Want to finance your next auto purchase? Before you proceed, familiarize yourself with the terminology you will encounter during the financing process. Found below are important terms you need to know.
Add-ons. These are products and services that the dealer may offer a customer in a sale. These include extended warranties, credit insurance, guaranteed auto protection, fabric protection, paint protection, rustproofing, VIN (vehicle identification number) etching, and alarm systems. All these add-ons are optional.
Amount financed. The amount of credit provided to a borrower in a loan. It is basically the amount you receive from the lender.
APR. Letters stand for ‘annual percentage rate,’ or the cost of borrowing money expressed in a yearly rate. Also known as the finance rate, it is influenced by a number of factors, including credit history, current rates, as well as market conditions. You can negotiate your APR.
Assignee. The lender that purchases the contract from the dealer. It could be a bank, credit union or finance company.
Buy rate. The rate at which the auto dealer acquires the financing. Also referred to as wholesale rate, it is the rate at which an assignee purchases a retail installment sale contract from the dealer.
Credit insurance. Optional insurance that covers the scheduled monthly payments if you become disabled or the scheduled unpaid balance if you die. Its cost should be disclosed in writing.
Credit report. A record of your history of borrowing and repayment. It includes key personal and credit information. This document is used to evaluate all your loan applications.
Credit score. A three-digit number that represents credit risk as determined by information found in the credit report. Your score determines the rate and terms you will get.
Down payment. A percentage of the full purchase price you pay in advance to reduce the amount you borrow.
Extended warranty. Optional service contract that provides protection on certain mechanical and electrical components of a vehicle. This is a supplement to the vehicle’s original warranty.
Finance charge. The cost of credit expressed in a dollar amount. This fee, which is basically the charge for borrowing, is negotiable.
Fixed rate financing. This is financing where the APR remains the same over the life of the contract.
Guaranteed auto protection (GAP). Optional insurance that covers the difference between the remaining loan balance and the amount to be received from the insurance company in the event the vehicle is stolen or destroyed before the loan is repaid in full.
Monthly payment amount. The amount due each month on the loan.
Negotiated vehicle price. The purchase price agreed upon by both the seller and the buyer. It must reflect any special offers such as discounts and rebates that you get at the dealership.
Pre-qualify. To have a lender endorse you for a loan without you promising to accept it.
Principal. The amount of money borrowed from the lender to acquire the vehicle.
Repossession. The process wherein the lender seizes the vehicle in the event of a loan default. The lender may have the right to take your vehicle without going to court or informing you.
Sell rate. The rate at which the dealer offers financing to a customer. This is usually higher than the buy rate.
Term. Length of the loan.
Total of payments. The overall amount paid or the total sum after all payments have been made as scheduled.
Variable rate financing. This is financing where the APR and the amount you must pay changes over the life of the contract. This is atypical in auto financing.