Overview

Getting an auto loan is a great way to get into a new car. However, many consumers feel daunted by the various terms and terminologies used by auto lenders and dealerships. Here, we will break down the definitions of the most common car loan terms and what they mean.


Accrue

To accumulate interest charges.


Acceleration Clause

An acceleration clause is a type of auto loan agreement that allows the lender to require you to pay off the entire balance of the loan in full, including interest, right away. If you fall behind on your auto loan payments, you may be forced by the lender to repay the balance.


Add-Ons

Refers to options added to the vehicle or loan package outside of the original quoted price.


Adjusted Capital Cost

Your adjusted capital cost refers to the dollar value of the car you are financing. This serves as one of the main drivers for lease agreements and auto loans. This can also be referred to as the “Cap Cost”.


Adverse Action

An adverse action occurs when a loan applicant is denied a line of credit. This is typically related to a person’s credit score. It is important to know that if you were denied an auto loan, your lender is required to tell you why, according to the Fair Credit Reporting Act.


Amortization

Amortization refers to the process of paying off a car through fixed payments on a set schedule for a specific duration (60 months, 72 months, etc.). With almost all loans, amortization determines how much of your payments go towards the auto loan principal and how much is allocated towards interest.


Amount Owed on Trade-In

The amount owed on trade-in refers to the total amount of money you owe on a vehicle you are looking to trade-in for a new one. Some dealerships will pay this for you if you purchase a new car.


Annual Percentage Rate (APR)

Your annual percentage rate (APR) is the annual interest you pay on a loan. TheAPR APR on your auto loan is calculated from the amount you finance with your auto loan.


Balloon Payment

A balloon payment is when you make a larger payment at the end of your auto loan to pay off the balance due on the car loan. Balloon payments can help keep your payments low. However, you will be required to pay a large balance at the end of the loan.


Base Rate

A car’s base rate refers to the Manufacturer Suggested Retail Price (MSRP). The base rate is the price of the car before any add-ons and options. Typically, your base rate will include all the standard features an automaker has.


Backdoor Money

Backdoor money is additional rebates that dealers receive from manufacturers for selling a certain amount of cars in a given period.


Bill of Sale

The bill of sale is a document prepared by the dealership or seller of a car to record the details of a transaction, such as the sale of a vehicle.


Blue Book Value

A car’s blue book value is the value of the car provided by Kelly Blue Book, a Kelly Blue Booktrusted source in valuing new and used cars.


Buydown

A buydown refers to the action of providing a large sum of money up front in order to help lower the interest rates being charged on the auto loan.


Buy Here Pay Here Dealers

A buy here pay here dealership is a type of dealership that finances auto loans themselves. Typically, you will make the payments directly at the dealerships physical location. A buy here pay here dealership does not work with any outside lenders like banks or credit unions. All financing is done in-house.


Capitalized Cost Reduction

A capitalized cost reduction happens when a consumer makes an up-front payment to aid in reducing the cost of financing a car. A capitalized cost reduction can come in many forms, including a trade in, a cash down payment, and manufacturer rebates or incentives.


Closing Costs

The closing costs of an auto loan include state sales tax, DMV title fees, and possibly an appraisal fee.


Collateral

Collateral refers to something of value that can be taken from you if you become delinquent on your auto loan. With auto loans, the car itself serves as the collateral, as the lender can take back the car at any time. This is why auto loans are referred to as Secure Loans.


Co-signer

A co-signer is somebody who “lends” their credit to another person in order to increase their chances of getting approved for an auto loan. If you have a less than perfect credit score, you may be required to bring a cosigner onto your auto loan. If the main borrower fails to make payments, the cosigner must repay the lender.


Credit Check

A credit check is when a lender conducts an inquiry to review your credit score and report. A credit check can lower your score if it’s a hard credit inquiry. Almost all hard-money loans will involve a hard credit inquiry.


Credit Report

Your credit report is a detailed log of all your credit-related activities. Your credit report includes information such as your address, any outstanding loans, late payments, credit inquiries etc. Your credit reports are created by the 3 major credit bureaus.


Credit Score

Your credit score refers to a 3 digit number that is produced from your credit report. The 3 major credit bureaus analyze your credit report to provide lenders with a 3 digit number that shows your “worthiness” as a borrower. Having a healthy credit score is essential for getting the best interest rates possible.


Creditor

A creditor is the person or entity that provides the financing for your loan. This could be a bank, credit union, or private lender.


Debtor

A debtor is a person who has borrowed money (i.e., the auto loan applicant).


Debt-to-Income Ratio (DTR)

Your debt to income ratio is a simple measurement of your debts compared to your income. If you make $100,000 per year and have current debts of $20,000, your Debt-to-Income ratio would be 1:5, or 20%.

Your debt to income ratio is important to lenders who use it to see if you have the ability to repay your loan.


Default

A default refers to an action taken that violates the terms of the auto loan agreement. This can include failing to make payments on time or only making partial payments. If you do default on your loan, your lender has the legal right to repossess the car.


Deferred Down Payment

A deferred down payment refers to paying your “down payment” through a series of payments made to the lender. This typically applies to consumers who do not have the funds to provide a down payment to provide up front. Most auto loan experts advise against deferred down payments since you may be charged interest.


Delinquent

If a borrower is late on their auto loan payments, they are delinquent.


Destination Charge

A vehicle destination charge is the cost of transporting a vehicle from a manufacturing plant to a dealership. This is typically included in a car’s sticker price.


Department of Motor Vehicles (DMV)

The DMV is a state agency that manages and oversees the registration of all automobiles.


Direct Financing

Direct financing occurs when a consumer goes directly to a lender for a loan, without any dealership involvement.


Down Payment

A down payment refers to money provided up front. A down payment is designed to help combat depreciation and also lower total interest expense. The larger the down payment you provide, the less interest you will pay overall.


Extended Warranty

An extended warranty is an additional warranty that helps to cover costs associated with vehicle repairs after the manufacturer’s warranty period expires.


Fair Credit Reporting Act (FCRA)

The Fair Credit Reporting Act is legislation that is designed to ensure that consumers credit information is protected in terms of privacy and accuracy. This legislation also requires that a lender inform you for the reason you were denied a line of credit, such as a car loan.


Fair Market Value

A cars fair market value is the price an average consumer would pay for a car at a certain time.


Finance Charge

The finance charge refers to the cost of the loan to the debtor. This includes any interest on the car and all fees. If you get an auto loan for $20,000 and end up paying $22,00 by the end of the loan with interest, the financing charge was $2,000. Think of this as the profit a lender makes from a loan.


Fixed Rate Loan

Commonly referred to as a fixed interest rate loan or flat rate loan, a fixed rate loan has an interest rate that does not change during the term of the loan. This will be outlined in any auto loan contract.


Front Loaded Loans

A front-loaded loan is a form of loan that charges mostly interest during the beginning of the loan term. This ensures that the lender is paid first.


Grace Period

A grace period refers to a certain amount of time you have to pay your “past-due” auto loan without paying a penalty.


GAP Insurance (Guaranteed Auto Protection)

Guaranteed auto protection insurance is a form of insurance coverage that covers the remaining balance on an auto loan if the vehicle becomes totaled. GAP insurance is popular with car buyers since it ensures that the borrower won’t be stuck with the remaining loan balance if he/she no longer has the car.


Incentive

An incentive is a deal or reward offered by a dealership or manufacturer. Incentives are designed to entice buyers into buying a new car.


Indirect Financing

Indirect financing occurs when the buyer gets their auto loan directly from the dealership, not a lender. Typically, a car dealership will have its own “in-house” financing department or an ongoing deal with an outside lender to provide customers with auto loans. Typically, indirect loans cost more than direct loans since the dealership will receive some compensation.


Installment Loan

An installment loan is a type of loan that is paid off in a specific number of scheduled payments. The term of an installment loan can be months or even years.


Interest

Interest is the cost of borrowing money. The amount of interest you pay for an auto loan is determined by your interest rate.


Interest Rate

The interest rate is the percentage that determines how much it will cost you to borrow money. Interest rate is related to risk, so if you have a less than perfect credit score, your interest rate may be higher.


Late Fee

A late fee is a form of penalty issued by a lender against a buyer. A late fee is typically applied if the borrower was late on a payment.


Lemon Law

Lemon laws are state laws designed to protect consumers against purchasing a car that is consistently defective.


Lienholder

The lienholder is somebody who owns your car until your auto loan is paid back in full. In almost all financing arrangements, the lender is the lienholder. The lien holder will be explicitly stated on the vehicle’s title.


Loan

A loan is money that you borrow and repay with interest. Most consumers get loans from banks, credit unions, or private lenders.


Loan Balance

The loan balance is the remaining amount of money left to repay on the loan.


Loan-to-Value Ratio (LTV)

A loan-to-value ratio is a ratio used to determine how much money a lender can give you based on the price or value of a vehicle. The LTV is calculated by dividing the amount of the loan by the MSRP.


Negative Equity

If you have negative equity in your car, it means that you owe more on a car than its current market value. This is also referred to as “being underwater”. A down payment can help combat negative equity.


Owner Financing

With owner financing, the legal owner of the vehicle agrees to finance the vehicle for the new buyer. The cars previous owner will serve as the lender and the new owner will make payments to the previous owner, instead of a bank. Many dealerships and private sellers offer owner financing.


Prepayment Penalty

A prepayment penalty is a fee that a lender charges you if you pay the loan off too early. Be sure to check your auto loan contract for any prepayment penalties.


Pre-Qualify

When you get pre-qualified for a car, the lender approves you to borrow a certain amount before you have purchased a car. Once you decide which car you wish to purchase, your lender will send the funds to the dealership themselves.


Prime Lender

A prime lender is a lender that only works with consumers who have good credit. Interest rates from a prime lender tend to be lower since less risk is involved.


Principal

The principal on an auto loan is the amount you still owe, minus all interest charges and other fees related to your auto loan.


Rebate

A rebate is a marketing tool used by manufacturers to entice buyers. When a vehicle comes with a rebate, you will receive a partial refund.


Refinancing

Refinancing refers to the process of financing your car again, but with a different lender and interest rate. The funds from the auto refinance loan are used to pay off the existing balance on your car loan. Consumers can save a few hundred dollars per year by looking at refinancing options.


Remaining Term

The remaining term of a loan is how much time you have to pay off the balance in full.


Sales Tax

Sales tax is a type of tax charged to consumers when a new product is being purchased. Sales tax can be a large expense in certain areas.


Secured Loan

A secured loan is a type of loan backed by an asset of value. Almost all auto loans are considered secured loans since the vehicle acts as the collateral. If the buyer falls behind their payments, the lender can repossess the car and sell it at auction to get it’s money back.


Simple Interest

Simple interest is a simple formula for calculating interest. The formula for finding simple interest is: Principal x Rate x Time in Years = Interest.


Sticker Price

A car’s sticker price the asking price of a certain car. Depending on options and features, the sticker price for the same model of car can vary.


Stipulation

A stipulation is a requirement or demand for a specific agreement. Examples can include a down payment of 10% or a credit score above 600.


Subprime Lender

A subprime lender is a lender that works with consumers who have less than perfect credit scores. Typically, most banks and credit unions are not subprime lenders.


Term

The term of an auto loan is the life of the loan, usually expressed in months. Some of the most common auto loan terms are 60-months and 72-months.


Title

A car’s title is a legal document issued by your state’s DMV that indicates who the Car titletrue owner of a vehicle is. A title is also referred to as a “pink slip”.


Trade-In

A trade-in refers to a car that a consumer brings to a dealership in order to secure a better deal on a new car. The consumers gives the car to the dealership, who will then apply a credit to a person’s new car. A trade-in can be a great down payment if you do not have the cash up front.


Trade-In Allowance

A trade-in allowance is money taken off of the purchase price of a new car in exchange for your traded-in vehicle.


Underwriting

Underwriting is the process of validating data and approving a loan or an agreement


Unsecured Loan

An unsecured loan refers to a form of loan that does not have an asset of value behind it. Unsecured loans are riskier and thus carry higher interest rates. Most auto loans will not fall into this category.


Usury Laws

Usury laws are regulations that manage how much interest can be charged on a certain loan. Usury laws are aimed at protecting consumers against predatory loans.


Variable Interest Rate

A variable interest rate is an interest rate that changes or fluctuates with time. A variable interest rate is typically matched by the current rate index.


Vehicle Identification Number

A car’s vehicle identification number or VIN, is a serial number attached to a car. The VIN helps to identify a car and is usually visible from the windshield.


Warranty

A warranty is a guarantee from a dealership or manufacturer that all aspects of the car will work like new for a certain period of time. Most warranties are limited to a certain amount of time or mileage.