Some of the people who use our services to find a good car loan aren’t old hands at the game of borrowing and lending. For many people, leaving school and getting a job is often what triggers the need for a car you need to get to work, don’t you, especially if that job is in a place or time that just doesn’t work for the other El Cheapo options such as walking, bussing, carpooling or biking. And unless you can get a bit of dough off Mum and Dad, you’re probably going to have to borrow some money so you can buy a car (or a motorbike another worthy option that’s a bit more frugal on petrol and is a good way to get about for those who don’t have to cart a family around) so you can get to work to earn some money which you will need for paying back what you borrowed to get the vehicle.
However, if you’re new to the world of borrowing and loans, some of the terms might be a bit unfamiliar. This glossary might help you start off and might also help you avoid a few traps for the unwary beginner.
Principal: The principal is the amount that you’re borrowing. This is usually the price of the car, but it pays to ask a few questions just in case there are a few extra charges here and there often, there’s an administration or application fee associated with applying for the loan (the employees of lending companies have to eat…).
Compound interest: Compound interest is not just something you have to calculate in maths class. In case you were asleep during that class and just went through the motions, compound interest works like this. Just say that you borrow $1000 at an interest rate of 10% per annum (per annum = per year). The interest calculated the first time round will be $100, which is 10% of $1000. The next time that the interest is calculated, it will be 10% of ($1000 + $100 = $1100), which is $110. This assumes, of course, that you haven’t made any repayments. Generally when the interest at Time B is calculated, it will be 10% of principal + interest calculated at Time A any repayments. It doesn’t take a maths whizz to work out that the amount you have to pay back keeps growing and growing, so the more repayments you make and the quicker you pay back your loan, the less you will pay in the long run.
Bailiff: This is something you want to avoid. If you don’t manage to make your repayments, the inevitable will happen. Remember how annoyed you got when someone borrowed your favourite CD but never gave it back? Well, this is how the loan companies get when you don’t pay them back the money you borrowed to buy that car. And they will send someone to get that vehicle off you, as it was paid for with their money, after all. This person is the bailiff. The car will probably be sold by them and this money will go towards what you owe them. You still might have to keep making payments, too, and your credit history (like a report card on what you’re like when it comes to paying back loans) will have a black mark against it, meaning it will be harder for you to borrow money a second time again. DON’T GO THERE! (If you have had problems in the past, don’t despair and feel like you’re condemned to riding the bus for the rest of your life talk to us, as we might be able to find something that will work for you.)
Of course, these are just a few of the terms that you need to know when you’re taking out a loan for a vehicle of any description. More in the next post!