Car Buying Terminology

Annual Percentage Rate (APR): rate charged by the bank or lender for you to borrow money to buy a car. Typically calculated monthly despite being an “annual” rate. 

Example: In January you borrow 15,000. At 2.4% APR, that is 360$ a year (15,000 X 2.4%). Divide that by 12 months and your monthly finance charge for January is $30.00. Next month, the finance charge will be recalculated using the new amount still owed on your car. 

A car loan calculator will break down payments on a month to month basis.

Car loan calculator: http://www.thecalculatorsite.com/finance/calculators/carloancalculator.php

Acquisition Fee: Financing institutions (such as banks) charge car dealers a fee to begin financing on a lease. This fee usually is charged to the car lessee and is usually between $300 and $1000. The amount depends on the value of your car. You might see the fee standing alone or hidden under “gross capitalized costs.” 

Balloon Payment: A type of loan where only a part of the vehicle is paid off during its term and demands a large sum (the balloon) to be paid at the end of the term. These keep monthly payments low by paying off interest. 

Base model: The most standard model of the vehicle with no added options. Usually the least expensive version of the vehicle because all equipment is standard meaning it is included in the base cost of the car. 

Buy Rate: The rate (APR) that the dealer can get to finance your car purchase. They can mark this rate up to make a profit on financing (Sell Rate). 

Cost of Funds: Financing costs. Cost of using a bank or lenders money to buy your car.

Dealer Holdback: Funds paid as a percentage of the vehicles cost back to the dealership by the manufacturer after a car has been sold. This allows them to sell at invoice or below and still make a profit in dealer holdback. 

Dealer Incentives: Manufacturers offer dealers special bonuses or discounts to encourage sales during slow times or when inventory is too high. These special offers usually get passed to the customer.

Dealer Invoice: Amount manufacturers charge dealers for a car.

Dealer Prep Fees: After the car arrives from the manufacturer, it must be prepped to be ready to go on the lot. Plastic covers must be removed, fluid levels must be checked, and other tasks performed to get the vehicle ready for sale. 

Documentation Fee: Fees to cover the cost of processing the paperwork involved in the sale of a car.

Down Payment: When borrowing money, the up-front payment made on the loan. A large down payment can reduce the amount finances in a loan resulting in lower monthly payments. 

Early Termination Fees:  Fees you have to pay as a penalty for getting out of a loan or lease before the contract ends. 

Extended Service Contract (Service Contract): covers specific serves and repairs for a set number of years (or miles).

Gap Insurance: Insurance that covers the gap in case you are in an accident and your insurance pays you less than what you owe on the car. 

Lien: A lien on your car means that you borrow or financed to purchase your vehicle. 

Monroney Sticker: The “window sticker” or price tag that lists the base price, standard features and optional features.

MSRP: Manufacturer Suggested Retail Price

Options: Optional equipment that you can pay to have installed in your vehicle. Example: heated seats, navigation, sunroof etc.

Principal: Actual amount borrowed.

Rebate: A type of dealer incentive that offers a discount or as money back on a purchase of a vehicle.

Registration Fees: You’ve probably heard “Tax, Title and Registration Fees.” A registration fee is what the DMV charges you to register your car, which involves ordering the license plates.

Subprime Loan: Loans that typically have a higher interest rate and down payments because the borrower is a high risk to the lender. 

Term: The length of a lease of loan

Trade In Value: The price the dealer will pay you for your old car when making a deal to sell you a new one. 

Upside Down: When you owe more on your loan than your car is worth.