Understanding Financing Terms When Buying a Car

Once you decide which car to buy, one other decision to make is whether you want to pay cash or finance the car. While paying for a car at the point of purchase is straightforward, financing a car is more complex than it may seem.

Banks have dedicated departments that see into assisting buyers on car financing. However, while some buyers are conversant with the terms governing car financing, others see them as a new language to learn.

When financing a car, it is wise to understand car financing terms to understand the contract you are about to sign. Don’t feel ashamed to learn the jargon of car financing, as this will help enhance your understanding of the different sections of the contract.

This article explains common financing terms to understand when buying a car.

Understanding Financing Terms When Buying a Car

Interest Rate

Interest rate is a common financing term, which means the extra percentage you pay on a loan. Your interest rate determines the total amount of money to repay, and the higher the interest rate, the higher the amount to pay. Hence, it is best to look out for the lowest interest rate when financing a car.

Fixed or Linked Interest Rate

Interest rate is classified into two: fixed and linked interest rates. The ideal interest rate for you depends on your choice. While a fixed rate means the rate remains the same from the point of the agreement, a linked interest rate is associated with the South African Reserve Bank’s Prime interest rate.

This means that a linked interest rate fluctuates with an external factor. The higher the external interest rate, the more you pay as interest.


When planning to finance a car, financing institutions demand that you pay an upfront cash amount, termed “deposit”. How much you pay upfront (deposit) varies from one financial institution to another, and the amount is deducted from the car’s price tag.

This means the bigger you pay upfront, the less you repay (with interest) in the long run. Hence, it’s always advisable to pay a decent percentage of the price tag when financing a car.

Finance Period

The finance period you sign for when financing a car is the length of time to pay off the car loan. How long it takes to repay the loan will affect how much you pay in total at the end of the contract. The longer you take to repay, the more interest you pay and vice versa.

A finance period influences both the installment and the interest rate, but in opposite dimensions. While you benefit from a longer finance period with lower installment, a longer finance period means more interest in the long run.

Hence, it is wise to choose a short period to pay off the car, as it lessens the total interest to pay out in the long run.

Balloon Payment

A balloon payment is a big sum amount you pay at the end of the contract. Some buyers consider this a trap, as it usually feels difficult to pay the sum at the end of the contract. While a balloon payment cuts back on the installment, it is a huge sum to pay at the end of the car finance contract.

It is best that you run from this option if you know you can’t save enough to pay off the balloon payment at the end of the contract. However, if you can’t pay off the balloon payment when the contract ends, you can refinance it, extending your payment term for the car loan.

Total Cost of Ownership

You don’t own a car just by paying the monthly installment – there is more to car ownership. You also need to budget for the running costs, include license, maintenance, tolls, tires and brakes, fuel, and insurance.

This adds up to how much to budget to own a car. Hence, factor in the total cost of ownership when planning to buy a car and go for a car that your budget can afford, even if it is not what you dream.


Insurance is important when buying a car. This helps take care of losses with the car and is available at different types. It is best to go for comprehensive insurance, especially as a first-time car owner. This is necessary should the car involve in an accident or fall victim to theft or vehicle write-off.

Also, comprehensive insurance means you are covered for third-party damage, meaning that your insurance company will take care of any damage you cause to another car during an accident. While insurance means extra payment, it is worth it.


Manufacturers offer warranties on their products, which vary from manufacturer to manufacturer and product to product. This covers damages with certain car components, such as a faulty fuel gauge, but excluding wear and tear on the brakes.

A car warranty lasts for a specific period, but your finance provider may offer to extend the period and offer a new warranty when buying a used car.

Service Plan

The service plan for your financed car is the amount to cover the car’s standard service. A service plan covers your car’s regular services as stipulated by the manufacturer, usually per km driven or period. Ensure you understand the parts included in the plan so you don’t pay unnecessarily.

Maintenance Plan

A maintenance plan is similar to a service plan but more comprehensive. This covers the total cost of the vehicle’s service and general maintenance, such as wear and tear and repairs to enhance the proper running of your car. Again, ensure you understand all that is included in the plan to know what you will be paying for.


Understanding financial terms when buying a car is important as it gives you the knowledge of the agreement you are about to sign. You don’t want to enter into a contract with unclear terms.

Now that you know what each financing term means, you are good to go and sign the contract, but ensure you are satisfied with the terms and conditions.

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