Guest Contributor | Dec 5, 2022 | 0
Term-busting car finance lingo
By Kutlwano Mogatusi
WesBank Motor’s Communications Specialist.
Buying a new or used car and applying for vehicle finance can be a daunting experience, even more so if you are a first-time or inexperienced car buyer and thus not versed in the technical terminology used for the deal you need to sign. While car finance can help you buy your car of choice, the unfamiliar words could put you off from securing the best finance arrangement to suit your pocket.
To put your mind at ease and to guide you through this process, WesBank has developed a simple glossary of some of the most common car finance jargon and frequently used terms to help consumers better understand the lingo when reading, and researching and applying for car finance. Once you’ve grasped the meaning of the terms, we are sure you’ll be much more confident about your car finance knowledge when it comes to putting your signature on the contract.
This is the most straightforward of all vehicle finance options: monthly repayments are calculated on the purchase price of a vehicle, minus whatever deposit is put down at the start of the deal. Finance terms can be structured into time frames of between 12 and 72 months. The longer the term, the lower the monthly repayment will be, however, be aware that the interest will add up over a longer-term, increasing the total amount repaid to the bank proportionally.
This is the final payment due at the end of balloon type finance agreements, which allows you to take ownership of the car. Think of it as a deposit, but one that comes at the end of the finance term agreed on and not at the beginning. Balloon payments work best with financially savvy buyers who can put aside all the money they save on monthly instalments to be ready to make the balloon payment when the time comes. The final amount owed to the bank at the end of a balloon payment agreement is also known as the ‘residual’ value.
GFV stands for Guaranteed Future Value. This term allows buyers to calculate what the monetary value of their vehicle will be at the end of their contract period (usually between three and four years). When this is reached, the customer is given three choices: enter into another GFV deal and drive away in a new vehicle, settle the outstanding amount and own the vehicle, or return the vehicle to the respective dealership and walk away. The fine print in GFV deals states that drivers cannot exceed a pre-agreed total mileage and the vehicle should be in an acceptable condition according to the terms in the agreement. It is always important to read and understand the fine print!
A deposit is a sum of money paid upfront and deducted from the total amount financed by a bank. The larger the deposit, the lower your monthly repayments will be. A healthy deposit also means that the total cost of finance will be less, as interest will be calculated on a lower amount.
A settlement is a total amount required to ’settle’ or completely pay off a loan to take ownership of your vehicle. Finance settlements can be quoted at any stage during a contract period but are time-sensitive and thus can vary from one day to the next, depending on the outstanding amount still owing to a bank.
Interest is the price you pay to borrow money from a bank. The total amount borrowed plus the interest must be paid back in agreed monthly payments over the life of the finance agreement. There are two types of interest rates car buyers can choose from at the start of an agreement – fixed or linked. Fixed means the agreed interest rate doesn’t change for the duration of your loan period, while linked means interest rates may vary depending on what the bank’s prime lending rate is at any given time. Interest rates are determined by the Reserve Bank rate.
Unpacking the jargon and understanding the lingo associated with car finance terms will stand you in good stead and empower you to make the best choice to suit both your budget and your needs when making your next vehicle purchase. Always read the full contract, including the terms and conditions in the fine print, and ask as many questions as necessary to ensure you completely understand,
Make sure you are comfortable with the terms and know exactly what you are agreeing to. Once you add your signature, the contract becomes a legal and binding document that you need to honour.