Understanding finance terminology is key to making informed decisions, but the jargon can sometimes feel like a foreign language. In this episode, we’ll break down the most common finance terms so you can confidently navigate the world of loans and asset finance.
1. Asset Finance
This type of financing is specifically designed to help you purchase assets such as vehicles, machinery, or equipment. Rather than paying the full cost upfront, you spread the payments over time through a loan or lease.
2. Chattel Mortgage
A popular option in Australia for business-related assets like cars or equipment.
- You own the asset from the start, but it’s used as security until the loan is paid off.
- Businesses can often claim tax benefits, such as GST on the purchase price, depreciation, and interest deductions.
3. Balloon Payment (Residual)
A balloon payment is a lump sum due at the end of a loan term.
- Pros: Lowers your monthly repayments.
- Cons: Increases the total interest paid over the life of the loan.
For example, if you borrow $50,000 with a $10,000 balloon payment, you’ll pay off $40,000 during the term, with $10,000 due at the end.
4. Interest Rate
The cost of borrowing, expressed as a percentage of the loan amount.
- Fixed Rate: Stays the same throughout the loan, providing consistent repayments.
- Variable Rate: Fluctuates with the market, which could increase or decrease your repayments.
5. Comparison Rate
This rate includes the interest rate plus most fees and charges, giving you a clearer idea of the loan’s true cost. Use it to compare loan options across different lenders.
6. Loan Term
The period over which you agree to repay the loan.
- Shorter terms mean higher monthly repayments but less interest overall.
- Longer terms reduce monthly repayments but increase the total interest paid.
7. Depreciation
This refers to the decrease in value of an asset over time. For example, vehicles lose value as they age. Understanding depreciation is essential when financing assets, as it affects resale value and the ability to pay off the loan.
8. Secured vs. Unsecured Loans
- Secured Loan: Backed by an asset (e.g., the vehicle you’re purchasing), usually offering lower interest rates.
- Unsecured Loan: No collateral required, but typically comes with higher interest rates.
9. GST (Goods and Services Tax)
In Australia, GST is a 10% tax on most goods and services. When financing business assets, you may be able to claim back the GST on the purchase price through your Business Activity Statement (BAS).
10. PPSR (Personal Property Securities Register)
This is a national register showing if an asset has an existing security interest (like a loan) attached to it. Always check this to ensure the asset you’re financing is clear of any claims.
11. Default
Default occurs when you miss a payment or fail to meet the terms of your loan. Consequences can include:
- Additional fees.
- Damage to your credit score.
- Repossession of the financed asset.
If you’re struggling with repayments, reach out to your lender early to explore potential solutions.
Next Steps
Now that you’re equipped with the essential finance lingo, you’ll be able to approach your loan options with confidence. In Episode 3, we’ll dive into Understanding Your Credit Score—an important factor that can impact your loan approval and interest rate.
Key Takeaways
- Familiarise yourself with key terms like interest rate, comparison rate, and loan term.
- Understand the benefits and risks of options like chattel mortgages and balloon payments.
- Always check the PPSR to ensure assets are free of previous security interests.
Ready to take control of your finance journey? Contact Better Broker Co. for expert advice and guidance tailored to your needs.
