Finance Jargon Buster
When applying for finance, you might come across terms you haven't heard of before and want to know what they mean. We've put together a Finance Jargon Buster to help you better understand each term.
Pre-approval is a common term when it comes to car finance, but what does it actually mean?
Pre-approval is the process of applying for a car loan before you've even found the one you want to buy.
It is a conditional approval that lets you know exactly how much you can borrow, what the interest rate would be, and how long you'd have to pay off your car.
You might have heard of the term 'Co-borrower', but did you know it could help you secure a loan?
A co-borrower is an additional borrower that appears on the loan agreement; their income and credit history is used to help you qualify for a loan. A co-borrower is usually a family member or a close friend of the person applying for the loan. Most often, it is a spouse, but you can also borrow with a parent, sibling, or friend.
All co-borrowers take equal responsibility for the entire loan. Therefore, if one of the borrowers can't contribute their share of repayments, the other borrowers are responsible for those repayments. The most common example of joint finance is when a couple has a mortgage other and pay off the loan.
Many people don't realise that you can also get a joint loan for a car, motorbike, caravan or boat that functions in the same way.
'CCI' in finance terms, refers to CreditCare Insurance. Have you or someone you know ever had an unexpected event like an illness, an accident, or a redundancy, really muck up your financial situation? This is where CreditCare Insurance comes in handy, otherwise known as Loan Repayment Insurance.
While it's not a fun topic to discuss, these things can happen. Adding 'CCI' to your loan provides peace of mind by covering your loan repayments if any of those unfortunate events occur.
'GAP' in finance terms, refers to Guaranteed Asset Protection Insurance. Even the best drivers who take all the precautions can have things happen. Adding 'GAP' to your loan covers you if your vehicle is stolen or written off from an accident, and the insurance payout is less than the finance you still owe.
For example, if you owe $15,000 on your car but your insurance company pays out $11,000, you will still have a shortfall of $4,000 to pay on your loan. If your vehicle is stolen or written off, 'GAP' will help you to pay this shortfall, as well as additional costs, such as covering the excess or paying towards your new Insurance premium for a replacement vehicle.
'Security' in finance terms, refers to an asset that serves as collateral for the loan - usually the asset being purchased, for example, a car, boat or caravan.
In the event that someone defaults on the loan, the lender will have the right to repossess the asset, sell it, and apply the proceeds from the sale to repay the loan.
This arrangement reduces the risk for the lender and often results in lower interest rates for borrowers. Remember to carefully read and understand your finance agreement to ensure you know the terms and conditions surrounding security.
'MBI' in finance terms, refers to Mechanical Breakdown Insurance. Most of us have been in the situation or know someone close to us in the situation where everything is going to plan, and then wham - the car has a breakdown. It always seems to be at the worst time too.
Adding 'MBI' to your loan protects you if your car has an unforeseen mechanical breakdown. MBI acts as a warranty, which covers a wide range of mechanical and electrical parts and helps cover many other costs that can come with a mechanical breakdown, including parts and labour.
A guarantor is someone who helps a borrower secure finance. Usually, they have a higher credit score or the financial ability to pay off the loan if the borrower fails to (E.g a parent or loved one).
A guarantor must supply all the same information as the borrower and has all the same legal obligations. Basically, this means a guarantor will sign the same contract and is required to make payments if a borrower fails to.
Being a guarantor is a big responsibility, so it is important to understand all the terms and conditions before you make the commitment of being a guarantor for someone.
Using a car loan as an example, the 'term' refers to the length of time you have to pay back the money you borrowed to purchase the car.
Our loan terms range from 12 to 60 months, depending on the loan amount and purpose. A longer term can result in smaller repayments, but you'll pay more interest. A shorter term usually means larger repayments but less interest paid overall.
Choosing a loan term that fits within your budget is essential.