Car Loan Terms Made Simple: A Guide to Car Financing Lingo

Wouldn’t it be simpler if you could understand the terms used when you take out a car loan? 

Navigating the car buying and financing process can be confusing with so many options and terms to learn. To help you out, we've compiled a list of common car loan terms you need to know, making it easier for you to understand and make informed decisions.

 

Car Loan Glossary:

 

1. Annual Percentage Rate (APR)

The yearly interest rate on a loan that includes all fees and costs associated with obtaining the loan.

2. Balloon Payment

A type of loan payment plan where you make lower monthly payments but a larger, lump-sum payment at the end of the loan term.

3. Bill of Sale

A legal document that confirms the details of the vehicle, including its description, VIN (Vehicle Identification Number), odometer reading at the time of purchase, purchase price, and other important details.

4. Cashback

A rebate or gift from the manufacturer for buying their vehicle. Cashback offers often come with conditions, such as requiring the buyer to secure financing through the dealership.

5. Co-signer

Someone with good credit who agrees to pay the loan if the primary borrower can't. Co-signers, often friends or family, are legally responsible for repaying the loan.

6. Certificate of Title

A document from the state's Department of Motor Vehicles (DMV) that proves you own the vehicle.

7. Certified Pre-Owned (CPO)

A used car that has been inspected and approved by the manufacturer.

8. Debt-to-Income (DTI) Ratio

A percentage showing how your monthly debt payments compare to your gross monthly income.

9. Depreciation

The decrease in a car's value over time.

10. Down Payment

Also known as "money down," this is the amount of money you pay upfront when buying a car. A larger down payment reduces the amount you need to finance and lowers your monthly payments.

11. Equity

The difference between what you owe on your car loan and the car's current value.

12. Finance

Borrowing money to buy a car and paying back the loan over time with interest. Once the loan is fully paid off, you own the car.

13. Finance Charge

The total interest you'll pay over the life of the loan.

14. Interest or Interest Rate

The cost of borrowing money, expressed as a percentage. This amount is charged by the lender for the loan.

15. Lease

An agreement where you pay a monthly fee to use a car for a set period. At the end of the lease, you can return the car or buy it for a predetermined price.

16. Lien

A claim the lender has on the vehicle until you pay off the loan. This means the lender owns the car until the debt is settled.

17. Loan-to-Value (LTV) Ratio

The amount of the loan divided by the car's value. Lenders use this ratio to decide how much they are willing to lend.

18. Loan

The money you borrow from a lender to buy a car. You repay the loan in monthly installments until the balance is paid off.

19. Markup

The difference between the dealer’s invoice price and the sales price of the vehicle.

20. MSRP

Manufacturer's Suggested Retail Price, also known as the "list price" or "sticker price," is the price the car manufacturer recommends the dealer sell the car for.

21. Monthly Payment

The fixed amount you pay each month to repay your auto loan. This includes both the principal and interest.

22. Negative Equity

When you owe more on your car loan than the car is worth, also known as being "underwater" or "upside down" on the loan.

23. Principal

The original amount of money you borrowed for your auto loan. Your monthly payments include both a portion of the principal and the interest charged by the lender. Paying down the principal increases your equity in the vehicle.

24. Rebate

A discount offered by car manufacturers to buyers. Other promotional incentives can include cashback deals, $0 down payments, or low-interest financing rates.

25. Refinance

Transferring your car loan from one lender to another to get a lower interest rate and reduce monthly payments. Refinancing is less common with rising interest rates.

26. Repossess

If you default on your loan, the lender can take back the vehicle.

27. Term

The length of time you have to repay your loan, usually expressed in months.

28. Title

A legal document, also called a "certificate of title" or "pink slip," that proves you own the vehicle.

29. Trade-in

When you give your old car to the dealership as part of the deal to buy a new car. The trade-in value is usually less than the cost of the new car, so you'll need to pay the difference.

30. Upside-Down

When you owe more on a vehicle than it's currently worth.

 

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