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Auto Loans 101: Definition of Terms

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If this is your first time to take out an auto loan, we want to help you get started. To better understand auto loans, we listed and defined some of the terms commonly used in the business.

 

Annual Percentage Rate (APR)

The cost of a loan in a year expressed as a percentage. The computation includes the interest rates and other fees associated with acquiring the loan. The law requires lenders to always disclose the APR. We suggest using the APR as your point of comparison among auto loans.

 

Collateral

An asset that secures the loan. In auto loans, your car stands as the collateral which your lender can repossess in case of default. (An auto loan is an example of secured credit.)

 

Co-Signer

Is a person you trust who agrees to sign the loan with you and take responsibility in case you default on the loan. A co-signer can increase your chances of getting approved for an auto loan especially if you have bad credit.

 

Credit History

A section in your credit report where information about your credit accounts, debt payments, and public records appear. Your credit history is a major factor lenders consider when making a decision on your application.

 

Credit Report

A document that contains some of your personal information and your payment history. You can get yours from a credit bureau or through AnnualCreditReport.com for a free copy.

 

Credit Score

Is a three-digit number that measures your overall credit standing. A low credit score indicates bad credit while a high credit score means good credit.

 

Dealer Invoice

This is how much the dealer paid the manufacturer for the car you are buying

 

Dealer Markup

The difference between the dealer invoice and the price for which the dealer is selling the car (purchase or sale price). Dealers can also mark up their auto loan rates and the prices of the other products and services they offer.

 

Down Payment

The difference between the purchase price and the loan amount. An ideal down payment is 20% of the purchase price.

 

Fair Credit Reporting Act

A federal law that regulates credit-reporting agencies in disclosing credit ratings to consumers

 

Finance Charge

The total cost of credit to the borrower. It is expressed in dollar amount.

 

In-House Financing

The type of financing which a borrower can get directly from a dealership. It is also known as “buy-here-pay-here financing”, “on-site financing”, and “dealership financing.” There are a lot of buy-here-pay-here dealerships in Colorado Springs. Examples are J.D. Byrider, Massa Auto Pawn & Sales, and Springs Automotive Group.

 

Interest Rate

A rate charged for your use of credit and added to your monthly payments. It is expressed as a percentage and included in the computation of APR.

 

Monthly Payment

The specific amount of principal and interest you ought to pay every month under the terms stated in the auto loan contract

 

Manufacturer’s Suggested Retail Price (MSRP)

The price a manufacturer recommends for a particular vehicle. The MSRP of a vehicle is indicated in the window sticker.

 

Principal

The total amount, without the down payment and interest, you ought to pay over the life of the loan. Another term for this is “amount financed.”

 

Refinancing

While refinancing is a popular practice in home loans, it is also possible with auto loans. Refinancing helps you get out of a high-interest auto loan and pay it off easily by obtaining a new loan.

 

Term

Refers to the length of auto loans. Auto loan terms range from 24 to 96 months.

 

Truth in Lending Act

A federal law that requires every lender to disclose to the consumer important details, costs, especially the APR, and the terms involved in the auto loan.

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