when you are sure of its terms and conditions.