Asset finance can be a complicated world and seem like it has its own language. In this article, Nodifi clears up some of the vocabulary used in asset finance.
Asset finance words defined
Asset – a tangible product / item that can be converted into cash. i.e., vehicles, equipment, inventory. When it comes to asset finance, ‘asset’ refers to something that a borrower is purchasing, e.g., a car, ute or caravan.
Asset-backed – refers to a client who is a homeowner. This can be confusing. Nodifi refers to ‘asset-backed’ as someone who owns property / has a mortgage. This does not include a borrower who owns a vehicle or caravan outright for example.
Banking conduct – refers to spending habits in terms of income vs expenses. Gambling, a high number of cash withdrawals and negative balances can result in poor banking conduct.
Bankruptcy – The AFSA (Australian Financial Security Authority) states that ‘Bankruptcy is a legal process where you’re declared unable to pay your debts.’
There are two common types of bankruptcy related to asset finance through Nodifi;
- Part IX (9) and Part X (10)
These two forms can have different outcomes and conditions depending on circumstances.
Borrowing power – the dollar amount an individual or organisation can potentially borrow in correlation to their disposable income.
Certificate of Currency – an insurance document that confirms all details and interested parties regarding the insured asset.
Commercial vehicles – vehicles used primarily for business purposes. Examples include utes and vans, equipment, machinery, light trucks, but can also include fleet vehicles.
Consumer vehicles – vehicles used for private use. Typically a passenger car.
Comparison rate – an interest rate which includes any fees and / charges relating to the loan. A comparison rate aims to display the cost of a loan alongside the interest rate.
Credit report / credit file – a document (often PDF or online report) displaying an individual’s or business’s credit history. They display repayment history on previous and existing loans / forms of credit, credit enquiries and personal information among other details. These reports are typically generated upon someone’s first application for credit and will populate for any line of credit, for example, a phone plan or electricity bill.
Credit score – a numerical rating of a person’s creditworthiness. Usually gauged from 0 to 1,200 or 1,000, these scores are crucial in determining a borrower’s interest rate and borrowing potential. Scores can be affected by credit enquiries and repayment history among other factors.
Default – failure to meet the obligations of a loan by not making the repayments. Typically, a lender will make contact with a borrower when a payment is seven or more days late.
Deposit – cash paid towards the asset up front. This can lower the loan amount and / or act as proof of intent from the borrower to repay the loan.
Depreciation – the loss of value an asset incurs over time, e.g., a vehicle depreciates in value the older it becomes.
Financials – a borrower’s financial documents, e.g., bank statements, BAS / tax documents.
Gross income – the total amount of money earned by an individual or business before expenses are deducted.
Interest rate – the ‘cost’ of a loan. The amount paid at regular intervals on borrowed funds. As this is listed as a percentage, the dollar amount of an interest rate will decrease as a borrower reduces the loan balance.
Line of credit – a loan that allows a borrower to take funds out of an account at any time up to a specified limit. Once the borrowed amount is paid back, those funds are available again.
Loan term – the duration of a loan, e.g., 60 months.
Low documentation loan (Low Doc) – loans offered to self-employed borrowers or small businesses who may meet criteria / not have access to income statements that PAYG employees have.
NAF (Net Amount Financed) – the total amount of money borrowed including fees and charges. Typically, a NAF will be slightly more than the loan amount as it includes fees and charges.
Novated lease – a three way arrangement between an employee, employer and a financier whereby the employee can use pre-taxed income towards their car repayments and running costs for potential income tax and GST savings.
Pay cycle – the period in which a person gets paid, e.g., weekly, monthly.
Payday loan – a fast cash loan, typically under $2,000. Often, these loans attract high interest rates and some asset finance lenders have limits on the amount of active payday loans a borrower can have.
PAYG (Pay As You Go) – refers to employees who have their income tax taken out of their salary or wages by their employer.
PPSR (Personal Property Securities Register) – an electronic (online) history register of certain assets, e.g., vehicles. Details available include whether a vehicle has finance owing or has ever been reported as stolen or written-off.
Salary packaging – an employee benefit offered by the employer and approved by the ATO, whereby and employee can pay for certain expenses with pre-taxed income to reduce their taxable income.
Security (collateral) – an asset ‘secured’ against the loan that can be repossessed by the lender should the borrower not meet their loan contractual commitments. Typically, this is seen as a last resort option.
Tiers – groups in which borrowers fall after being assessed per lender requirements. Generally, the higher the tier, the lower the interest rate. Most lenders have a ‘gold/silver/bronze and diamond/ruby’ tier system.
Variable interest rate – an interest rate of a loan that changes with market conditions for the duration of the loan.
Yellow goods – machinery / equipment for construction and earth moving, e.g., forklifts, graders, dozers, etc.
More support
If you require any assistance, don’t hesitate to get in touch with your Nodifi Relationship Manager.
