Financing a vehicle can be exciting but also confusing; there are quite a few terms used that you may not be familiar with if you haven’t been through the financing process before. I thought it would be helpful to share some of the most commonly misunderstood terms used in the world of automotive finance so you can be prepared the next time you’re looking to purchase a vehicle.
This is the amount of money you make before any taxes, E.I., or CPP contributions come out. The easiest way to determine your gross income is to look at the biggest number on your paycheque. This is the one to report when filling out a credit application. If you’re reporting the amount that actually gets deposited into your account after taxes, you’re selling yourself short. This income figure is what the bank uses to calculate how much of a payment you can afford.
Acronyms can be vague and confusing. One of the most common terms used in the finance world is TDSR or “Total Debt-Service Ratio”. Basically, it’s a helpful term that represents the total amount of money you make compared to the amount you’ve committed to paying out in regular monthly bills.
Things like groceries don’t count but think of the car payment you’re applying for, your monthly utility bills and your monthly rent or mortgage payment. The maximum amount a lending institution will typically allow you to commit to is 42% of your Gross Income. If you hear someone say your “TDSR is maxed” or is “too high” it just means that the amount you’re requesting to borrow would represent a monthly payment that pushes you past the 42% threshold. This is something important to keep in mind when you’re considering co-signing for someone, too. Banks look at the worst-case scenario, so if you’re signed on to someone else’s contract it uses up some of your TDSR.
A payment call is simply the monthly payment amount a lender will allow you to take on after considering your Gross Income and current TDSR. Typically, there’s a couple of other conditions attached to this, including an interest rate. For a person rebuilding their credit, rates will range from 10.9% to 29.5%. If you have a $400 payment call, it means the bank will allow you a maximum of $400 a month, but the interest rate attached to that has a big influence on how much you can spend on a vehicle. It’s also worth noting that your interest rate tends to be lower if the model year of the vehicle is more recent.
Also known as “negative equity”, being “upside down” means you are in a position where the appraised value of your vehicle is less than the amount currently required to pay it off. Of course, this only applies if you’re planning on trading in the vehicle you currently own and you still owe money on it.
It’s also worth noting that when you trade-in, you save taxes on the appraised value, but you won’t pay taxes on the amount you still owe (also called the lien). So, if you bring your vehicle to a dealership and they tell you that your vehicle is worth $10,500 but you currently owe $11,500 to the bank, you’re not “upside down”. You’ll save the 15% tax on the $10,500 amount which will bring you to cash equivalent value of $12,075—so you’d actually be ahead by $575.
I hope this blog was helpful and provided some clarity for you. If you have any questions about automotive financing, I’d love to hear from you. Feel free to contact me with your questions anytime.