Owning a car brings with it a feeling of joy, pride and accomplishment. The reason for wanting to own a car may be many, from making transportation easier, convenient and safer to fulfilling a goal of owning a dream car or it may even be a case of simply upgrading an existing car. A car loan is a simple short term loan provided to a borrower in order to finance the purchase of a car. Usually in such loans, the title of the car is put up as collateral and the car should belong to the borrower. Failure in repaying the car will result in the car being repossessed. Below is a glossary of terms that are often used in the realm of vehicle financing.
The administrative fees are the fees levied for the processing of paperwork such as loan applications and to cover costs of checking the credit scores of the applicant.
Base Lending Rate (BLR):
This varies from bank to bank and is a rate determined by a particular bank based on the cost incurred by the bank to borrow money that is to be lent out to borrowers.
Down payment is the initial amount paid by the purchaser which is used to reduce the amount needed to be financed.
It is when a borrower repays the loan and interest before the tenure of the loan is completed. Early settlement can incur a fee which varies from bank to bank.
Fixed rate Interest:
It is a rate of interest levied on the loan amount that is fixed or flat for the entire duration of the loan period and does not fluctuate.
A loan amount when borrowed needs to be paid back in periodic monthly payments that include a portion of both, the principal loan amount and interest charged. The monthly payments are known as instalments. Fixed rate interest loans have the same instalment amount every month for the tenure of the car loan whereas in a variable rate loan, the amount needed to be paid in the monthly instalments may fluctuate.
lease is a contract that allows a Lessee to hire a vehicle from a lessor for a particular period of time and is subject to parameters such as a specified limit on kilometre usage. A lease usually involves hiring a vehicle for a fixed monthly rent known as lease rental which is inclusive of the costs borne by the lessor such as renewal of road tax and payment of insurance premiums.
Lessee and Lessor:
Lessee is a term used for the person who takes out a vehicle on lease and lessor implies the financier who gives out a vehicle on lease.
Reducing balance method:
It is a method employed in variable rate loans where the amount to be paid in the monthly instalment is lower due to lower base lending rates.
This occurs in the case of a default where a borrower is unable to repay the loan amount. In such cases the lender can repossess the car that is put up as collateral against the loan.
It is the duration of the loan at the end of which the borrower will have pad of the principal loan amount plus interest charged on it.
It implies the valuation given by used car dealers for the traded car.
Variable Rate of Interest:
For loans that offer variable rate of interest, the rate of interest throughout the tenure of the loan may not remain fixed. This rate of interest is pegged to the base lending rate of a bank and may fluctuate with any fluctuation in the base lending rate. In a variable rate loan, the borrower has either a choice of retaining the number of instalments to be paid by adjusting the amount paid in each instalment accordingly or pay the same amount for each instalment but adjust the number of instalments to be paid. It is more flexible than a fixed rate of interest as it allows one to make additional payments and possibly reduce the interest incurred.