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Below
is a list of the mot commonly used auto loan terms
in alphabetical order
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Acquisition
fee
A charge by the leasing company for allowing you to lease
their car. Though this charge is supposed to be similar to
the 'points' mortgage lenders routinely charge home buyers,
not all leasing companies require an acquisition fee. Those
that do may add it to the sticker price (capitalized cost)
of the leased vehicle so it becomes part of your monthly
payments.
Actual
cash value
The money a broker or dealer has paid to buy and refurbish a
used car.
Add-ons
This is another term for options, glitz and extras, from air
filters to zebra stripes. If you're leasing the car, shun
nonessential options because you will be paying for them
with no chance to recoup your cost on resale.
Amortization
This means retiring a loan through monthly payments
consisting of both principal and interest. Early payments
are considered largely interest. The point here is that if
you must sell the car and repay the loan after only a year
or so, your outstanding loan balance will be reduced by only
a fraction of the total payments you've made.
Amount
due at lease signing
All the money you must pay before you drive away in a leased
car. This total may include the capitalized cost (negotiated
price) plus any deposit or agree-upon fees.
Amount
financed
All the money you still owe after you drive your
leased car home. The principal may include most of the
negotiated price of the car, and also other expenses you
agreed to pay over time, including warranty costs and
insurance.
Annual
percentage rate (APR)
For loans only, the APR is the total cost of a loan per
year, including both interest charges and most or all fees
(be sure to ask if any fees have been left out). Knowing the
APR lets you compare different loans fairly, even when
they're structured differently. APR is usually expressed as
a percentage. If your interest rate is 7.5%, you will pay
$75 per $1000 borrowed.
Balloon
payment loan
With this type of loan, you make comparatively low payments
at first, but agree to make a large final payment (the
'balloon').
Base
price
The cost of a vehicle that has only standard equipment and
the manufacturer's warranty. To this price buyers and
sellers add options. The base price and all the options
should appear on the car's price tag, displayed in the form
of a big sticker on a window.
Blue-book
value
This refers to the widely acknowledged resale value of a
vehicle. Some years ago, the 'blue book" meant only the
Kelley Blue Book, a car industry publication listing resale
prices of all cars. Nowadays, many imitators produce similar
tomes.
Capitalized
(cap) cost
This car-lease expression translates loosely as, 'the car's
price.' You're not actually buying a car, of course, so it's
not really the selling price. Still, it's useful to think of
it as the sticker price because when you lease, you must
negotiate this number in much the same way. The total cost
of the car lease depends largely on the size of this 'cap
cost.'
Captive
finance company
A finance company operating solely for a specific car maker
or dealership.
Closed-end
lease
This is the lease most people encounter most often. With
this, you return the car when the lease runs out, pay any
fees demanded at that time, and your lease ends. Typically,
monthly payments for a closed-end lease are slightly higher
than those for an open-end lease because the 'closed end'
says that the car dealer assumes all the risk for the car's
resale value.
Collateral:
Assets that a borrower is obliged to turn over to a lender
if unable to repay a loan. Usually, the vehicle is the
collateral for a vehicle loan.
Consumer
Leasing Act
Now almost 25 years old, this federal law mandates full
disclosure of all leasing charges and terms. Federal
guidelines for consumers are available online from The
Federal Reserve Board.
Credit
life insurance
This variety of life insurance protects a lender,
guaranteeing repayment if the borrower dies or is disabled.
Usually optional, credit life insurance may be included as
part of your monthly loan payment.
Dealer
charges
'Rust-proofing,' all-weather undercoating and the 'extended
warranty' are dealer extras -- for extra money, of course.
Before you buy such things, ask yourself this: When was the
last time you saw 'rust-proof' steel?
Dealer
holdback
Extra money given by a car manufacturer to a dealer for
selling certain vehicle models. Typically 2% to 3% of the
manufacturer's suggested retail price (MSRP), the holdback
may provide a dealer with a profit even if the car sells
below the published 'dealer invoice' cost.
Dealer
incentives
Extra money given by a car maker to a dealer for selling
unpopular models, or sometimes just to motivate the dealer
to clear the lot. Sometimes a dealer passes this price-cut
along to the consumer. Sometimes the dealer forgets to
mention it.
Dealer
invoice
The amount the manufacturer charges the dealer for a vehicle
and all factory-installed options.
Dealer
preparation
Or 'dealer prep,' this is a dealer's charge for services
that may be more imagined than real. Try to minimize any
dealer prep charges.
Dealer
sticker price
Not quite the same as the sticker price on the car window
(the "Monroney sticker") this is a separate bill
listing charges imposed by the dealer for dealer-installed
options -- and the sometimes-fanciful "dealer
prep."
Default
A legal and financial circumstance that occurs when a
borrower misses too many loan payments, or otherwise fails
to live up to the letter of the loan contract.
Deposit
The amount of money a buyer pays to the dealer to
"hold" a deal in place while loan papers and other
documents are completed. Typically, the deposit is later
applied to the down payment.
Depreciation
The drop, over time, in the value of an asset. New cars and
trucks lose about 30% of their value as soon as you drive
them home. Depreciation is factored into monthly lease
payments.
Destination
charge
It costs a dealer a certain amount to have cars delivered to
the lot. The dealer can either pay this expense or pass it
on to you, the buyer. Many dealers opt for the latter.
Direct
financing
This is financing that is not arranged through the dealers.
On occasion, a dealer may offer a tempting loan rate, but
resist. It's usually wiser to keep the financing entirely
separate from price negotiations.
Disposition
fee
This extra charge, which is fairly common, duns the person
who leases the car merely for turning it in when the lease
ends. Try to keep this out of your lease contract.
Down
payment
Money paid initially in cash or in kind in the form of a
trade-in. The larger the down payment, the smaller the loan
needed to purchase the vehicle.
Early
termination charge
Typically hefty enough to discourage ending a lease, this is
the amount of money the person leasing the car must pay if
he or she returns the car before the agreed-upon term. Death
is no excuse: Your survivors or your estate must keep the
car until the lease expires, or pay the big penalty.
Equal
Credit Opportunity Act
Specifically forbidding discrimination on the basis of race,
national origin, gender, age or source of income, this
federal law also prohibits creditors from rejecting someone
just because he or she has asked for consumer rights
provided by the Consumer Credit Protection Act.
Excess
wear charge
Normal wear on a leased car is allowed by most leases, but
beyond certain limits the person leasing the car must pay
for damages when the lease expires.
Extended
warranty
This contract guarantees that the dealer will pay the costs
of specified repairs after the manufacturer's warranty
expires. It's hard to resist, but it's probably a waste of
money all the same. Nowadays, if something's going to go
wrong with a new car, odds are it will happen before the
standard 36,000-mile, three-year manufacturer warranty
expires.
Fair
market value
The amount of money that an 'average' buyer would pay for a
vehicle.
Finance
lease
Also called an 'open-end' lease, this type of contract
stipulates that the person leasing the car pays for the
difference between the predicted 'residual value' stated in
the lease, and the 'fair market value' -- as determined by
the dealer.
Gap
insurance
Coverage (for leased cars) that makes up the difference
between the amount of money you've paid on the lease and the
fair market value when the car is stolen or destroyed.
Holdback
Another term for dealer holdback, this is money paid
behind-the-scenes to the dealer by the manufacturer as a
kind of bonus for selling the car or truck.
Interest
The cost of a loan expressed as a percentage of the loan.
Invoice
price
Once regarded as the dealer's 'bottom line' (the amount the
dealer paid for the car), the 'dealer's invoice' price no
longer reflects a dealer's true cost. Rebates, holdbacks and
other compensation from car makers now bolster dealer
profit. The invoice price still includes a 'destination
charge' for transporting the car to the dealership.
Kelley
Blue Book
A widely used price guide for used cars, the 'blue book' was
started in 1918 by California car dealer Les Kelley. In
addition to his authoritative price list, Kelley claimed to
have been the first to paint a car with a color other than
black. In the early 20s he repainted a car pink, and it sold
as soon as the paint dried. So he painted every car on his
lot pink. And sold every one in a matter of days.
Lease
An agreement allowing a customer to drive a car for a
specified time in exchange for payment more or less equal to
the car's estimated depreciation over the term of the lease.
Leasing often costs a bit less overall than buying a car
outright, but the lessee (person leasing the car) must pay
for insurance, repairs and maintenance - just like a real
owner.
Lease
extension
Continuing on a month-to-month basis to lease a car after
the original lease contract has expired.
Lease-like
loan
A car loan with low (non-amortized) monthly payments, a
small or zero down payment and no security deposit, this
arrangement calls for a large payment when the loan ends,
typically within five years. Sometimes available from credit
unions, this deal usually permits a higher mileage limit
(18,000 miles a year). When the loan ends, the customer can
sell the car to pay off the loan balance, or renegotiate the
loan and keep the car.
Lessee
The person who signs a lease for a car, truck or a
wheelbarrow for that matter; it's the contract that defines
the customer.
Lessor
The person or entity granting a vehicle lease.
Liabilities:
The money you owe.
Lien:
A legal claim on a piece of property until the debt or
obligation is satisfied.
Liened
Vehicle: A liened vehicle is a vehicle that has an
outstanding loan obligation. The Certificate of Title for
the vehicle lists the individual(s) as the registered owner
with the lender listed as the lienholder.
Lien-Free
Vehicle: A lien-free vehicle is owned outright by an
individual(s), listing that individual(s) on the title as
the registered owner. There is no outstanding loan
obligation on a lien-free vehicle.
Loan-to-Value
Ratio: The relationship between the amount of the loan
and the appraised value of the vehicle, expressed as a
percentage
Market
value
This is another term for 'fair market value,' which is,
broadly, how much you're likely to be able to sell the
vehicle for.
Mileage
allowance or mileage limitation
A key lease provision, this allowance specifies how many
miles you can drive the leased car without incurring a hefty
penalty. Many leases set the limit between 12,000 and 15,000
miles annually. But if you drive more than 25 miles to work,
you won't have many lease-miles left to get to the grocery
store, much less over any river or through any woods to
grandmother's house.
Mileage
charge
The per-mile price you must pay when the lease expires, if
you've exceeded the mileage limit in your lease.
Money
factor
For leasing only, this term describes the cost of
'borrowing,' and is analogous to the interest rate for a
traditional loan. It's not quite the same though. The usual
claim is that you multiply the money factor by 24 to find
the comparable loan interest rate. But complication favors
the dealer, so as a practical matter try to negotiate a
money factor at least 1% lower than the going rates for car
loans.
Monroney
sticker
So named because an Oklahoma congressman named A.S.Monroney
sponsored the law requiring dealers to itemize car costs on
a big window sticker, this now-familiar bill of particulars
shows what goes into the manufacturer's suggested retail
price (MSRP). The sticker should list the car's base price,
its options and their costs, the 'destination charge' for
bringing the car to the showroom and the car's average gas
consumption. Monroney's law, called the Automobile
Information Disclosure Act, mandates that the sticker be
displayed prominently until the car is sold.
Monthly
payment
As the term implies, this is the money you agree to pay
every month for your car lease, or to repay your auto loan.
Mop and
glow
This rather cynical term refers to dealer-added 'extras'
that add little or no real value to the car, but
significantly swell the seller's profit. Items such as paint
'sealants' and 'rust-proofing' must be weighed in light of
the consumer's personal experience with any automobile paint
that washed off in the rain.
MSRP
This is the acronym for manufacturer's suggested retail
price, an impressively creative number based very loosely on
charges listed on the price sticker. If useful for little
else, the MSRP is a fairly reliable indicator of a sum of
money too large to pay for that car.
National
Automobile Dealers Association
Known better by its acronym, this trade organization
publishes the NADA Official Used Car Guide, a widely used
reference for used-car retail prices. NADA also provides a
confidential price list to dealers, suggesting how much to
offer the consumer for a trade-in.
Negative-equity
financing
This unhappy expression refers to a situation in which the
outstanding balance of a car lease (or a loan) is greater
than the car's trade-in value. Sometimes called financing
'upside down,' this situation is often remedied by adding
the amount owed to the amount borrowed to buy or lease a new
car.
Open-end
lease
The key element of an open-end lease is the customer's
responsibility for the value of the car when the lease ends.
Say, for instance, the lease says that SUV ought to be worth
about $35,000 when the lease ends. But it's not. Fear of gas
guzzlers has knocked the 'fair market value' of the vehicle
down to about $25,000. With an open-end lease, the customer
must pay the dealer the difference between the value
stipulated by the lease, and the dealer's estimate on
drop-off day. This added risk typically makes open-end
leases somewhat less costly than closed-end deals -- in
theory anyway. Of course, if you disagree with the dealer's
appraisal, you may be in for an unpleasant siege until an
independent appraiser settles the matter.
Options
An in-dash CD player, special loudspeakers, leather seats
and many other options can greatly increase your enjoyment
of a car, and may well add long-term value. But not all
options are worthwhile. Those derisively called 'mop and
glow' add a little sparkle at first, but do not increase the
value of the vehicle.
Payment
saver loan
Also called a 'lease-like' loan, this type of loan permits
low initial payments in exchange for a single, large
'balloon' payment when the loan ends some three-to-five
years hence. The customer may pay off the loan and keep or
sell the car, or renegotiate the loan and continue payments.
Depending on the details, a payment-saver loan can reduce
the total cost of the loan by as much as 30%.
Preparation
charges
This is just another name for 'dealer preparation charges,'
making the buyer wonder once more why so many car-commerce
terms seem to have two or three names. Why, it almost
appears that the some folks want to confuse the consumer!
Principal
The loan amount the borrower must repay, usually by means of
monthly payments that gradually pay back the loan with
interest.
Purchase
option
This leasing term refers to the lessee's right to buy the
car when the lease ends. In most cases, the price will be
close to the car's residual value.
Rebate
A price cut made by the manufacturer in the hope of
triggering a consumer stampede. In the matter of car buying,
rebates often materialize for slow-selling models. In some
instances, rebates really do result in significant savings,
but make sure all other charges - especially finance charges
- are also benign.
Reconditioning
reserve
Yet another multiple-name leasing expression, this one
means, essentially, a security deposit. If you bring the car
back in perfect condition, you may retrieve most of this
deposit.
Residual
value
An amount -- agreed upon before you sign the lease -- that
will be considered the value of the vehicle when the lease
ends. If the true resale value in market is higher than the
residual value, the dealer wins. If it is less, you win -
unless you have an open-end lease, in which case you lose.
Rule of
78
A method of loan repayment in which all the interest is paid
in the first year of the loan, thereby reducing the lender's
risk somewhat.
Security
deposit
Remember the 'reconditioning reserve'? Well, this is it
again with another name. Typically equal to one month's
lease payment, this ransom is usually surrendered when you
pick up the car. If you return the car in pristine
condition, you may be able to get the bulk of the deposit
back.
Service
contract
This, of course, is another term for the dealer's 'extended
warranty.' Regardless of the name, most car buyers don't
need it because many new car models hold up well for many
years.
Simple
Interest:
A method of allocating monthly loan payments
between interest and principal. The amount of your payment
allocated to interest is calculated based on your unpaid
principal balance, the interest rate on your loan, and the
number of days since your last payment.
Sticker
price
This itemized price sheet is attached to the window of new
(and some used) cars, showing many of the key ingredients of
the final asking price.
Term
In car-buy parlance, this is the length of the loan or
lease, typically expressed in months. Loans and leases may
be for 24, 36, 48 or 60 months.
Title
Issued by the state in which the car is registered, this is
your written proof of ownership.
Trade-in
value
The amount a car dealer will grant for your old car as
credit against the price of new car. You hand over title to
your old car, and the dealer is apt to reduce the new-car
price by roughly the wholesale value of the trade-in, less
5% or so
Up-front
costs
These are the charges you must pay immediately when you
lease a car. Up-front costs may include a security deposit
equal to a month's lease payment, a down payment and fees
for registering the vehicle.
Upside-down
When you owe more on a lease or loan than the car itself is
worth, your financial situation is sometimes said to be
upside down. Sometimes this holdover debt is rolled into a
new loan or lease for another car, and sometimes you simply
have to pay it off right away.
VIN
More properly, the vehicle identification number, this is
the unique number put on every car by the manufacturer. The
VIN must appear on both the car's registration and title.
Walk-away
lease
A closed-end lease. With this variety, when the lease ends
and you turn the car in, you can walk away without worrying
about the current market value of the car.
Warranty
This is a written promise by a car manufacturer or a car
dealer to repair or replace specified flaws or failures.
Typically, the car maker warrantees the major components of
the car; a dealer may promise to repair a range of problems
later in exchange for a sizeable payment up front.
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