Finance jargons decoded for the average Joe
Below we will break down some key terms you may come across:
Finance Jargons everyone must know
AML – Anti-money laundering. This is one of the big words thrown around not just in finance, but in any industry that deals in cash or businesses that move assets and money.
In its simplest terms, it is the rules and restrictions imposed on NZ businesses to restrict the ability for dirty money to be laundered into clean money and ensure all parties in any transaction are identified.
For normal transactions, it’s quite straightforward and is just a link where you take a selfie + photo of your licence. For larger commercial transactions it is the same as the above, but ensuring all shareholders and directors of a company are identified.
MBI, PPI and GAP –are the three “extra” insurances that can be included in any loan.
MBI is mechanical breakdown insurance and provides cover for any mechanical claims you have for your vehicle.
PPI is payment protection insurance and cover’s the loan repayments under a few scenarios such as redundancy or illness.
GAP is guaranteed asset protection – this covers the difference between what insurance pays out if your car is written off and what is owing on the loan.
When your car is insured for market value – in some cases the difference can be thousands. In cases where a large deposit is paid for the loan, or there are no extras and a short loan term – the insurance has less of a benefit and may be of no benefit case by case.
Your broker will talk to you about what is available for your loan, the associated costs and whether or not it is actually of any benefit to you.
Interest – this is a key part of how loans work, but the scenes working are very rarely explained.
Most people will look at a rate e.g.: 6.95%. So they think it is 6.95% per annum, but that’s an overly simplistic view of how it is charged. Lenders will take that rate, divide it by 365 and apply that onto the amount owing on your loan, including accrued interest, at the end of every day.
So it compounds on itself and if you take out a $10,000 loan over 5 years. The interest won’t be 6.95% of the balance at the end of each year, but that rate changed to a daily rate, charged on the balance owing every day.
Fees – Asset finance has more fees than standard mortgages or unsecured loans. Due to the amount of work involved up front, vs. the long term return on a transaction vs. a mortgage – an upfront application fee is always charged.
This changes from lender to lender depending on their processes and rates offered. Many lenders also charge monthly admin fees as they pass on the cost of having a direct debit setup. Some lenders also charge ongoing “maintenance fees” – these are just another way to clip the ticket and Nobilo Finance will always try to avoid using any lenders with excessive or unreasonable fees.
Servicing – this is the main word used to explain whether or not the loan is affordable. Once you take your income, subtract your expenses – is there enough of a surplus left over to repay the loan and let you live your life without being under financial stress.
This is one of the key points lenders look for since the CCCFA changes came on 1 Dec 2021. IT is the lender’s responsibility to ensure that you can afford to repay the loan.
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CCCFA– Credit Contracts and Consumer Finance Act. This is the main governing legislation that impacts how lenders operate in NZ.
As noted above it had a large charge as of 1 Dec 2021 and the industry is only just coming to terms with the changes now. The biggest change is requiring proof of income by way of bank statements for almost every single transaction to ensure the loan is affordable.
This is typically done via a bank link that automatically codes transactions for the approval teams. If the lender gives you a loan you can’t afford – they are opening themselves up to massive fines for being in breach of this act. This is why approvals now take a lot more time and lenders have to ask a lot more questions than Pre Dec 2021.
Also Read: What does a major bump in OCR mean for you
Sam has a passion for finance and helping clients, stemming from his own love of responsible lending and hearing of the joy a new asset or working capital can bring to you.