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Must-Know Car Buying Terms

Posted on February 24th, 2014

ride today loans 54In an earlier post, the key terms in auto financing were listed down. In this post is another list that all car buyers must pay attention to as it includes other significant car buying terms. If you are a first-time car buyer, read on and remember.


Balloon loan. A loan that pays off only a portion of the vehicle price during its term and asks for a balloon payment or a large sum at the end of the loan.


Bump/spread. The difference between the buy rate and the sell rate. Dealers don’t disclose the bump or spread. This is usually about one percent, but it could be higher.


Cost of funds. Other term for finance charge or finance cost, which is the charge for using a lender’s money to buy a vehicle.


Dealer holdback. A percentage of a vehicle’s cost that a manufacturer pays back to the dealer after the vehicle has been purchased. This enables the dealer to still make a profit even after selling a vehicle at or below invoice price.


Dealer incentives. These are offered by manufacturers to dealers to boost sales when sales are slow or when there is overstock. The special offers are often passed on to customers.


Dealer invoice. This is the amount the manufacturer charges the dealership for a vehicle.


Dealer prep fees. These are fees charged by the dealer to cover the cost of preparing the vehicle for sale after it was delivered from the manufacturer. Experts advise against paying these fees, but if the dealer does not budge after you have refused to pay, at least try to negotiate the charges.


Default. The failure to make payments or to abide by any of the terms in the financing contract.


Delivery/destination charge. The amount charged for vehicle delivery, or the transportation of the vehicle from the manufacturer’s assembly plant to the dealer showroom. You are required to pay this fee, which is non-negotiable. While you have to pay the destination charge on the dealer invoice, you should not pay any additional delivery fee charged by the dealer.


Documentation fee. The amount charged for the processing of paperwork involved in the car purchase. This fee should not be more than $100.


Early termination fees. Penalties that will be charged for withdrawing from a loan prior to the end of its term. These fees are often hefty—you may need to pay off all remaining car payments. These are often charged when a vehicle is totaled or stolen and one is without gap insurance.


Monroney sticker. Another name for window sticker, or the price tag on a brand new vehicle. It features many details, including the base price, standard and optional features, as well as their retail prices. Not included on the Monroney sticker is the invoice price.


MSRP. Manufacturer’s Suggested Retail Price. This is inclusive of the base price and all the options listed on the Monroney sticker.


Pre-computed interest. A loan in which the total interest is computed in advance and an equivalent percentage is charged into every monthly payment. The lender must refund the remainder of the charges if you pay off your principal early.


Prepayment penalties. Charges for paying off a loan early. Check your contract to see if you will be charged with prepayment penalties before you plan to pay off your loan early.


Rebate. A partial refund on a new-vehicle purchase. It can be deducted from the purchase price or refunded by mail after the auto purchase. Like incentives, rebates are offered by automakers or dealers to boost sales.


Trade-in value. The amount the dealer will pay to buy your current vehicle when selling you a new vehicle. This is usually lower than the amount you would get by selling the vehicle yourself, but it is a decent price considering the convenience of getting rid of your old vehicle with the dealer’s help.


Upfront costs. The overall cost to be paid at the signing of the contract. This is inclusive of the down payment and all other fees.

Photo credit: Paul Swansen/ Flickr/ CC BY-ND


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