A guide to understanding common car loan terms.

Put simply, a balloon payment is the amount of money owed at the end of the loan term. While the whole car can be financed, only the amount outside of the balloon repayment amount will be paid back gradually. The borrower would also pay interest on the balloon amount, therefore paying more interest than a loan without a balloon payment, as the daily balance is always higher.

Because this lump sum will be paid at the end of the loan, the borrower will have lower monthly repayments. For example, if a borrower bought a $40,000 car and took out a loan with a term of five years and an agreed $10,000 balloon payment, they would pay $30,000 split over 5 years and then the remaining $10,00 at the end of the loan. 

The borrower would pay interest on the entire $40,000 loan.

A car loan term usually refers to the length of your car loan. For example, the loan term may be five years, which means that’s the agreed amount of time you’ll pay your loan over. However, it’s important to note that loan terms can sometimes refer to other conditions associated with your loan (e.g. the interest rate, additional fees and charges and your due dates). For this reason, it’s important to check with the specific lender what they define a loan term as.

Amortization is a fancy word that simply refers to the gradual process of paying off your loan. When you apply for a loan, you’ll be required to pay off the principal amount, as well as the interest and any other fees. Amortization is the process of paying both over time. 

The general term of interest rate is pretty well known, it’s an amount that’s added to the principal and charged by the lender for borrowing the money. Variable interest rates differ from fixed interest rates because they can fluctuate over time in response to the benchmark interest rate. 

Residual value is the estimated worth of a car that’s deprecated in value over time. This term is commonly used in car leasing when the leaser wants to buy the vehicle at the end of the leasing term. The car’s worth – or residual value – will be calculated at how much it’s determined to be worth by the end of the lease.

A certificate of title is a legal document that determines who the car belongs to. In the case of an unsecured car loan, the borrower will usually have the title in their name, as the car isn’t used as security. However, in the case of a secured loan, the lender will usually have the title in their name until the car is fully paid off.

A cooling-off period is a grace period where a borrower can change their mind without penalty. The amount of time the borrower is given depends on the state in which the loan was granted. It’s important to check with the lender if there is a cooling-off period and how long it will be. 

A customer deposit is essentially just a deposit – it’s an amount of money that the borrower puts down at the start of the loan and can help with how much they will be allowed to borrow. For example, the higher the customer deposit is, the more likely it is that the finance company will lend the borrower a more significant amount on a home loan. A large customer deposit will also help a borrower be accepted for the loan and lower monthly payments.

Most lenders will conduct a credit check of an applicant before granting a car loan. This means accessing information that’s stored with a credit bureau and assessing your financial behaviour and credit history. If you have borrowed money in the past and paid it back on time, without any defaults or late payments, you should have a good credit score, meaning that you’ll be more likely to be approved for a loan.