Finance glossary
45 lending terms explained in plain English, from balloon payments to comparison rates.
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A
- An 11-digit number that identifies your business to the government and other businesses. Lenders often ask how long you've held an active ABN when assessing self-employed applicants or business finance, as a longer trading history can widen your options.
- A free, independent service that handles complaints about financial firms, including lenders and credit providers. If you can't resolve a complaint directly with the business, you can usually take it to AFCA at no cost to you.
- A higher interest rate lenders use when checking whether you could afford repayments, rather than the actual rate on your loan. It builds in a margin so you could cope if rates rise. Each lender sets its own approach, guided by regulators.
B
- A lump sum owed at the end of a loan term, common on car and equipment finance. It lowers your regular repayments but means a larger amount is due at the end, which you can pay, refinance or cover by selling the vehicle.
- A form businesses registered for GST lodge with the ATO, usually quarterly, to report GST and other tax obligations. Lenders often use BAS to verify turnover for self-employed borrowers, particularly when assessing low doc loans.
- A legal obligation requiring mortgage brokers to act in the consumer's best interests when providing credit assistance for home loans. Where there is a conflict of interest, the broker must prioritise the customer's interests over their own.
- Fees a lender may charge if you pay off or change a fixed rate loan before the fixed period ends. They aim to cover the lender's losses and can be significant, so ask for an estimate before refinancing or making large extra repayments.
- Short-term finance that helps you buy a new property before selling your current one, covering the gap between purchase and sale. Interest may build up during the bridging period, and you need a clear plan to sell within the lender's timeframe.
C
- A type of business finance where you own the vehicle or equipment from the start and the lender takes a mortgage over it as security. It's popular with ABN holders buying vehicles mainly for business use. Ask your accountant about tax implications.
- A rate that combines the interest rate with most upfront and ongoing fees, expressed as a single figure, to help you compare the true cost of loans. Lenders must show it alongside advertised rates, though it may not capture every possible fee.
- A record on your credit file showing you applied for credit. Lenders can see how many enquiries you've made and when. Many enquiries in a short period may suggest financial stress, so it's sensible to apply selectively.
- A document lenders and brokers must give you, explaining who they are, their credit licence details, how they are paid and how to make a complaint. Read it before going ahead so you understand the relationship and any commissions involved.
- A number summarising your credit file, calculated by credit reporting bodies such as Equifax, Experian and illion. Higher scores generally indicate lower risk to lenders. Scores differ between agencies, and each lender also applies its own criteria.
- When one property is used as security for more than one loan, or several properties secure a single loan. It can help you access equity, but may reduce flexibility when selling or refinancing because the lender holds security over multiple assets.
D
- Your total debts divided by your gross annual income. Lenders use DTI to gauge how much debt you carry relative to what you earn. A high DTI may limit how much you can borrow, and regulators monitor high-DTI lending closely.
- A listing on your credit file showing a debt that is overdue by at least 60 days and has been formally reported by the creditor. Defaults can stay on your file for years and make borrowing harder, even after they've been paid.
- A fee charged when you pay out a loan in full and the lender releases its security, such as removing its mortgage from your property title. It's usually payable when you sell the asset or refinance to another lender.
E
- The difference between what an asset is worth and what you owe on it. If your home is worth $800,000 and your loan balance is $500,000, you have $300,000 in equity. Lenders may let you borrow against part of it.
- An upfront fee some lenders charge to set up a new loan, covering administration and processing costs. It may be paid at settlement or added to the loan amount, and it's included when calculating the comparison rate.
F
- A one-off payment from state and territory governments to eligible first home buyers, usually for newly built homes. Eligibility rules, grant amounts and property price caps differ between states and change over time, so check with your state revenue office.
- An Australian Government scheme that lets eligible first home buyers purchase with a smaller deposit without paying lenders mortgage insurance, because the government guarantees part of the loan. Property price caps and eligibility rules apply and can change.
- An interest rate that stays the same for an agreed period, often between one and five years. It offers repayment certainty but can limit extra repayments and features, and break costs may apply if you exit the loan early.
G
- A person, often a parent, who agrees to be responsible for a loan if the borrower can't repay, sometimes by offering equity in their own property as security. It's a serious commitment, and guarantors should get independent legal advice first.
H
- Financial difficulty that makes it hard to meet loan repayments, often due to illness, job loss or a relationship breakdown. Lenders must consider hardship requests and may offer reduced repayments, a temporary pause or a change to your loan terms.
- A benchmark of typical living costs for different household types, used by many Australian lenders. If the expenses you declare are lower than the HEM figure for your household, the lender will often use the benchmark figure instead.
I
- A loan period where you pay only the interest, not the principal, so repayments are lower but your balance doesn't reduce. Interest-only periods are usually limited, after which repayments rise to cover both principal and interest.
L
- Insurance that protects the lender, not you, if you can't repay your home loan and selling the property doesn't cover the debt. It's usually charged when you borrow above a certain LVR and can be paid upfront or added to the loan.
- Your loan amount as a percentage of the property's value. Borrowing $400,000 on a $500,000 home gives an LVR of 80 per cent. A lower LVR generally gives you access to more options and may help you avoid LMI.
- A loan for self-employed borrowers who can't easily provide standard income evidence such as tax returns. Lenders accept alternatives like BAS, business bank statements or an accountant's letter, and may set lower maximum LVRs or different pricing.
N
- A three-way agreement between you, your employer and a lease provider, where car lease payments and running costs are deducted from your salary, partly from pre-tax pay. Fringe benefits tax rules apply, so check the tax implications with your accountant.
O
- A transaction account linked to your home loan. Its balance is offset against the loan when interest is calculated, so holding $20,000 in the offset on a $500,000 loan means interest is charged on $480,000.
P
- A national online register showing whether personal property, such as a car, has a security interest like finance owing on it. A PPSR search before buying a used car can also show whether it's been recorded as stolen or written off.
- A conditional indication from a lender of how much it may be willing to lend you, based on initial information. It helps you shop with a clear budget but isn't a final approval, and it usually expires after a set period.
- The standard repayment type, where each repayment covers the interest charged plus part of the amount you borrowed. Over time your balance reduces, and the loan is fully repaid by the end of the agreed term.
R
- A feature letting you access extra repayments you've made on your loan. Unlike an offset account, the money sits in the loan itself. Some lenders charge fees or set minimum redraw amounts, and redraw availability can change.
- Replacing your existing loan with a new one, either with your current lender or a different one. People refinance to change rates or features, consolidate debts or access equity. Weigh up fees, break costs and discharge charges first.
- The amount owing at the end of a lease, similar to a balloon payment on a loan. For novated leases, minimum residual values follow ATO guidelines based on the lease term. You can pay it, refinance it or trade in the vehicle.
S
- A loan backed by an asset, such as a car or property, that the lender can take and sell if you don't repay. Because the lender's risk is lower, secured loans are often priced lower than unsecured loans.
- An asset pledged to a lender to back a loan. If you default, the lender may take possession of the security and sell it to recover what's owed. Cars, property and business equipment are common forms of security.
- A lender's assessment of whether you can afford loan repayments, based on your income, living expenses, existing debts and dependants. It usually includes a buffer to test whether you could still pay if rates or circumstances change.
- The point at which a loan is finalised and the funds are paid out. When buying a home, it's when ownership transfers and the seller is paid. For a car loan, it's when the lender pays the dealer or seller.
- A home loan divided into separate portions, typically one fixed and one variable. It offers some repayment certainty on the fixed portion while keeping flexible features like extra repayments or an offset account on the variable portion.
- A state or territory government tax on certain purchases and transfers, including property and motor vehicles. Amounts and concessions vary by state and by circumstance, such as first home buyer status, so check with your state revenue office.
U
- A loan not backed by an asset. Because the lender has no security to sell if you default, unsecured loans are often priced higher and may have lower borrowing limits. Many personal loans are unsecured.
V
- An interest rate that can move up or down over the loan term, often in response to changes in the official cash rate. Variable loans usually offer more flexibility, such as extra repayments without penalty and access to offset accounts.
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