Car buying terminology explained

Buying a new or pre-owned car can be an extremely exciting process but it can also be a daunting prospect as dealership sales staff and banks throw around technical terms that can be confusing. Understanding what these terms related to the car buying process mean will allow motorists to make a much more informed decision around the intricacies of the car buying process.

Credit check

When applying to buy a car via a loan or leasing agreement the financial institution will do a credit check. This check is done to determine a few things including the level of risk they are taking by entering into the agreement with the motorist, how good you are at servicing existing credit agreements as well your affordability.

Loan agreement

A loan agreement allows motorists to buy a car and pay it over a number of years, which can range from four to six years. At the end of this period, once all payments are made, the car becomes your property.

Lease agreement

A lease agreement allows you to pay a monthly fee and to drive a car for a certain period of time and is often referred to as a long-term rental. At the end of that period you will need to return the car to the leasing company in a pre-agreed condition. The advantage of such an agreement includes lower monthly payments but the disadvantage is that the car will never become your property.

Deposit

A deposit is the cash amount that you pay upfront when financing a car and will be subtracted from the total price of the car. The balance will then be paid off via a repayment agreement. Not all financing institutions require a deposit, and this requirement can depend on your credit rating. However, the bigger your deposit, the less your monthly payments will be and the less interest you will pay over the contract period.

Monthly payment

Your monthly payment is the agreed amount that you need to pay back every month for the period agreed upon in your loan or leasing agreement. This amount will include interest, admin fees as well as a portion that goes towards repaying the capital amount.

Interest rate

The interest rate is the amount that the financial institution charges to loan you the money and is added to your repayment on a monthly basis. The interest rate is determined by your credit rating. Interest rates are either fixed for the entire term or can change along with the prime lending rate if you opt for that option.

Residual value or balloon payment

A residual value allows motorists to only finance a certain percentage of the car, for example 60% and pay a lower monthly instalment. At the end of the contract period the remaining 40% will still be due and this will need to be paid off via a new finance arrangement or by selling or trading in the car and using the proceeds from that transaction to settle the outstanding debt. While lower monthly payments are attractive to many motorists, a big disadvantage of a balloon payment is that it takes much longer to pay off the car, which means you will pay more interest over the contract period.

Comprehensive insurance

Comprehensive insurance protects motorists against loss or damage to their vehicle. Comprehensive insurance will replace your vehicle in the event of theft or replace or repair a vehicle should it be involved in an accident. Financing institutions will require insurance as the car remains the property of the financing institution until it is fully paid for.

Service plan

A service plan covers regular service items such as oil and filters at manufacturer determined service intervals with work carried out in an OEM manufacturers workshop. A service plan will be valid for a predetermined period of time and mileage, such as five-years/75 000km and will expire once one of those parameters are met.

Maintenance plan

A maintenance plan covers service items as well as wear and tear items such as brake pads, tyres and shock absorbers, with work carried out in an OEM manufacturers workshop. A maintenance plan means that motorists will not need to spend any additional money on maintaining their vehicle for the period of the plan. A maintenance plan will be valid for a predetermined period of time and mileage, such as five-years/75 000km and will expire once one of those parameters are met.

On the road fees

On the road fees are the financing charges applied for getting the car ready for delivery. This includes a pre delivery inspection, registering the vehicle into your name, licensing and the fitment of numberplates if required.