O% interest loans: With 0% financing, this suggests that you can finance a car and pay no interest over the term of the loan. For 0 percent loans, you pay no interest. That means you’re borrowing money from a bank but paying no fee for the privilege of doing so. Essentially, 0 percent interest gives you the chance to pay the same amount of money as a cash buyer, even though you’re spreading your payments over a longer term.
Amortization: At the outset of your loan, a greater amount of your payment goes toward paying the interest on your loan, and less goes toward paying down your principal. As the loan term progresses, though, the balance shifts. More and more of your payment goes toward principal at the end of the loan. You can save a little bit more on your car loan interest by making extra principal payments at the beginning of the loan.
Since the simple interest is calculated on the remaining principal periodically, you can reduce the amount of interest that you pay overall by putting extra money toward the principal. You can pay off your car loan faster, and save money, by making extra principal payments.
APR (Annual Percentage Rate): This is a measure of the total amount of interest you will pay to finance your loan, over a one year term. It includes all of the fees and expenses paid to acquire the loan. When APR is calculated, it has to include both the cost of the borrowing and any associated fees that are automatically included. Thus it’s meant to give you the overall equivalent cost of a loan.
As Is (No Warranty): This generally means that the seller assumes no responsibility to fix anything that goes wrong after the sale. According to the law, when a dealer offers a vehicle “as is,” the box next to the “As Is – No Warranty” disclosure on the Buyers Guide must be checked. If the box is checked but the seller promises to repair the vehicle or cancel the sale if you’re not satisfied, that promise needs to be written on the Buyers Guide. If not, the law will protect the seller if they go back on their word. Some states in the United States including Connecticut, Kansas, Maine, Maryland, Massachusetts, Minnesota, Mississippi, New Jersey, New York, Rhode Island, Vermont, West Virginia, and the District of Columbia, don’t allow “as is” sales for a large percentage of used vehicles.
Buyers get more protection in Louisiana, New Hampshire, and Washington, as they require different disclosures than those on the Buyers Guide. If the dealer fails to provide proper state disclosures, the sale is not “as is.” To find out what disclosures are required for “as is” sales in your state, contact your state Attorney General.
Base Price: This is the cost of the car without options, but includes standard equipment and factory warranty. This price is printed on the Monroney sticker (See below).
Balloon payment: (also known as Residual Value). This is a lump sum owed to the financier at the end of a loan term after all regular monthly repayments have been made. Your monthly repayments are significantly reduced in exchange for owing the financier a massive lump sum at the end of the loan term. For example: a new car buyer borrows $50,000 over 5 years and elects to have a $10,000 (20%) Balloon Payment on their loan.
Their monthly repayments will be lower than if they had no Residual Value/Balloon Payment. This reduces the size of the regular monthly repayments due throughout the term of a car loan. However, they will still owe the financier $10,000 at the end of the 5 year loan.
Book Value: The book value of a car is what is used to determine the market value of a used car. It is generally used as a guideline for car dealers and others who buy and sell used cars. Thanks to the internet, it is very easy to find out exactly how much your car is worth. There are multiple appraisal guidebooks and websites that provide the book value of a car. The most famous of these books is the Kelley Blue Book. Other examples include The Black Book and Edmund’s.
Branded Titles: These are labels assigned by a state titling agency with one of the following comments: Not Actual Mileage, True Mileage Unknown; Reconditioned, Salvage; Rebuilt, Flood, Manufactured Buyback; Lemon Law Buyback; Warranty Return; Exceeds Mechanical Limits; or Reconstructed Prior Collision. This is a red flag, as it indicates there is something you need to understand before buying any of the vehicles that have been so branded.
Car Loan Interest Rate: When you take out a car loan, you’re borrowing money to pay for a car. However, the bank doesn’t give you that money for free. Instead, you have to pay what’s called interest. This is a fee that you give the bank for lending you the money to pay for the car. With car loans, you only pay simple interest on the principal.
As an example, say you get a loan for $10,000, and you pay it off over the course of five years (60 months), which is pretty typical for an auto loan. The interest rate is 5%. Here is what your final cost (principal plus simple interest) would be: $11,322.74. This means you paid $1322.74 in interest.
Caveat Emptor: Caveat emptor is a Latin term that means “let the buyer beware.” The concept is the same as “sold as is”, and serves as a warning that the buyer assumes the risk that a product may fail to meet expectations or have defects and have no recourse with the seller if the product does not meet their expectations.
In reality, consumers, including car buyers have more protection than the rule suggests although the buyer is still required to make a reasonable inspection of goods upon purchase. State laws hold dealers responsible if cars they sell don’t meet reasonable quality standards. However, dealers in most states can use the words “as is” or “with all faults” in a written notice to buyers to eliminate implied warranties. There is no specified time period for implied warranties.
Clear Title: This is a title that is free of any dispute or legal questions as to the ownership of a particular piece of property.
Co-signer: An individual who agrees to take on the legal obligation of a contract if the buyer defaults on his obligations. So, if you co-sign a contract to buy a vehicle for a buyer, if he defaults on the agreement to pay for the vehicle, the seller can come after you for the money as you will be just as liable as the buyer.
Collateral: This is an asset that guarantees repayment of a loan. For example, if you take out a personal loan with your bank and offer your car as collateral, if you default on the loan, your car will be seized and sold in order to satisfy the loan.
Contract: An agreement entered into voluntarily between two parties who agree to be bound by the rules stipulated in the agreement.
Contract Hire: This is a type of lease agreement. It means that you agree to take control of a car for a fixed period but it is never actually yours to own. You enter into an agreement with the leasing company to make fixed monthly payments for the duration of the contractual period, and return the car to the company at the end of the contractual agreement. The contract can be fixed to suit your needs and is typically between three and four years.
Credit Bureau: a company that gathers consumer credit information from various sources and provides consumer credit information on individuals’ borrowing and bill-paying habits.
Creditor: A person or institution that extends credit and to whom the obligation is payable. This can be your bank, credit union or other lender.
Credit History: This is your detailed record of your paid and unpaid debts as well your fiscal discipline. It is one of the most important factors that lenders consider in assessing your loan application and credit worthiness.
Credit Report: This is a record of all of the credit accounts you’ve had and whether you’ve made repayments on time and in full. It contains items such as missed or late payments which stay on your credit report for at least six years, as do court judgments for non-payment of debts, bankruptcies and individual voluntary arrangements.
Credit Score: This is a single number between 300 and 850 that summarizes your credit history, with 850 being an excellent score and 300 being the worst. It is an indicator of your potential to default on a loan or line of credit. This score is what a lender will base the amount of interest to charge you on a car loan. It also influences your down payment and the maximum amount of money you can borrow to purchase your new car.
Credit utilization: Credit utilization is the ratio of your credit card balances to credit limits as listed on your credit report. For example, if you have a $1000 limit and owe $250, then your credit utilization is 25%, which is perfect. The lower your credit utilization, the better because it indicates excellent money management.
However, if you then take out a cash advance of $250, your credit utilization is 50%. This indicates poor money management skills, and could have a strong impact your credit score. To find out your credit utilization simply divide your credit card balance by your credit limit then multiply by 100.
Dealer Invoice: This is the amount the dealer pays the manufacturer for an automobile, and is a crucially important number for you to have in the buying process. Knowing this number will enable you to save thousands in the final price.
Deposit: This is the part of the purchase price that the buyer has to pay in cash and does not finance with a loan. The higher the deposit is, the better the terms of the loan will be.
Depreciation: This is a decline in the value of a new automobile over time.
Early Settlement: This is the term used when you pay off a credit agreement before it is due to end. The law allows borrowers to settle most agreements early, provided certain conditions are met.
Equity: Equity is the difference between the value of the assets/interest and the cost of the liabilities of something owned. For example, if you own a car worth $15,000 but owe $5,000 on that car, you have $10,000 equity.
Extended Warranty: Also known as service charge, an extended warrantee is a contract that covers a car’s repairs and services after a manufacturer’s warranty expires. Manufacturers and independent companies sell extended warranties. You can purchase one as the owner of the vehicle. A service contract can be purchased along with a vehicle to extend the coverage period of a warranty. These service contracts usually cover the cost of repairs including parts and labor for the vehicle with or without a deductible.
Fair Wear and Tear: This is damage or deterioration of a particular vehicle that occurs by ordinary and reasonable use of the property.
Fixed Rate Loan: This is a loan in which the interest rate remains constant throughout the life of a loan. When purchasing a vehicle, you should never sign a variable rate loan as it’s a clear sign that you aren’t entering into a standard purchase agreement.
FCA (Financial Conduct Authority): The Financial Conduct Authority (FCA) is a financial regulatory body in the UK. It operates independently of the United Kingdom government, and regulates financial firms providing services to consumers.
GAP Insurance: This is the difference between the actual cash value of a vehicle and the balance still owed on the financing (car loan, lease, etc.). For example, if your car is stolen or totalled, it pays what you owe to the finance company. GAP is a must if you are leasing a car.
GFV/GMFV: Every car sold through a PCP finance option has a guaranteed minimum future value (GMFV) set by the finance company which is a forecast of the car’s value after depreciation. The finance company guarantees that, subject to certain conditions, the value of your car will be worth at least the same as the outstanding amount.
HP (Hire Purchase): You take ownership of a vehicle under an agreement to make monthly payments towards the total amount of the purchase price plus an agreed upon interest rate. There’s an initial deposit to pay, typically 10% of the full amount. The HP payment amounts are normally fixed, meaning that the APR (Annual Percentage Rate) is set before the contract begins.
The loan period is also fixed – typically three to four years – and the finance agreement is secured against the car being bought, which means that lenders can be flexible in the terms and conditions they offer.
Interest Rate / Flat Rate: Interest rates indicate the price at which you can borrow money. If you borrow money and the interest rate is 5% a year, it will cost you 5% of the amount borrowed to do so. This will need to be repaid along with the original money you borrowed. Interest rates are usually quoted annually, but not always, so make sure you check.
For example: How much does it cost to borrow £1,000 at 10% then repay it six months later? Consider this: One year at 10% would cost you £100 (10% of £1,000). So over six months you’d pay about half that, ie, £50. As far as car loans which are offered at a simple (as opposed to compounding) rate, it really is almost as simple as that.
Invoice Price (Dealer cost): This is the price that appears on the invoice that the manufacturer sends to the dealer when the dealer receives a car from the factory. Note however, that this price is almost always higher than the amount the dealer actually ends up paying to the manufacturer.
This results from a variety of discounts offered to the dealer such as rebates, allowances, discounts, and incentive awards that do not appear on the invoice. The two most common discounts are Dealer Holdback and Dealer Cash Incentives, and there are others that may be based on factors such as a dealer’s sales volume for a particular month.
Lease: Car leasing allows companies to reduce the monthly payments on a car by only requiring the buyer to pay for the cost of the car during the time they are using it. It’s very similar to renting – you don’t own anything, you are just paying for the right to use something.
Lemon Law: A blanket term used in the United States to refer to various state laws that protect consumers against the purchase of an auto found to be persistently defective.
Logbook Loan: Logbook loans are loans secured on your vehicle, so the lender owns your vehicle until you pay the loan back. You are allowed to keep on using your vehicle as long as you repay the loan. However, they are expensive and risky and experts recommend that you avoid them where possible.
Loan Term: This is the length of the loan, usually broken down into months (24, 36, etc.). The rule of thumb is that the longer the term, the lower the monthly payment. You’ll definitely pay more over a longer term loan due to accrued interest though, so tread carefully here.
Long term loans: These are car loans that are taken out over a longer period, which can be as long as 8 to 10 years. The main disadvantage of long term loans is that the vehicle is going to depreciate faster than you’re paying the loan down.
Mileage: The mileage is the amount of miles you’re allowed to drive per year as specified in the contract. This typically ranges anywhere from 10,000-20,000 miles per year, typically in increments of 1,500 miles depending on what kind of car you are leasing.
You will usually have the opportunity to purchase extra miles up front at a good rate if you know you’ll exceed the set mileage band. Consider how many miles you’ll need per year before you go in to sign your paperwork on a lease. Overage penalties at the end of the lease are typically pretty expensive, so it’s important to lease for slightly more miles than you think you’ll need rather than end up not having enough.
Monroney Sticker Price (MSRP): This shows the base price, the manufacturer’s installed options with the manufacturer’s suggested retail price, the manufacturer’s transportation charge, and the fuel economy (mileage). Affixed to the car window, this label is required by federal law, and may be removed only by the purchaser.
MSRP (Manufacturer’s Suggested Retail Price): Also known as the list price (LP) or recommended retail price (RRP) of a product, this is the price at which the manufacturer recommends that the retailer sell the product. MSRP plays a real role in your negotiations. Generally, lenders will not loan more than the Blue Book or MSRP, so add-ons are going to come out of your down payment or be paid for separately.
Negative Equity/Upside Down: In most transactions which include a part exchange or trade-in vehicle the car dealers use negative equity to take advantage of their unsuspecting customers. Typically, the car dealer finds out the pay-off amount due on the car and offers to pay-off the amount in exchange for the trade in. This makes the customer believe that the dealership is valuing the vehicle being traded in at the same amount that’s owed and the customer will not owe anything on the trade-in.
In reality, however, what the dealership does is to give a cash value that is significantly less than the amount that is owed on the car, and adds the difference to the cash price of the vehicle being purchased. Essentially, they are purposefully undervaluing your trade after initially promising a straight swap.
No Credit Loans: These are loans that are made to people with adverse credit or no credit.
Options: These are features that are added to a base model. Examples include a sunroof, sat nav, chrome rims, automatic transmission, and bucket seats. Options are also referred to as add-ons.
Personal Loans: Personal loans are loans that a bank or other lender makes that are not secured against any asset such as your property. They are also known as unsecured loans.
PCH (Personal Contract Hire Agreement): A PCH agreement will be suitable for you if you’re not looking to buy the car at the end of your contract. You lease the car for an agreed period of time by making fixed monthly payments, and your monthly payments on the car will be much lower than if you were buying it. There’s no option to buy the car at the end. When the contract expires, you simply return your car or take out a new contract on a new vehicle. You never have to worry about the car’s resale value.
PCP (Personal Contract Purchase): With a PCP agreement, you will usually pay an initial deposit, followed by monthly instalments. However, your monthly instalments are only paying off the depreciation of the car, rather than the full value of the car. Once your monthly payments are finished, you can buy the car by paying the final balloon payment (also known as the guaranteed future Value), hand the car back or part exchange for a new car.
Principal: This is the amount of the auto loan without the interest factored in. This is the amount that you will pay interest on.
Purchase agreement: A purchase agreement is a type of legal document outlining the different conditions and terms that are related to the sale of a particular item. It creates a legally binding contract between the buyer and the seller.
Quote: A price that represents the cost of a specific item.
Re-finance: This involves replacing an older loan with a new loan offering better terms such as a lower interest rate.
Rollover: If you need a new car for whatever reason and have an outstanding balance on your current car, you can trade in the car and roll the old loan into the new loan. Doing this will get you a new car, but you’ll owe more on it than it’s worth.
Residual Value: This describes how much your car is expected to be worth at the end of its lease. This is also the price you can buy the car for at the end of the lease. For example, if you lease a car for three years, its residual value is how much it is worth after three years.
The residual value is determined by the bank that issues the lease before the lease begins. So the total amount you pay on the car (excluding interest, tax, and other fees) is the selling price minus the residual value. This is the total amount of depreciation over the term of the lease. It is based on past models and future predictions. It is an important factor in determining the car’s monthly lease payments (the other factors are the interest rate and tax).
Secured Loan: A secured loan is a loan that requires a cash collateral deposit that becomes a secured debt owed to the creditor who gives the loan.
Sub-prime Loans: Subprime loans are loans that are extended to people with poor credit history. Interest rates are higher on subprime loans, reflecting their higher credit risk. When somebody applies for a loan and gets declined, they tend to turn to a sub-prime lender as they are generally more willing to lend money to people with questionable credit.
The Warranty of Merchantability: This is the most common type of implied warranty. With this type of warranty, the seller promises that the product offered for sale will do what it’s supposed to. That a car will start up when you turn the key in the ignition lock is an example of a warranty of merchantability. This promise applies to the basic functions of a car. It does not cover everything that could go wrong.
Breakdowns and other problems that occur after the sale don’t prove the seller breached the warranty of merchantability. A breach occurs only if the buyer can prove that a defect existed at the time of sale. A problem that occurs after the sale may be the result of a defect that existed at the time of sale or not. As a result, a dealer’s liability is judged case by case.
Warranty of Fitness for a Particular Purpose: A warranty of fitness for a particular purpose applies when you buy a vehicle based on the dealer’s advice that it is suitable for a particular use. For example, a dealer who suggests you buy a specific vehicle for hauling a trailer in effect is promising that the vehicle will be suitable for that purpose.