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Understanding car loans

Definitions for Australian car finance

When you are in the market for a new or used automobile, you may be overwhelmed by the variety of car loans available in the financial market. Varying interest rates and length of loans can be confusing even to the experienced consumer. Here are some helpful definitions for terms you may encounter while looking for automotive financing.

Comparison Rate
This is the actual cost of a loan on an annual basis, including charges, fees, and interest payments. The comparison rate is sometimes called the Annual Percentage Rate, or APR; however, it includes far more than a simple annualised interest rate. The comparison rate typically includes all fees and charges except those assessed by government agencies. The stamp duty, for instance, is not included in the comparison rate.

Early Termination Fee
An early termination fee or payout fee is assessed by some lenders if car loans are paid off early. Typically, this fee is intended to protect lenders and ensure that they receive expected interest payments over the life of the loan. Some lenders do not charge early termination fees, and this can sometimes be negotiated directly with the lender at the time of financing.

Chattel Mortgage
Some companies offer loans wherein the corporate customer assumes ownership of the vehicle at the time of purchase, and the company retains a mortgage over the vehicle as security against the loan. This is one of the most common forms of corporate vehicle financing, as it provides significant tax advantages for companies who can often claim interest charges on the vehicle as a tax deduction. This loan option is not typically available to individual car buyers.

Personal Loan
In certain cases, companies that provide car loans will offer highly-qualified borrowers the opportunity to obtain financing without requiring a lien against the vehicle as security. These arrangements are known as personal loans, and are different from traditional car loans in that the finance company does not claim the vehicle as collateral and cannot repossess it in the traditional manner. Most people cannot qualify for these types of loans unless the amount to be borrowed is very small.

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