Auto Loan Learn the Terms
Car Talk
Below are some terms you may hear when shopping for a new or used vehicle or auto loan. Some words may have more than one meaning. Only those meanings relating to this site will be used.
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Definitions A - Z
A
A/C
Air Conditioning. A cooling system which controls the temperature and humidity of the air in the passenger compartment of a vehicle during hot weather conditions.
All Wheel Drive
Also known as full time four wheel drive. All Wheel Drive is automatic power to all four wheels at all times to improve on road traction year round. Usually confused with Four wheel drive (4WD), which is temporary power to all four wheels by manually engaging, good for driving off road and rough terrain.
Amount Financed
The dollar amount of the credit that is provided to you.
Annual Percentage Rate (APR)
The APR is a measure of the cost of credit expressed as a yearly interest rate. The APR of a loan is the total finance charge, including interest, points, broker fees and certain other credit charges that the borrower is required to pay. Lenders are required by law to disclose the APR. Usually, the lower the APR, the better for you. Be sure to check the fine print to see if your offer has a time limit. Your APR could be much higher after the initial limited offer.
Anti Lock Brakes
Also known as ABS, Anti lock Brake System, Anti lock Braking System, anti skid brakes. If you have had to slam on the brakes suddenly and experienced skidding caused by the brakes locking up the wheels, your vehicle didn't have anti lock brakes. The anti lock brake system pumps your brakes at a very high rate to prevent wheel lock up so you can maintain steering control of your vehicle and prevent skidding. Be aware when driving on certain surfaces, anti lock brakes can make the braking distance even longer. Example, gravel or snow on hard road surfaces.
As Is - No Warranty
When the car dealer offers a vehicle as is, the box next to the "As Is - No Warranty" disclosure on the Buyers Guide must be checked. It will say: "As Is - No Warranty You will pay all costs for any repairs. The dealer assumes no responsibility for any repairs regardless of any oral statements about the vehicle."
If the dealer promises to repair the vehicle or cancel the sale if you're not satisfied, make sure the promise is written on the Buyers Guide. Some states don't allow as is sales for many used vehicles.
Asset
Everything of value an individual owns, cash, securities, investments, real estate, etc.
Assignee
The bank, finance company or credit union that purchases your loan contract from the car dealer.
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B
Back End Profit
Dealers will often take smaller profits when selling you a car, called front end profit, if they know that they are going to make a nice profit on the financing of the car, called back end profit. Car dealers make approximately half of their money through financing the autos they sell.
Bank Statement
Monthly bank report that summarizes financial transactions.
Base Price
The cost of the car without options, but includes standard equipment and factory warranty. This price is printed on the Manufacturer's Suggested Retail Price (MSRP) (monroney sticker).
Blue Book
Refers to the Kelley Blue Book a guide dealers use to estimate wholesale and retail vehicle pricing.
Bona Fide
Something that is in good faith, without fraud, the real thing.
Budget
Many individuals design and stick to a budget plan to get their debts under control. A budget is a plan for how much money you have and how much money you spend. Sticking to a realistic budget allows you to pay off your debts and save for the rainy days ahead.
Buyer's Remorse
A feeling of regret, or anxiety, felt by a person, that buying the purchase of a house, or vehicle, or anything expensive, was the wrong thing to do.
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C
Co-Applicant
Another person who joins the applicant (you) in applying for a loan.
Co-Buyer
A Co-Buyer's income is combined with the buyer's. This option is normally limited to a spouse or a person closely related residing at the same residence.
Co-Signer
Someone who assumes legal responsibility for repayment of a loan in the event the borrower does not pay. A Co-signer may be considered for a buyer who does not comply with all the credit requirements. You may be allowed by the creditor to have a co-signer sign the finance contract with you in order to make up for any deficiencies in your credit history. The income of the buyer, however, must meet all the income and budget guidelines without reliance upon the income of the co-signer. A co-signer assumes equal responsibility for the contract, and the account history will be reflected on the co-signer's credit history as well. For this reason, everyone should exercise caution if asked to co-sign for someone else. Since many co-signers are eventually asked to repay the obligation, be sure you can afford to do so before agreeing to be someone's co-signer.
Commercial Bank
A financial institution that offers a variety of financial services including checking accounts, savings accounts, CD's, mutual funds, credit cards, IRA's, savings bonds, trust services, online banking services, mortgage loans, auto loans, boat loans, student loans, personal loans, construction loans, home improvement loans, business loans, second loans secured by home equity, home equity lines of credit and a wide range of other services.
Commission
An amount of money, usually a percentage of the sales price, that is collected by sales professionals, real estate agents, car sales representatives, loan officers, attorneys, insurance agents, brokers, escrow representatives, etc., as a fee for negotiating a transaction or performing a service.
Consumer Reporting Agency (CRA)
If you've ever applied for a charge account, a personal loan, insurance, or a job, there's a file about you. This is your credit report. This file contains information on where you work and live, how you pay your bills, and whether you've been sued, arrested, or filed for bankruptcy. Companies that gather and sell this information are called a Consumer Reporting Agency (CRA). The information a CRA sells about you to creditors, employers, insurers, and other businesses is called a consumer report. There are many types of consumer reporting agencies, including credit bureaus (the most common type) and specialty agencies (such as agencies that sell information about check writing histories, medical records, and rental history records). The 3 major credit bureaus are Equifax, Experian, and TransUnion. More about Credit Bureaus
Contract
A legally enforceable agreement between two or more competent people that creates an obligation to do or not to do a particular thing.
Convey
To transfer ownership of the title to property from one to another.
Credible
Capable of being believed, plausible, worthy of confidence, reliable.
Credit
Credit is more than just a plastic card used to buy things. It's your financial trustworthiness. Good credit means that your history of payments, employment and salary make you a good candidate for a loan, and creditors (those who lend money or services) will be more willing to work with you.
Having good credit usually translates into lower payments and more ease in borrowing money. Bad credit, however, can be a big problem. It usually results from making payments late or borrowing too much money, and it means that you might have trouble getting a car loan, a credit card, a place to live and, sometimes, a job.
People who are just starting out might find it hard to get a loan or a credit card. That's because having no credit history makes it difficult for lenders to know if you're a good risk to repay a loan and make your payments on time. Establishing a good credit history is not as difficult as it seems. In all cases, however, you'll need to make payments on time. Some tips include:
1) Apply for a credit card through a local store. Local stores are more likely to extend credit to people without an established credit history.
2) Apply for a secured credit card. By borrowing against your own money, creditors find this to be far less risky.
3) Ask someone with a good credit history to co-sign on a loan or a credit card application. By co-signing, the person is agreeing to pay back the loan if you don't.
Credit Bureau
Agencies that keeps your credit record. The three major credit bureaus are Equifax, Experian, and TransUnion LLC.
Credit Counseling
Many universities, military bases, credit unions and housing authorities operate nonprofit financial counseling programs. Some charge a fee for their services. Creditors may be willing to accept reduced payments if you are working with a reputable program to create a debt repayment plan.
Credit History
A credit history is a record of credit use. It is comprised of a list of individual consumer debts and an indication as to whether or not these debts were paid back in a timely fashion or as agreed. Credit institutions have developed a complex recording system of documenting your credit history. This is called a credit report.
Credit Insurance
Optional insurance that pays the scheduled unpaid balance if you die or scheduled monthly payments if you become disabled. As with most contract terms, the cost of optional credit insurance must be disclosed in writing, and, if you want it, you must agree to it and sign for it.
Credit Limit
The maximum amount of money that may be borrowed on a loan account, or the maximum amount allowed you can charge and owe on a credit card account.
Credit Rating
A rating determined by a rating agency of the likelihood that a borrower will be able to repay its debt.
Credit Report
A document used by the credit industry to examine an individual's use of credit. Your credit payment history is recorded in a file or report. You have a credit record on file at a credit bureau if you have ever applied for a credit or charge account, a personal loan, insurance or a job. Your credit record contains information about your income, debts and credit payment history. It also indicates whether you have been sued, arrested or have filed for bankruptcy. These files or reports are maintained and sold by consumer reporting agencies (CRAs). One type of CRA is commonly known as a credit bureau.
Credit Score
A computer generated number that summarizes an individual's credit profile and predicts the likelihood that a borrower will repay future obligations.
Creditor
A person, bank, business or other organization that you can borrow money from or you can owe money to.
Creditworthy
Your ability to qualify for credit and repay debts.
Customer Service
Customer service is something most people don't consider, or appreciate, until there's a problem. At the very least, look for a 24 hour toll free telephone number when evaluating customer service.
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D
Dealer Preparation
(or dealer prep or preparation charges) An additional charge that dealers try to impose on buyers. It represents pure profit for the dealers, who have already been paid by the manufacturer for the cost of preparing the car for sale.
Dealer Sticker Price
Dealers will often add a sticker to the factory manufacturers suggested retail price (MSRP). Sometimes it even resembles the factory sticker, but now you know it is not. It is the dealer's asking price (suggested retail price of dealer-installed options, such as additional dealer markup (ADM) or additional dealer profit (ADP), dealer preparation, and undercoating). Dealer sticker asking prices are almost always inflated. Inform the salesperson upfront that you will not be negotiating from the dealer's sticker, you will only negotiate from the invoice price.
Debit Card
This card allows you to access the money in your checking account or savings account electronically to make purchases.
Debt
Something owed by one person to another that must be repaid, such as money borrowed, or goods, or services.
Debt Ratio
How much you earn compared with how much you owe. The lower your debt ratio, the more disposable income you have. You calculate it like this: Take the amount needed to repay debts each month, including rent or mortgage, and divide this by your gross pay (your pay before deduction of tax).
Debt to Income Ratio
The percentage of gross monthly income that goes toward paying for your monthly housing expense, installment debts, alimony, child support, car payments, and payments on revolving or open ended accounts such as credit cards.
Default
Failure to perform a legal obligation. A default includes failure to make the payments on a financial obligation, but may also be a failure to perform some action or service that is non monetary (not relating to money).
Delinquent
1. When you, the borrower, fails to make a payment on the due date on a debt, loan agreement or any other financial obligation, the account becomes delinquent and late fees may be charged.
2. A young person who commits an illegal act that is against the law. This could affect the persons credit report and possibly a rejection of a loan application. There is no time limit for consumer reporting companies to report and leave information about criminal convictions in a persons credit report.
Depreciation
A decrease in the price or value of something, such as a vehicle, over a period of time caused by use, age, wear and tear, mileage or other causes.
Dicker
To talk with another or others to reach an agreement towards a good deal. Same as bargaining, haggling, or negotiating. Example: you dicker with the car salesman or auto dealer when trying to get the best possible price for the vehicle you are wanting to buy. Be patient, shop around, compare costs and terms and dicker for the best deal.
Direct Lender
Originates loans directly to consumers, a bank, credit union, etc.
Disclosure
Information that must be released to you about your financial dealings that is required by law, such as terms, fees, finance charges and conditions associated with a loan or credit card agreement, etc.
Discrimination
Treating people different or unfair because of their race, color, national origin, sex, age, religion, disability or other personal characteristics covered by law. Unfair discrimination is prohibited by law.
Down Payment
A portion of the purchase price paid up front, that is paid in cash by the buyer to reduce the amount financed.
Driving Record
Also called Motor Vehicle Record (MVR) or Driver Record. A record that contains information about an automobile driver's traffic violations and accidents.
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E
Employed
Having a job that pays you wages or a salary.
Extended Warranty
(service contract) A contract that can be purchased to cover the costs of parts and service on a vehicle beyond the manufacturer's original warranty period. Whether or not you should buy an extended warranty service contract depends on you. If you are going to drive and keep the vehicle for a long time, an extended warranty may be a good idea. Used car extended warranties can be a good idea too. It is best to get the extended warranty service contract that is provided by the manufacture.
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F
Factory Invoice Price
Factory Invoice Price or Invoice Price is the manufacturers initial charge to the car dealer for a vehicle. This charge is usually higher than the dealer's final cost because dealers receive rebates, allowances, discounts, and incentive awards. The dealer will have a printed invoice that shows this price figure. It is the invoice price that you want to work from. You can get the invoice price by looking at the dealer's invoice or reviewing car publications. The invoice price always includes freight, also known as destination and delivery which is passed on to the buyer without any markup. If you're buying a car based on the invoice price and freight is already included, make sure freight isn't added again to the sales contract. The factory invoice price is less than the manufacturer's suggested retail price (MSRP), which is also called list price or sticker price or monroney (involving or relating to money) sticker price. This is the sticker you see attached to a new vehicle's window. This label is required by federal law, and may be removed only by the purchaser. On this sticker is the manufacturer's suggested retail price (MSRP), which is the price the manufacturer thinks the new car should sell for, the base price, all standard equipment, the manufacturer's installed options, the manufacturer's transportation charge, and the car's fuel economy (mileage).
Fixed Rate Financing
The interest rate remains the same over the life of the contract, which makes your monthly payments stay the same.
Finance Charge
The total dollar amount you pay to use credit.
Forced Placed Insurance
If the lender discovers that you have no car insurance on your vehicle, they will take out a special policy to cover the vehicle loan they approved for you. This kind of insurance is very very expensive and it only covers the collateral. The lender will then add the premium costs of the new vehicle insurance policy to your loan, and you must pay it, so make sure you get the vehicle insurance coverage you need.
Front End Profit
Dealers will often take smaller profits when selling you a car, called front end profit, if they know that they are going to make a nice profit on the financing of the car, called back end profit. Car dealers make approximately half of their money through financing the autos they sell.
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G
GAP Insurance
GAP means Guaranteed Auto Protection or Guaranteed Asset Protection. Optional protection that pays the difference between the amount you owe on your vehicle and the amount you receive from your insurance company if the vehicle is stolen or destroyed before you have satisified your credit obligation.
Grace Period
A grace period is the time between the date of a credit card purchase and the date the company starts charging you interest, or the time period stated in a contract during which the payment is permitted beyond the due date without penalty. Example: your monthly payment is due at the begining of every month, but the grace period allows you to make a payment a few days later without being penalized. Grace periods vary for Inusurance Companies, Credit Card Companies, Student Loans, etc. Some contracts may not have a grace period. Contact the company about your account and for grace period details.
Gross Monthly Income
The income you earn in a month before taxes and other deductions. Under certain circumstances, it may also include rental income, self employed income, income from alimony, child support, public assistance payments, and retirement benefits.
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H
Haggle
To bargain or argue in a petty, mean way, over the price of something or over the terms of an agreement. Example, same as bargaining, dickering, or negotiating to get a really good deal, negotiating for the best price to pay for a vehicle.
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I
Income
All money a person earns or receives during a period of time, such as employment from one's job (wages, salary, commissions, bonuses, tips) or unemployment compensation, child support, alimony, earnings on investments, financial aid, self employment, social security, welfare, disability pensions, interest, dividends, rental income, and other property income, veterans' benefits, etc.
Interest Rate
The percentage of a sum of money charged to the borrower (you) by the lender (a bank, or other financial institution) for borrowing the lender's money. Interest rates change because of the market conditions.
Invoice Price
Invoice Price or Factory Invoice Price is the manufacturers initial charge to the car dealer for a vehicle. This charge is usually higher than the dealer's final cost because dealers receive rebates, allowances, discounts, and incentive awards. The dealer will actually have a printed invoice that shows this price figure. It is the invoice price that you want to work from. You can get the invoice price by looking at the dealer's invoice or reviewing car publications. The invoice price always includes freight, also known as destination and delivery which is passed on to the buyer without any markup. If you're buying a car based on the invoice price and freight is already included, make sure freight isn't added again to the sales contract.
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J
Jumbo Loan
Also called a non-conforming loan, a jumbo loan is any loan size over a set amount which "exceeds" Fannie Mae's and Freddie Mac's loan limits (single family mortgage loan limit $417,000 for 2007, which changes yearly). Interest rates tend to be higher on jumbo loans because lenders generally have a higher risk.
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K
Kelly Blue Book
A guide dealers use to estimate wholesale and retail vehicle pricing.
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L
Lease
A contract agreement between the lessee (you) and the lessor (the leasing company) for temporary use of a vehicle, property, an apartment, machinery, or personal property, etcetera, subject to stated terms and limitations, for an agreed period of time and for a specified payment.
In the case of a vehicle, the lessee (you) pays to the leasing company monthly payments without actually buying the vehicle. The company leasing the vehicle continues to own the vehicle. The vehicle is returned to the leasing company when the lease expires unless the lessee (you) decides to buy the vehicle, if the contract allows for that option.
In the case of a rental agreement between a property owner and a tenant, the tenant (you) signs a contract for use of the property for an agreed period of time and a specified payment of rent. Example: The tenant (you) signs a contract to lease an apartment from a landlord (owner of the apartment) for 12 months at 850 dollars a month.
Lease Purchase
An option for the buyer (you) to lease with an option to buy.
Lemon Law
State laws that provide remedies to consumers for vehicles that repeatedly fail to meet certain standards of quality and performance. Lemon laws vary by state and may not cover leased vehicles.
Lender
The lender may be a bank, finance company, credit union or other financial institution or a government agency that provides loan funds to the borrower (you).
Lessee
The person who signs a lease (you).
Lessor
The leasing company or lender or individual who leases property to another, such as a car dealer, business, manufacturer, financial institution or landlord.
Liabilities
Your debts and other monetary obligations.
List Price
List price is another name for manufacturer's suggested retail price (MSRP). Also called sticker price. This is the sticker you see attached to a new vehicle's window.
Loan Origination Fees
Fees charged by the lender for processing the loan and are often expressed as a percentage of the loan amount.
Loan Principal
The total sum of the amount of money borrowed or the amount of the loan that has not yet been paid back to the lender.
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M
Manufacturer's Suggested Retail Price (MSRP)
Also called list price or sticker price or monroney (involving or relating to money) sticker price. This is the sticker you see attached to a new vehicle's window. This label is required by federal law, and may be removed only by the purchaser. On this sticker is the manufacturer's suggested retail price (MSRP) which is the price the manufacturer thinks the new car should sell for, the base price, all standard equipment, the manufacturer's installed options, the manufacturer's transportation charge, and the car's fuel economy (mileage).
Minimum Payment
The smallest dollar amount you must pay, usually each month, on your loan account or credit card account. The minimum payment may cover interest only, or it may include both principal and interest.
Monetary
Involving or relating to money.
Monthly Payment Amount
The dollar amount due each month to repay the credit agreement.
Motor Vehicle Record (MVR)
A record that contains information about an automobile driver's traffic violations and accidents. Also called driver record or driving record.
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N
N/A
Not applicable (not applied). If you finance your vehicle with the car dealership, insert N/A or put a cross through any blanks not applied to you. If information is inserted by someone else after you have signed the contract, you may still be bound to the terms of the contract. Never sign a blank document or a document containing blanks.
Negotiate
To speak with another or others in order to come to terms or reach an agreement. When buying a vehicle, be patient, remember to shop around, to compare costs and terms and to negotiate for the best deal.
Negotiated Price of the Vehicle
The purchase price of the vehicle agreed upon by the buyer and the dealer.
Net Monthly Income
Net monthly income is your take home pay after taxes. It is the amount of money that you actually receive in your paycheck.
Net Worth
The value of your total assets (what you own) minus your total liabilities (what you owe).
Note
A legally binding contract you sign when you get a loan. This legal contract lists the conditions under which you are borrowing and the terms under which you agree to pay back the loan, for example, you borrow a specified sum of money at a specified interest rate to be paid over a fixed period of time. Also called a mortgage note or a promissory note.
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O
Odometer
An odometer is a device used to measure the total miles - kilometers traveled by an automobile or other vehicle.
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P
Payment
The process of paying money that is owed each month, such as a monthly mortgage payment, or a monthly car payment.
Payment to Income Ratio
Your monthly car payment compared to your gross monthly income. Most lenders prefer this ratio to be less than 15%.
Pre-Approved Loan
A loan the lender issues to the borrower "before" buying a home or automobile. These loans are usually valid for a limited time only, such as 30 days from the loan approval date. Pre-approved only means that a potential customer has passed a preliminary credit information screening. Neither a pre-approved nor a pre-qualified are seen as absolute loan commitments. To give yourself the negotiating advantage at the car dealership, always get a pre-approved loan. Have a pre-approved loan check draft with you when you walk into the car dealership. Having a pre-approved loan gives you the negotiating power of a cash buyer who the dealer views as ready to buy the right auto at the right price.
Prepayment Penalty
A lender's charge to the borrower for paying off the loan before the end of the term. Always check with the lender if you can pay extra payments or pay the entire loan off early (if you choose) without a penalty.
Principal
The amount of money borrowed or the amount of the loan that has not yet been paid back to the lender. This does not include the interest you will pay to borrow that money. The principal balance (sometimes called the outstanding or unpaid principal balance) is the amount owed on the loan at any given time.
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Q
Qualify
To meet a lender's approval requirements for a loan.
Qualification
As determined by a lender, the ability of the borrower to repay a loan based on the borrower's credit history, employment status, assets, debts and income.
Qualifying Ratios
Lenders determine how much you can afford to borrow by calculating the ratio of your fixed monthly expenses to your gross monthly income.
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R
Rebate
A manufacturer's reduction on the price of the car as an incentive to buyers.
Reconditioning
The process of preparing a vehicle for resale or re-lease if you return it.
Reconditioning Reserve
An amount you may pay at the beginning of the lease that may be used by the lessor (the leasing company) or assignee to offset any amounts you may owe at the end of the lease term for excessive wear and use and excess mileage. Any remaining amount may be refunded to you.
Registration Fee
A fee charged by a state motor vehicle department to register a vehicle and authorize its use on the public roadways.
Repossess
When a creditor takes possession of your vehicle after you default on your loan or lease. For credit rating purposes it does not matter if the repossession was voluntary or involuntary.
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S
Stipulations
(STIPS) Documentation may be required to prove items on your initial credit application, proof of income (POI), proof of address (POR), telephone bill, mortgage statement, lease agreement.
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T
Title
A legal document containing specific information about the vehicle and stating who owns it. If you borrow money to get a car, the title will be held by the lender until the vehicle is paid off.
Trade In Value
The amount that the dealership will credit you for the vehicle you provide as partial or full payment for another vehicle. Amount credited is frequently about 5 percent below the wholesale value of the vehicle.
Transaction Fees and Other Charges
Most creditors charge a fee if you don't make a payment on time. Other common credit card fees include those for cash advances and going beyond your credit limit. Some credit cards charge a flat fee every month, whether you use your card or not.
Truth in Lending Act
Truth in Lending Act requires that, before you sign an agreement, creditors give you written disclosure of important terms and conditions associated with the credit agreement such as Annual Percentage Rate (APR), total finance charges, all fees, monthly payment amount, payment due dates, total amount being financed, length of the credit agreement and any charges for late payment. Read more about Truth in Lending Act
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U
Used Vehicle
A vehicle that has previously been owned and driven by another person.
Used Car Guidebooks
Publications that report current wholesale and/or retail prices of vehicles. Wholesale values generally are determined from such factors as auto auction prices, other wholesale transactions and regional demand. Prices are listed according to year, make, model, options, mileage and condition of the vehicle. Retail prices are generally determined by such factors as dealership retail sales prices, other retail transactions and regional demand.
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V
Value
An expression of monetary (relating to money) worth of a particular piece of real estate, or vehicle, or goods, etc. A fair price.
Variable Rate Financing
The interest rate varies and the amount you must pay changes over the life of the contract.
Vehicle Identification Number
Also known as VIN or VIN Number or VIN #. A unique number given by the motor vehicles manufacturer that identifies one vehicle from another and usually consists of 17 characters that do not include the letters I, O or Q. It is usually located under the windshield on the driver's side, viewed from the outside of the car looking through the windshield.
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W
Warranty
A guarantee that the vehicle will function and perform as specified. A warranty usually covers specified mechanical problems during a specified period of time and/or number of miles.
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X
X Mark Signature
A signature made by someone who cannot write their name. Example, if a person is unable of signing their name, they can sign with an "X" mark and have two people sign as witnesses in the space beside the mark.
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Y
YTD
YTD stands for Year To Date. For the period starting January 1 of the current year and ending today.
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Z
Zero Percent Financing
A loan with no interest in the contract.
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