Understanding Your Car Loan

The fine print of car loans can be riddled with complicated conditions and industry lingo, making them hard to understand for car finance novices. In its simplest terms, a car loan involves the lending of money from a financial institution to a borrower for the purchase of a motor vehicle. That money will then have to be paid back within a set period of time, with added interest. While this sounds straightforward enough, there are a few components of loans which are essential to understand before agreeing to take one out. While these are the common elements of car loans, it's important to check the specific terms and conditions of loans from different car finance institutions, which are likely to vary.

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Interest Rate. The interest rate of a loan refers to the rate that the interest on the loan is charged by the financial institution, expressed as a percentage of the sum borrowed. Interest rates vary between different loans and different financial institutions and are largely determined by the size of the loan and your credit history. For loans that require little financial documentation, for example, interest rates are likely to be higher as there is little guarantee that the borrower will be able to make repayments on time. In this instance, the interest rate acts as a form of collateral. Term. Term refers to the length of the loan, which can be anything from one to six years, depending on your financial situation. The longer the length of the loan -or the time by which it must be repaid - the greater the interest rate will be. Deposit.The loan deposit refers to the down payment - or the money that a borrower can afford to pay up front - when applying for a loan. The larger the deposit, the less money you will have to loan from a financial institution, and accordingly the lower the interest rate. However, the larger your deposit, the more money you will be authorised to borrow. All loans require borrowers to lay down a deposit. Early exit fees.To ensure they make as much money off a loan as possible, most loan companies will charge an early exit fee should you want to pay the loan off more quickly than the term agreement. It is possible to get loans that charge no exit fees, however they can be harder to find and can charge higher interest rates. However, if you are planning to pay a loan off as quickly as possible and don't wish to be locked into a long term contract, it's worth trying to negotiate a loan with no early payment penalties.

Understanding a loan before taking one out will help ensure you get the best car loan deal and are fully prepared for the payments and term you'll be locked into for your vehicle purchase. When looking for car loans, Australia offers a range of different loan and car finance options and institutions through which they are available. Researching your car loan thoroughly will help guarantee that you are a savvy car buyer and able to repay the loan on terms and agreements that suit you.

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