Glossary - Car Financing Terms

A

Amortization:
Loan payment calculated to pay off the debt at the end of a fixed period, including interest on the outstanding balance.

Annual Percentage Rate (APR):
The annual percentage rate that you will pay on a new car loan – the lower the APR, the more money you will save.

Appraisal:
It is an estimated value of a property, based on a analytical comparison of similar saleable property.

B

Balance:
The balance of the loan is the amount remaining to be paid. Each time you make a payment, the balance is reduced.

Base Price:
The cost of a car without options.Also called the "sticker price" or "MSRP."

Bad Credit:
Bad Credit is a credit rating term. If you’ve defaulted on a loan or missed a credit card payment, for example, you can easily be labeled as a bad credit risk by financial companies.

C

Credit:
This word is loosely used in a number of ways. In the financial world, it means the ability to borrow money.

Credit History:
A document that shows borrowing and repayment of debts.

D

Down Payment:
When someone buys a car, and finances it through the dealership, they are usually required to make a down payment of cash. This payment is credited against the balance of the loan.

Depreciation:
How rapidly a car loses its value. Most cars will lose at least 50% of their original value after three years.

E

Equity:
The positive difference between the value of an asset (in this case, your car) and the amount outstanding on the finance you used to buy it.

Effective Annual Interest Rate:
Effective annual interest rate is the percentage rate that represents one year's yield on an investment, including the effects of compounding. When interest is compounded more often than once a year, the effective annual interest rate will be higher than the stated rate.

F

Finance:
If a car is "financed," it means you are borrowing money.When you buy a car with cash, it immediately becomes yours. When you finance the car, the bank owns it, and holds the title, until you've made the last payment.

Finance Charge:
Finance charge is the fee assessed each billing period for the use of a credit card or credit account. The finance charge includes interest, account fees, late fees, and other transaction costs.

G

Guarantee:
A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.

Grace Period:
A grace period is the time during which a loan payment may be made after its due date without incurring a late penalty.

H

Hire Purchase:
A type of credit agreement where the finance is secured on the vehicle you buy. You make regular monthly payments over an agreed repayment term – you may need a deposit.

I

Interest Rate:
The amount of interest charged on a loan, normally expressed as a percentage per annum.

Invoice Price:
The price the dealer pays to buy a car from the manufacturer, exclusive of hold backs or other discounts.