What is proof of income?
Before giving you a car loan, lenders will ask for proof of income – documentary evidence that you earn as much as you claim you earn. Lenders will typically want some combination of tax returns, pay slips and bank statements. The reason lenders want proof of income is because they want to be sure you have the means to repay the car loan.
Some lenders will make you pay a penalty, or early termination fee, if you pay off your loan ahead of schedule. This is to compensate them for the interest payments they don’t get to collect.
A commercial hire purchase, or CHP, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. Once the final payment is made, you take ownership of the car.
The trade-in value is the price you could realistically charge if you were to sell your car to a dealer while buying a replacement vehicle. Generally, a car’s trade-in value is less than its market value. That’s because the dealer has no interest in buying your car unless it can make a profit – which can only be done if the dealer has room to increase the price.
An upfront fee is a one-off fee that many lenders charge when you take out a car loan.
The loan-to-value ratio, or LVR, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have a loan-to-value ratio of 75 per cent. Loan-to-value ratios change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the loan-to-value ratio would now be 67 per cent.
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