Glossary of Terms

BALLOON
See Residual Value.

CAR FINANCE
See Vehicle Finance.

CAR LEASE
See Finance Lease.

CAR LOAN
A personal finance product where the financier lends the customer funds for the purchase of a car or other vehicle, and secures the loan against that vehicle.

CHATTEL MORTGAGE
A commercial car finance product under which the customer takes ownership of the vehicle at the time of purchase, and the financier takes out a mortgage over the vehicle (chattel) as security.

COMMERCIAL HIRE PURCHASE (CHP)
A commercial finance product where the customer hires a car or commercial vehicle from the financier for a fixed monthly repayment over a set period of time.

COMPARISON RATE
Also known as the true interest rate, a comparison rate is a tool to help consumers identify the true cost of a loan, including the interest rate and some fees and charges relating to a loan.

In Australia the term Comparison Rate is defined under law in the Consumer Credit Code, and includes the amount of the loan, the term of the loan, the repayment frequency, the interest rate and all fees and charges except government charges (such as stamp duty), fees which may or may not be charged (such as early payout fees) and fees not ascertainable at the time the comparison rate is provided.

Comparison Rates are designed to provide an effective way to compare different loans as come close to reflecting the “real” interest rate of the loan, however it is important to remember that they do not include variable charges such as early payout penalties (which can be significant).

CONSUMER LOAN
See Car Loan.

COST PRICE DEPRECIATION LIMIT
See Depreciation Limit.

DEPRECIATION LIMIT
The maximum asset value that is allowed by the Australian Tax Office when depreciating a motor vehicle. Please ask a Drive Easy consultant for up to date financial year allowances.

EARLY TERMINATION FEE
A fixed dollar fee applied by some lenders if you payout (end) a vehicle finance contract early. An Early Termination Fee should not be confused with a Retained Interest or Payout Penalty.

EFFECTIVE INTEREST RATE
An interest rate that attempts to reflect the true cost of a loan, including all fees & charges. When we refer to an effective interest rate in an example loan scenario we calculate it by the same formula used for a Comparison Rate, but include any extra fees applicable only in the example. This is different to a Comparison Rate as Comparison Rates do not include fees that vary dependent on a specific loan scenario.

FINANCE
In the context of cars and vehicles, see Vehicle Finance.

FINANCE LEASE
A commercial car finance product under which the financier purchases the vehicle on the customer’s behalf, and then leases it back to them for a specified period of time.

HIRE PURCHASE (HP)
See Commercial Hire Purchase.

INTEREST RATE
The amount of interest charged on a loan, normally expressed as a percentage per annum.

LUXURY CAR TAX (LCT)
A tax paid on new passenger vehicles whose sale price exceeds the Luxury Car Tax Threshold. Luxury Car Tax is calculated as 33% of the GST exclusive portion of the vehicle’s purchase price over the Luxury Car Tax Threshold.

LUXURY CAR TAX LIMIT
See Luxury Car Tax Threshold.

LUXURY CAR TAX THRESHOLD
The minimum value (price) at which Luxury Car Tax must be paid on vehicles that meet Luxury Car Tax criteria. For the 2016-2017 financial year the threshold for regular vehicles is $64,132.00, and for fuel efficient vehicles is $75,526.00. Please ask a Drive Easy consultant for up to date financial year allowances.

NOVATED LEASE
A method of salary packaging a car or other vehicle, under which an employee leases a car and the employer agrees to take on the employee’s obligations under the lease, paying the monthly lease rentals from the employee’s pre-tax income.

PAYOUT FEE
See Early Termination Fee.

PAYOUT PENALTY
A monetary penalty for paying out (terminating) a vehicle finance contract early. Technically a Payout Penalty is a retained interest penalty, but the term can sometimes be incorrectly used to refer to a Early Termination Fee.

PERSONAL LOAN
A personal finance product where the financier lends the customer funds which can be used to purchase a car or other vehicle, but does not hold any security over the loan.

RESIDUAL VALUE
A lump sum owed to the financier at the end of a loan’s term, expressed either as a dollar value or a percentage of the amount borrowed.

RETAINED INTEREST
Unpaid future interest included in an early payout figure. Also colloquially known as a Payout Penalty.

RULE OF 78
A method of amortising interest across the payments made over the life of a loan, used by almost all Australia vehicle financiers for commercial car finance facilities.

Under the Rule of 78, the interest component of payment n is equal to the number of remaining payments (including payment n) divided by the sum of the sequence of terms between 0 and the total number of payments, multiplied by the total interest for the loan.

For example, with a 3 year loan paid monthly, there are 36 monthly payments. Therefore, the amount of interest applied in month 7 is equal to 30 (remaining months including current) divided by 666 (sum of the sequence of terms between 0 and 36), multiplied by the total interest to be paid over the term of the loan.

The “78” in Rule of 78 comes from applying the above formula to a 1 year loan paid monthly, where the sum of the sequence of terms between 0 and 12 equals 78.

SALARY PACKAGING
Incorporating a vehicle in an employee’s remuneration package, normally by way of a Novated Lease, Operating Lease or company car.

SECURED CAR LOAN
See Car Loan.

SECURITY
Property – the vehicle in the case of car finance – that a financier can claim in case a borrower defaults on their loan obligation.

TERM
The length of a loan, normally expressed in months or years.

TO APPROVED PURCHASERS (TAP)
A disclaimer indicating that an offer (often an advertised offer) is subject to approval (normally finance approval).

TRUE INTEREST RATE
Normally synonymous with Comparison Rate

UNSECURED CAR LOAN
See Personal Loan.

VEHICLE FINANCE
A general term referring to borrowing money to purchase cars or other vehicles. Generally “car finance” (as opposed to “car loan”) refers to commercial car finance, such as Car Lease (Finance Lease), Commercial Hire Purchase (CHP or HP), Chattel Mortgage and Novated Lease.

VEHICLE LEASE
See Finance Lease