Auto Loan Glossary

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Acquisition Fee
A fee charged by a dealer to begin a lease. Also known as a bank fee if the lessor is a bank, or an initiation fee. Acquisition fees start at about $300 and are seldom negotiable.

Add-Ons
Products or services added by dealerships. Common examples are pinstriping, rustproofing, alarm systems, electronic equipment, and extended warranties.
Add-ons can really drive up the sticker price of a vehicle, but their actual cost is usually negotiable.

Accrued Interest
Interest that has accumulated from one payment-due date to the next. Also, the total amount of interest paid on a loan over time.

Advertising Fee
An amount charged the buyer to cover the cost of national and local advertising. Many experts suggest that this fee should be no more than 1.5 percent of the manufacturer's suggested retail price (MSRP).

Amortization
The gradual reduction of a debt by periodic payments of interest and principal that are large enough to pay off a loan at maturity. The loan is repaid through regular, monthly payments of principal and interest paid for a predetermined amount of time.

Amount Financed
The part of a vehicle's cost that a lender supplies. To determine the amount financed, multiply the purchase price by the interest rate; subtract that amount from the purchase price; add state purchase tax to that remainder; then subtract the down payment. Put differently, AF = purchase price - (purchase price X interest rate) + tax - down payment.

Annual Percentage Rate (APR)
The annual cost of a loan to a borrower.
Like an interest rate, the APR is expressed as a percentage of the loan amount. Unlike an interest rate, however, it includes other charges or fees to reflect the total cost of the loan. The Federal Truth in Lending Act requires that every consumer loan agreement disclose the APR in large, bold print. Since all lenders must follow the same rules to ensure the accuracy of the APR, borrowers can use the APR as a good basis for comparing the cost of loans.

Application
A written statement of personal and financial information that is required to approve a loan. Note that application fees are usually required for home loans but not for auto loans.

Appraisal
A written analysis of the estimated value of a property, as prepared by a qualified appraiser. A fee is typically charged for a real estate appraisal because a home appraisal is time-consuming. An appraisal of an auto is usually not necessary because auto dealers, sellers and buyers all have quick access to the market value of autos.

Asset
Anything that has monetary or exchange value that is owned by an individual, business or institution. Assets include real estate property, personal property, vehicles and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on). A lender is very interested in the amount and value of any assets you may have because assets can be used as collateral against a loan. Along with other factors such a borrower's credit rating, assets are also used to help determine the amount of the loan.

Bankruptcy
A proceeding in a federal court in which a borrower who owes more than his or her assets can relieve the debts by transferring his or her assets to a trustee. Different chapters or types of bankruptcy exist. If a person files bankruptcy, a record of the filing appears on the borrower's credit report for up to 10 years.

Base Price
The cost of a car without options, but including standard equipment, factory warranty, and freight. This price is printed on the Monroney sticker. It's a good idea to know the base price of a car so you know what it would cost without all the bells and whistles.

Bill of Sale
A document detailing the conditions of a sale used to transfer the title to certain goods from seller to buyer. The seller is responsible for preparing the bill of sale.

Black Book
A reference book typically used by dealerships to look up the wholesale value of an auto. Similar to the Kelley Blue Book, which is generally used more by consumers.

Blue Book
Officially named The Kelley Blue Book, this reference is typically used by consumers to look up the fair market price of the wholesale, retail, and loan values of autos.

Capitalized Cost
The total value of an auto that is leased.

Capitalized Cost Reduction
The amount paid in cash or trade-in at the beginning of a lease. Similar to a down payment made on a new auto purchase.

Captive Finance Company
A finance company that is separate from a dealership but is owned by a parent company. Automobile manufacturers have established captive finance companies for the purpose of financing autos for consumers. These finance companies are able to finance any vehicle - not just the specific manufacturer's products. Often, a dealer will give you a choice of a special dealer finance rate or a manufacturer's rebate. In many cases, the rebate will be a better deal.

Cash Flow
A measure that compares your income and your expenses. When more cash comes in than goes out, you have a positive cash flow. Negative cash flow occurs when more cash goes out than comes in. Your ability to qualify or be approved for a loan is determined in part by your cash flow situation.

Close-Ended Lease
The higher the capitalized cost and the lower the residual value, the higher the auto's depreciation and the more you'll pay in lease payments. However, the lessor (the company leasing the auto) accepts the risk that depreciation may be greater than stated in the lease. In this case, auto is worth less than the residual value stated in the lease and the lessor is responsible for that loss.

Collateral
An asset or something of value that guarantees the repayment of a loan. Examples of collateral include real estate property, a new auto or different kinds of financial investment accounts. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract.

Collision Insurance
Insurance which covers damage to your vehicle that results from a collision with another vehicle or object. Different than comprehensive insurance.

Commission
The fee charged by or paid to a broker, agent or auto sales rep for negotiating a real estate, car sale or loan transaction. A commission is generally a percentage of the sales price.

Compounded Interest
A loan term that is considered interest on interest. The borrower pays interest earned on principal plus interest that was earned earlier. If you are borrowing, try to get a loan that charges simple interest. If you are investing, try to invest at an institution that pays you compounded interest.

Comprehensive Insurance
Insurance which covers damage to your vehicle caused by events other than a collision, such as flood, fire, hail, theft, or vandalism. Different than collision insurance.

Consumer Reporting Agency
An organization, commonly referred to as a credit bureau, that prepares credit reports which are used by lenders to determine a potential borrower's credit history. The agency obtains data for these reports from a credit repository and from other sources.

Credit Bureau
An organization that prepares reports that are used by lenders to determine a potential borrower's credit history. The agency obtains data for these reports from a credit repository as well as from other sources.

Credit History
A record of an individual's open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.

Credit Report
A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.

Credit Repository
An organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit.

Creditworthiness
The overall general eligibility of a person or company to borrow money.

Customer Incentive (Rebate)
Commonly referred to as rebate, an incentive is paid by manufacturer to the customer as a way to increase product sales that are usually targeted for a quick sale. For example, slow-selling vehicles or previous model-year autos still in the dealerships may be priced with an incentive to sell faster than they have been. The payment can be applied to the cost of the vehicle or received in cash by the customer. Or, the auto buyer may choose special dealer financing. Often, taking the rebate is the better deal. But check out the best option for you using Creditland's easy calculators that do the figuring for you.

Dealer Charges
Charges for extra services or products sold by the dealer, including rust proofing, undercoating and extended warranties.

Dealer Holdback
An allowance, usually between 2 and 3 percent of MSRP, which manufacturers provide dealers, frequently as a credit to the dealer's account. A holdback allowance may allow the dealer to pay the manufacturer less than the invoiced amount. Therefore, the vehicle could be sold to you at cost while permitting the dealer to receive a small profit. Holdback is also known as a pack.

Dealer Incentives
Programs offered by manufacturers to increase the sales of slow-selling models or to reduce excess inventories. Dealers may elect to pass on the savings to the buyer. Often, the dealer gives the buyer a choice of a special dealer finance rate or a manufacturer's rebate. In many cases, the rebate will be a better deal. If you're considering buying a new car and want to figure out whether the special financing or rebate works best for you, you'll find that Creditland's easy Calculators will do the figuring for you.

Dealer Invoice
The amount which dealers are invoiced or billed by the manufacturer for a vehicle and any optional accessories.

Dealer Sticker Price
The Monroney sticker price plus the suggested retail price of dealer-installed options, dealer preparation, and undercoating.

Dealership
A company authorized by a manufacturer to sell that manufacturer's products.

Debt
An amount of money owed by one person, company, organization or other entity to another.

Depreciation
The decrease in the market value of a vehicle over time. The amount of yearly depreciation is influenced by car condition, supply and demand in the resale marketplace, and reputation of the manufacturer and model. Convertibles, autos with large engines, trucks, and vans tend to depreciate less than other vehicles.

Depreciation Fee or Charge
A component of the monthly lease payment that accounts for the value the car loses during the term of the lease. Depreciation is the difference between the vehicle's list price and the projected residual value at the end of the lease. This figure, divided by the number of months in the lease, determines one part of the monthly fee; the lease charge is the other.

Destination Charge
The fee charged for shipping, freight, or delivery of the vehicle to the dealer from the manufacturer or port of entry. This charge is to be passed on to the buyer without any markup.

Down Payment
The difference between the loan amount and the purchase price, usually paid immediately upon purchase with cash or a trade-in.

Escrow
Money, stocks or other property held by a neutral third party until the conditions of the contract are met. In the auto business, it is a process of a transaction in which a third party carries out the procedures necessary to transfer ownership of a vehicle.

Finance Contract
A legal document specifying the terms of a loan.

Gap Insurance
A type of insurance that covers the amount of money owed on a lease that is not covered by standard auto insurance. Gap protection applies only if the lease is terminated involuntarily and earlier than maturity date of the lease because the leased auto was stolen or significantly damaged in an accident. It's important protection to have because the actual cash value of the car paid by your standard auto insurance policy may not be adequate to pay the payoff balance and early-termination penalties of the lease. The protection shouldn't cost you more than a few dollars a month.

Grace Period
The amount of time after a payment due date when no interest is charged. You will frequently see grace periods of 20 to 30 days offered by certain credit card issuers. Credit card grace periods only apply if a cardholders previous month's balance was paid in full.

Gross Pay
The total amount of salary earned before taxes and other deductions are made. Different than net pay or take home pay, which is the amount of salary after taxes and other deductions are taken. Lenders look at your gross and net pay to help decide how much money to lend you.

Home-equity loan
A loan in real estate property that is used to secure or guarantee the amount borrowed. Sometimes referred to as a second mortgage or borrowing against your home. The loan allows you to tap into your home's built-up equity, which is the difference between the amount your home could be sold for, and any claims held against it. People often use a home-equity loan for home improvements or to pay for a new car. A home-equity loan is a good way to borrow money for two main reasons. First, the interest rate is usually one of the lowest loan rates a borrower can get. Also, the interest you pay on the loan is usually tax-deductible. But taking out a home-equity loan also means the lender can take possession of the home if the loan isn't repaid. This is why some people decide to not borrow against their home, and may decide to take out a personal loan. But for many borrowers, a home-equity loan can be the best loan option. Your best loan option is the loan that best meets your needs. See how Creditland can offer a wealth of loan choices and lenders, and information to make the right decision.

Inspection
Concerning autos, it's the mechanical evaluation of a used auto that is advised before buying the vehicle. The inspection should be performed by an independent auto mechanic. Home inspections by independent inspectors are also recommended before you buy a home.

Insurance
A type of legal relationship whereby individuals, companies and other entities concerned about the risk of losses pay premiums to an insurance company for protection against potential losses. Specific types of insurance relevant to vehicles include collision, comprehensive, uninsured motorist, underinsured motorist, rental reimbursement, and vehicle-related accident insurance.

Interest
The price you pay for borrowed money. Interest is usually expressed as a percentage of the amount borrowed or interest rate. See accrued interest, compounded interest and simple interest.

Interest Rate
The rate of interest charged for the use of borrowed money. Or, the cost of a loan expressed as a percentage.

Invoice Price
The manufacturer's initial charge to the dealer including freight, destination, or delivery charges. This price may not reflect the dealer's final cost due to rebates, allowances, discounts, and incentive awards the dealer may receive. To give you the negotiating advantage when buying a new auto, do your research. Find out the invoice price, and try to negotiate a purchase price that's close to the invoice price. Often a buyer will pay $100 to $300 over invoice, and both dealer and buyer will be happy. To negotiate an even better deal, find out if the manufacturer is currently offering any incentives to the dealer. If such incentives exist, you may get the dealer to take more money off the sales price by passing on at least some of the incentive to you. Autos that are in high demand and short supply will probably be sold close to, at, or even above the Manufacturer's Suggested Retail Price (MSRP). This is the invoice price plus the cost of add-ons as determined by the dealer.

Lease
A means of acquiring the use of the vehicle for a specific period of time in exchange for regular payments without actually purchasing it. As part of leasing agreement, the company leasing the vehicle maintains ownership. During the lease, the lessee or the person leasing the auto is responsible for its reasonable maintenance. The auto is returned to the company when the lease expires unless the lessee decides to buy the car, assuming the lease contract allows for that option. Also see close-ended lease and open-ended lease.

Lease Buy Out
In auto leasing, the option to buy a leased auto usually during the life of a lease or when the lease ends. You have an option to buy out the lease only if you have an open-end lease, which is better than a closed-end lease. Also called an option to buy.

Lease Fee
The cost of leasing the vehicle. It equals the monthly lease payment multiplied by the lease term. See also capitalized cost and residual value.

Lessee
The person who leases the vehicle; the consumer.

Lessor
The company that grants the lease, such as a dealer, automaker or bank. The dealer effectively sells the car to the lessor, which then "rents" it to the consumer.

Lien
A claim against a vehicle by another party which utilizes the vehicle as security for repayment of a loan or other claim. Usually affects the ability to transfer ownership.

List Price
Another term for manufacturer's suggested retail price or sticker price. List price is the recommended selling price for a vehicle and each of its optional accessories as defined by the manufacturer.

Loan terms
Different requirements of a loan that determine the borrower's and lender's financial obligations. Common terms are Annual Percentage Rate (APR), principal, and length of loan. Usually, the better the borrower's credit history, the better the loan terms. A good combination of loan terms is simple interest, a low APR and no prepayment penalties.

Loan-to-Value Ratio (LTV)
A ratio determined by dividing the sales price or appraised value into the loan amount, expressed as a percentage. For example, with a sales price of $10,000 and an auto loan of $8,000, your loan-to-value ratio would be 80 percent.

Lock-In
A commitment you obtain from a lender assuring you a particular interest rate or feature for a definite time period. Provides protection should interest rates rise between the time you apply for a loan, acquire loan approval and close the loan and receive the funds you have borrowed.

Manufacturer's Rebate
A program offered directly to the buyer by manufacturers to increase the sales of slow-selling models or to reduce excess inventories.

Manufacturer's Suggested Retail Price (MSRP)
MSRP is the recommended selling price for a vehicle and each of its optional accessories, as defined by the manufacturer.

Mark-up
The amount of profit received by the dealer on each car. Mark-up can be calculated by subtracting the selling price from the invoice price.

Maximum loan amount
The greatest amount of money that a borrower is qualified to borrow.

Money Factor
This number is set by the lessor and can vary from company to company. This is how the lessor determines their profit. It is a fractional number, such as .0042, and is used to calculate the lease fee, by multiplying it by the sales price of the vehicle you are leasing. The monthly payment combines the resulting fee with the depreciation charge. Consumers should look for a lower money factor number. While lessors are not required by Regulation M to disclose the money factor, you can still insist on knowing it before entering a lease. See How Loan & Lease Terms Compare for more information on how the money factor in a lease compares to APR on an auto loan.

Monthly Payment
The amount of principal and interest the buyer is obligated to pay each month for the term of the loan.

Monroney Sticker Price
Required by federal law, this label affixed to the car window shows the base price, the manufacturer's installed options with the manufacturer's suggested retail price, the manufacturer's freight or transportation charge, and the fuel economy (mileage). The label may not be removed by anyone other than the purchaser.

Net Pay
The amount of salary left or clear after taxes and other deductions are taken. Different than gross pay, which is the amount of salary earned before income is taxed and other deductions are taken. Lenders look at your gross and net pay to help decide how much money to lend you. See take-home pay.

Normal wear and tear
The reasonable condition of an auto assuming its age, mileage and proper maintenance.

Open-End Lease
A lease which requires the lessee (the person leasing the auto) to pay any difference between the residual value of the auto and the fair market value of the auto at the end of the lease. The risk of paying depreciation greater than anticipated and stated in the lease at the time of the lease negotiation is assumed by the lessee, not the lessor (or company leasing the car). Also see close-end lease, which is the better of the two kinds of leases to have.

Option To Buy
In auto leasing, the option to buy a leased auto usually during the life of a lease or when the lease ends. You have an option to buy the leased auto only if you have an open-end lease, which is better than a closed-end lease. Also called a lease buy-out.

Personal Loan
An unsecured loan, which means a borrower does not put up any collateral or security to guarantee the repayment of the loan. For this reason, personal loans carry high interest rates. If a borrower owns a home, a lower-interest-rate alternative is a home-equity loan. But this option requires that the borrower put up his or her home or other real estate property as collateral. Your best loan option is the loan that best meets your needs. See how Creditland offers a wealth of loan choices and lenders, and information to make the right decision.

Pre-approved Loan
A loan the lender issues to the borrower before buying the auto. These loans are usually valid for a limited time only, such as 30 days from the loan approval date. To give yourself the negotiating advantage, always get a pre-approved loan. Have a pre-approved loan check draft with you when you walk into a dealer, or go to test drive a used car that's for sale by an individual owner. Why? First, having a pre-approved loan gives you the negotiating power of a cash buyer who the seller views as ready to buy the right auto at the right price. Also, dealers make approximately half of their money through financing for the autos they sell. It usually always pays to shop for a loan, and get pre-approved for loan. The best loan option is the loan that best meets your needs. See how Credit land offers a wealth of loan choices and lenders, and information to make the right decision. Pre-Approved Loan Check Draft See pre-approved loan.

Preparation Charges
Charges imposed by a dealer for preparing a newly purchased car for delivery to the buyer. Includes filling the gas tank, verifying appropriate fluid levels, last minute touchup cleaning, etc.

Prepayment Penalties
The fee paid by a borrower to a bank when a loan or mortgage is repaid before its scheduled maturity. These penalties only apply if the loan contract did not have a clause that prohibited penalties for prepayment. Always try to get a loan that does not charge a prepayment penalty.

Prime Rate
The interest rate charged by lenders to their best, most creditworthy customers. A less credit worthy customer may be offered a loan at the prime rate plus anywhere from 2 to 10 percent. Borrowing at below-prime also occurs, but is less common and usually applies to businesses, not individual consumers. The Federal Reserve determines whether to lower or raise the prime rate based on a variety of economic factors. Many consumer loans, such as auto, home equity, mortgage and credit card loans are based upon the prime rate. Building and maintaining a good credit history are two of the most important qualifications for prime-rate borrowing.

Principal
The face amount or actual amount borrowed on which interest is owed. The amount of interest owed is a percentage of the amount of principal borrowed. When you make payments to the lender each month, you pay back a portion of the principal as well as additional fees in the form of interest charges. Also see amortization.

Purchase option
Typically, the option to buy a leased auto usually during the life of a lease (lease buy out) or when the lease ends. Also see closed-end lease.

Rate
In lending, the amount of interest on the loan expressed as an interest rate or annual percentage rate (APR) of the principal.

Rebate
An incentive paid by the manufacturer to the customer as a way to increase sales of products. For example, slow-selling vehicles or previous-year models still in the dealer's inventory may feature this type of incentive to sell faster than they have been. Typically a rebate can be applied to the cost of the vehicle or received in cash by the customer. Instead of the rebate, the buyer is often offered special dealer financing. Often, taking the rebate is the better deal.

Regulation M
The Federal Reserve Board's Consumer Leasing Act, which requires full disclosure of all leasing costs. It took effect Jan. 1, 1998.

Repossession
Due to a default on or failure to pay the loan, the lender, or someone acting on the lender's behalf, takes possession of the vehicle.

Residual Value
The amount mutually agreed upon between lessor and lessee to represent the value of the car at the end of a lease. This value is usually determined by the amount of depreciation in the car's value predicted during the term of the lease.

Retail Blue Book Value
The resale value of an auto that is identified in the Kelley Blue Book. It's the amount of money that is commonly charged for a similar used vehicle by a dealership or private seller. See also black book value.

Retail Price
The amount the buyer pays to the dealership. Distinguished from wholesale price.

Secured Debt
Money borrowed that is guaranteed (or secured) by the borrower's funds and held by the lender in an interest-bearing account. Typically required when a borrower is without credit or has poor credit. The lender usually returns the secured money plus a nominal rate of earned interest to the borrower with a certain period of time if a good credit history is established. Distinguished from unsecured debt.

Simple Interest
Interest that is paid on the principal amount borrowed. Considered the best interest term for a borrower because it is not compounded.

Sticker Price
Another term for manufacturer's suggested retail price or list price. List price is the recommended selling price for a vehicle and each of its optional accessories as defined by the manufacturer.

Take-home pay
The amount of money considered clear or net after income taxes. Different than gross pay, which is the amount of pay earned before income is taxed. Lenders look at your gross and net pay to help decide how much money to lend you. Also see net pay.

Term
The length of a loan, or the number of months you have to pay the lender the monthly payment.

Test drive
A drive taken to test the auto's overall handling, performance or feel. A vehicle inspection by an independent mechanic is also recommended before buying a used car.

Title
An official document that proves the right of ownership of a vehicle.

Trade-In Value
The amount that the dealership will credit you for your trade-in vehicle towards the purchase price of another vehicle. The amount credited is frequently about 5 percent below the wholesale book value of the vehicle.

Underwriting
The process of verifying data and approving a loan.

Unsecured Debt
Money borrowed by a person with a good credit history. The lender does not require the borrower to guarantee (or secure) the amount borrowed with personal funds. Distinguished from secured debt.

Used Auto Value
See Blue Book and Black Book

Unsecured debt
A loan that is not guaranteed by the pledge of any collateral. Most credit cards are unsecured debt, which is a main reason why their interest rate is higher than other forms of lending, such as mortgages, which rely on real property as collateral.

Upside-Down
A situation which occurs when the value of your vehicle is lower than the outstanding balance of the loan secured by the vehicle.

Wholesale Book Value
The amount the dealership usually pays for a used auto. In turn, the dealer will want to sell the auto at a higher retail value. Also see Kelley Blue Book Value and Black Book

Zero balance
What shows on a credit card cardholder's bill when the outstanding balance has been paid and no new charges have been incurred during the billing cycle.