Car Finance 101

Posted Date: Sat Jul 2016

We have already talked about the basics of car financing,  5 really important things to know about car financing and how Islamic car finance differs from conventional car finance. Now we will inform our readers about some of the most commonly used technical terms and what they mean when it comes to car financing.


In car finance, the car being leased is the asset. In case you are unable to make your monthly installment payments on time, your asset may be confiscated by the lender I.e. the bank as it still has ownership of the vehicle.

Annual Percentage Rate:

This is the interest rate charged on a yearly basis along with all applicable fees. Hence APR is a representation of the yearly cost that you will have to bear for borrowing money.

Principal Amount:

This is the actual cost of the vehicle that you would have paid if you bought the car in cash.


Known as Karachi Inter Bank Offer Rate, given by State Bank of Pakistan given on a regular basis to all commercial banks of Pakistan so they can charge interest to their customers accordingly.


The remaining worth of the asset after the gradual wear and tear over a period of time has been applied.


An agreement between the lender that enables the borrower to use an asset owned by the lender against a monthly installment payment. After the complete amount of the asset has been paid, the borrower may then transfer the ownership of the car to their name.


This is the amount paid on top for borrowing money from the bank as a specific set percentage which can be fixed or floating.

Early Termination:

If you think you’re unable to carry on the agreement due to lack of funds to pay for the monthly installments or anything else. Then you may terminate the deal prematurely. For this you will need to return the car to the lessor i.e. the bank.

Down Payment:

The partial amount from the total cost of the vehicle paid at the start of a car financing agreement by the lessee after which the bank pays its own share to get you the car by paying the manufacturer for it.

On Site Financing:

Also known as a “buy here, pay here” financing, this is done at the dealership of the car manufacturer itself. It is offered to customers who plan to finance a new car in which all the terms and conditions are intimated to the customer by the dealership itself instead of the bank. These were some of the widely used jargons in terms of car finance. If you have any questions or feedback, please email us at