The following terms and definitions are those commonly used by local car dealerships and new car showrooms. It’s important to understand the terms used by car sales centers so that you can be clear about the services you’re receiving and the details of your new car purchase.
Annual Percentage Rate (APR)
The APR is the interest rate charged on auto loans. Auto financing lenders stay in business by charging interest, or a percentage of the total amount borrowed. You will save money on your new car purchase by choosing an affordable loan that has a low APR. The higher the APR and the longer the life of the loan, the more you will pay in interest on the loan.
Also known as: APR, finance rate
Auto loans that cover only part of the cost of a vehicle during the term of the loan and require a large final sum at the end of the loan term (the balloon payment) are known as balloon loans. Some short-term balloon loans may have lower interest rates than long-term loans, so they can be attractive to short-term borrowers who can cover the larger sum at the end of the loan term.
Also known as: balloon payment
Auto manufacturers often provide dealer incentives, or special offers that are passed on to the customer to help move more vehicles when inventories are high or in a slow market for auto sales. You can save money by looking for dealer incentives on the makes and models you’re interested in.
The dealer invoice cost is what the manufacturer charges the dealerships for the vehicles they sell. Auto dealerships have to mark up their cars above dealer invoice so that they can make enough money to stay in business.
dealer prep fees
Some dealers charge dealer prep fees, or charges accrued to cover the cost of readying a new car or truck for sale. These fees are often negotiable depending on the auto dealership.
Moving a new vehicle from the factory to the dealership always accrues fees. These are not negotiable. However, some dealerships charge a destination fee for bringing a vehicle to their lot from another auto showroom. You should not be asked to pay this fee unless you’ve requested the car and have agreed to paying for transport.
Also known as: auto transportation fee, car moving fee
Most auto dealerships charge small documentation fees to cover the cost of the paperwork involved in buying a new car or truck. These fees rarely exceed $100, so carefully review all additional charges when buying a new vehicle and ask about ones that appear extraneous.
A down payment, or money paid up front, will lower the amount a customer needs to pay for a new car. This can reduce the amount financed and can lower monthly payments and interest over the life of the loan. Keep in mind that down payments may be lost if your car is stolen or totaled while the loan is still unpaid. Cash paid up-front by a borrower to reduce the amount financed in a lease or loan.
early termination fees
Paying off a loan ahead of schedule may result in early termination fees or penalties. Verify that your loan doesn’t include early termination fees, or, if it does, be aware that paying off the loan ahead of the scheduled end date may cost you as much as continuing to pay the loan on time.
Also known as: early termination penalties, loan termination penalties, loan prepayment penalties, loan termination fee
Extended warranties and service contracts are separate warranty plans you can purchase to cover services and repairs. However, many do not cover services beyond your factory warranty. If you are considering extended warranty coverage or a service contract in addition to your manufacturer warranty, check to be sure the benefits are worth the extra cost.
Also known as: service contract
Financing costs include all the costs accrued for loans and auto financing.
Also known as: cost of funds, cost of financing, cost of auto financing
An auto lease is a long-term vehicle rental. The auto dealership still owns the car and the lessee (person leasing the vehicle) pays a monthly fee to drive the vehicle. After the lease term ends, the lessee can decide to return the car to the dealership or purchase it (depending on the contract signed at the start of the lease). Leasing may be a smart option for some consumers and may cost you more than an outright purchase depending on what kind of a car buyer you are.
When a customer fails to make their auto payments on schedule or doesn’t live up to their agreement on the finance contract, they are said to be in default. This can have financial ramifications including higher loan payments, penalties, reduced credit scores and even forfeiting the loan or having the vehicle repossessed.
Also known as: defaulting on a loan, payment default, defaulting on a payment, missing an auto loan payment
The Moroney Sticker is the price tag window sticker that is required by law to be placed on all vehicles. This includes the base price, standard features, optional auto features and other information. The invoice price does not have to be listed on the Monroney Sticker.
Also known as: dealership asking price, sticker price, auto sticker price
MSRP (Manufacturers Suggested Retail Price)
The MSRP is the price the auto manufacturer recommends charging for a specific vehicle. This includes the base price and options found on a specific make and model.
Also known as: Manufacturers Suggested Retail Price
Auto loans are considered to have pre-computed interest when the total interest amount is calculated in advance and portioned out equally into each monthly loan payment. The customer is entitled to receive back any interest remainder if they pay off an auto loan before the proposed loan end date.
Consumers can prequalify for loans by having auto lenders confirm they are eligible to receive a loan before actually applying for the loan. These prequalification statements may state how much money the lender is willing to offer. Pre-qualified customers often have more flexibility in making deals for auto loans and auto sales because they are guaranteed to be able to secure a loan for a new car or truck.
Also known as: loan prequalification, prequalify for an auto loan
The amount borrowed for an auto loan is considered the principal amount. Principal plus interest is the total amount of the loan.
Also known as: loan principal, principal amount owed
Rebates are a popular way to reward new car buyers. Rebates are often a partial refund on a new car that is offered by the manufacturer or auto dealership. Rebates are usually refunded by mail or taken off of the closing cost of the new vehicle sale, depending on what the customer prefers.
The length of an auto loan is known as a term.
Also known as: auto loan term, term of auto loan, new car loan term
Used vehicles often have some trade-in value at local car dealerships. This is the price a dealer will pay to purchase your old car if you buy a new one. Trade-in value on current vehicles is a popular way new car buyers help pay for their new vehicles. Dealerships usually pay less for used vehicles than customers could make by selling the car in a private sale. However, some customers appreciate the convenience of not having to sell their old vehicles to a third party.
When buying a new car or truck, you should be informed of the up-front costs, or the total cost you must pay when you sign the contract. Upfront costs generally include the down payment for a new vehicle plus any fees associated with the new car purchase.
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Customers who owe more on their vehicle loan than their car is worth are said to be upside down on their loans. This is common because most vehicles lose a lot of value in their first months and years. This can cost you money if you sell or trade in your vehicle while your loan is up-side down, or if your vehicle is totaled in an accident. That’s because you will only get back what your car was worth, not what you owe on the loan. Prevent upside down loans by purchasing vehicles you can afford and by financing car loans over a short period of time rather than taking out lengthy loans.