Auto Financing Terms can be intimidating

Take a moment and brush up on some of the more commonly used auto financing terms

Acceleration Clause

Allows the lender to speed up the rate at which your loan comes due or even to demand immediate payment of the entire balance of the loan should you default on you loan.

Amortization

Loan payment calculated to pay off the debt at the end of a fixed period, including interest on the outstanding balance.

Annual Percentage Rate (APR)

The cost of credit as a yearly rate. The percentage results from an equation considering the total amount financed, the finance charges, and the term of the loan. Usually not the same as the interest rate.

Appraisal

An estimate of the value of property, made by a professional appraiser.

APR

Annual Percentage Rate. A way of expressing the cost of credit on a loan. Under federal law, all consumer loans must disclose the Annual Percentage Rate.

Asset

Property that can be used to repay debt, such as stocks and bonds or a car.

Blue Book

A publication of Kelley Blue Book, Inc. and one of several standard references used to determine the value of used vehicles. The value is sometimes called the “Blue Book Value.” Blue books typically show a wholesale value and a retail value for each vehicle.

Broker

An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself.

Collateral

Property offered to support a loan that can be seized if you default.

Depreciation

Decline in value of a vehicle due to wear and tear or any other reason.

Lien

A claim upon a piece of property for the payment or satisfaction of a debt or obligation.

Monroney Sticker

The price sticker required by federal law for all new vehicles. The Monroney Sticker lists all the vehicle’s options along with the manufacturer’s suggested retail price (MSRP).

MSRP

Stands for Manufacturer’s Suggested Retail Price. It represents the manufacturer’s recommended selling price for a vehicle and each of its options.

Net Effective Income

The borrower’s gross income minus federal income tax.

Open-End Lease

A lease which may involve a balloon payment based on the value of the property when it is returned.

Principal

The amount of debt, not counting interest, left on a loan.

Rebate

A special payment from the manufacturer to the customer to promote sales of slow-selling models. Also called a “Customer Incentive”.

Snake Oil

Products or services sold by dealerships that can be added on to the vehicle. Some examples include rust-proofing, upholstery treatments, alarm systems, and extended warranties. Remember that these add-ons will increase the price of the vehicle, and your monthly payment. Also these items are normally marked up outrageously. Also referred to as snake oil by dealers, because it bites you.

Sticker Price

The manufacturer’s suggested retail price for a vehicle. Also called “List Price” or “MSRP.”

Term

The period of time between the beginning loan date on the legal documents and the date the entire balance of the loan is due.

Title

A document that gives evidence of an individual’s ownership of property.

Trade-in Value

The value of a used vehicle that you trade in to a dealership as part of a purchase.

Truth-in-Lending

A federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan.

Wraparound

Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.

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