4 min read • Published April 17, 23
When it comes to getting the best deal on car financing, it’s essential to understand commonly used terms, phrases and concepts. Savings Club’s list of 40 auto loan terms is the perfect beginner’s guide to understanding the auto financing landscape. Let’s get started!
- Annual Percentage Rate (APR): The yearly cost of a loan, expressed as a percentage. APR includes the interest rate, fees, and other charges associated with the loan.
- Amortization: The process of paying off a loan through regular payments over a specific period of time.
- Balloon Payment: A large, lump-sum payment due at the end of a loan term, typically for auto loans with a shorter repayment period and lower monthly payments.
- Buyout Price: The cost to purchase a leased vehicle at the end of the lease term.
- Capitalized Cost (Cap Cost): The negotiated price of a vehicle in a lease or financing agreement. This amount can be reduced through trade-ins or down payments.
- Capitalized Cost Reduction: A down payment, trade-in, or rebate used to lower the capitalized cost of a vehicle in a lease or financing agreement.
- Credit Score: A numerical representation of your creditworthiness, based on your credit history. Lenders use credit scores to determine loan eligibility and interest rates.
- Dealer Incentives: Discounts or rebates offered by manufacturers to dealers, which can lead to lower vehicle prices for consumers.
- Depreciation: The decrease in a vehicle’s value over time, usually due to age, wear, and tear.
- Down Payment: An upfront payment made when purchasing a vehicle, which reduces the total amount financed.
- Early Termination Fee: A fee charged for ending a loan or lease agreement before the end of its term.
- Extended Warranty: An additional warranty that covers certain repairs and services beyond the manufacturer’s standard warranty.
- Finance Charge: The total cost of borrowing money, including interest and fees.
- Fixed Interest Rate: An interest rate that remains the same throughout the entire loan term.
- GAP Insurance: Guaranteed Auto Protection insurance covers the difference between the loan balance and the actual cash value of a vehicle if it’s stolen or totaled in an accident.
- Lease: A contract allowing someone to use a vehicle for a specific period in exchange for regular payments. The car is returned to the dealership at the end of the lease.
- Loan Term: The length of time a borrower has to repay a loan.
- Manufacturer’s Suggested Retail Price (MSRP): The recommended selling price of a vehicle set by the manufacturer, also known as the “sticker price.”
- Money Factor: A number used in lease calculations to determine the interest portion of the monthly lease payment. To convert the money factor to an APR, multiply it by 2,400.
- Principal: The initial amount borrowed in a loan, excluding interest and fees.
- Residual Value: The estimated value of a leased vehicle at the end of the lease term.
- Trade-in Value: The amount a dealership offers for your current vehicle, which can be applied as a credit toward the purchase or lease of a new car.
- Underwater Loan: A loan where the borrower owes more on the loan than the vehicle is worth, also known as being “upside-down” or having “negative equity.”
- Variable Interest Rate: An interest rate that can change over time, typically based on market conditions or a reference rate.
- Vehicle Identification Number (VIN): A unique 17-character code assigned to each vehicle, used for identification and tracking purposes.
- Pre-approval: A lender’s commitment to provide a loan or financing before the borrower finalizes their vehicle purchase, based on a preliminary review of their creditworthiness.
- Prepayment Penalty: A fee charged by some lenders if a borrower pays off their loan early, either
- Title: Legal document that proves ownership of a vehicle, which is transferred from the seller to the buyer during a vehicle purchase.
- Lien: A legal claim on a property (such as a car) by a lender, which must be paid off before the borrower can sell or transfer ownership of the property.
- Refinancing: The process of replacing an existing loan with a new loan, typically to secure a lower interest rate or better loan terms.
- Cosigner: A person who agrees to take on the responsibility of repaying a loan if the primary borrower fails to do so, often used to help someone with limited or poor credit secure a loan.
- Debt-to-Income Ratio (DTI): A financial measurement that compares a person’s total monthly debt payments to their gross monthly income, used by lenders to assess a borrower’s ability to repay a loan.
- Invoice Price: The price the dealer paid the manufacturer for a vehicle, which may be lower than the MSRP.
- Loan-to-Value Ratio (LTV): The ratio between the loan amount and the value of the vehicle being financed, expressed as a percentage. A higher LTV may result in higher interest rates or loan denial.
- Origination Fee: A one-time fee charged by a lender to cover the cost of processing a loan.
- Prepayment: Making additional payments on a loan before the due date, which can help reduce the overall interest paid and shorten the loan term.
- Subprime Loan: A loan offered to borrowers with low credit scores, typically featuring higher interest rates and less favorable terms due to the increased risk to the lender.
- Total Cost of Ownership (TCO): The sum of all costs associated with owning and operating a vehicle over its lifetime, including the purchase price, financing, insurance, maintenance, fuel, and depreciation.
- Truth in Lending Act (TILA): A U.S. federal law requiring lenders to clearly disclose important information about loan terms and costs, such as the APR, finance charges, and payment schedule.
- Zero-Percent Financing: A promotional financing offer in which the borrower pays no interest on the loan, typically available only to borrowers with excellent credit and offered by some automakers to boost sales.
By understanding this list of auto loan terms, you’re now better prepared to navigate the process of purchasing a vehicle. Bookmark our list for an easy-to-access guide when you need to make informed decisions and secure the best possible deal on car financing. If you know your stuff and want to save thousands, check out the Savings Club site!
As savings.club’s copywriter, Ash takes on various B2B and B2C communication tasks. He went to school for illustration at SCAD. There, he developed a passion for writing and effective storytelling. Ash is fond of journalism and reporting on the facts. He’s interested in new and groundbreaking ideas, especially ones that challenge the norm. Ash still loves to create art outside of work. His cartoons and writing have even been featured in The New Yorker!