Understanding Auto Loan Terms
So, you've decided to buy a car – exciting times! But before you zoom off the lot in your new ride, it's crucial to understand the language of auto loans. Like any important agreement, car financing comes with terminology that can read like a different language. Speaking the language can make buying easier and potentially save you money. Check out these key terms to help you navigate the process and feel confident as you finance your new car.
Jump to a term:
Actual Cash Value (ACV)
This is the estimated market value of your car at a given time. You can consult a few independent and widely recognized sources to get an estimate of a car’s ACV. These include Kelley Blue Book and J.D. Power.
Amortization
This refers to how you pay off your loan over time. Each payment chips away at the loan amount (principal) and the finance charge (interest) you owe. Check out our Auto Loan Calculator to see how this works.
Annual Percentage Rate (APR)
This is the total cost of your loan, including the interest rate and fees, expressed as a yearly percentage. It's a key number when comparing different loan offers. For example, if two cars have the same base price, the one with a higher APR will cost more over the life of the loan.
Co-Signer
Someone who agrees to repay your loan if you become delinquent or stop making payments. Having a co-signer may help you get approved for a loan or a better interest rate. However, it's a big responsibility for both parties because if you can’t pay off the loan, your co-signer becomes legally responsible to repay.
Depreciation
Depreciation is the decrease in the value of your car over time. It's the difference between your car’s value when you bought it and when you decide to sell it. Over five years, a vehicle could lose as much as half its value (or more).
Down Payment
A lump sum of money you pay up front towards the cost of the car. A higher down payment reduces the amount you need to borrow and can lead to lower monthly payments and overall interest charges. Use our Auto Loan Calculator to see how the size of your down payment can affect the overall cost of your loan.
Force-Placed Insurance
If you don't maintain car insurance during your loan, the lender might buy insurance for you, which is often more expensive. Most lenders won’t set up a car loan if you don’t have proof of insurance, so it's best to shop around for your own insurance beforehand.
Guaranteed Auto Protection (GAP) insurance
GAP insurance covers the difference between your car's Actual Cash Value and what you owe on your loan if your vehicle is totaled in an accident or stolen.
Interest Rate
The annual rate you pay the lender on the principal of the loan. You can think of the interest rate as the cost you pay for taking out the loan. The lower the interest rate, the less you'll pay overall. Use our Auto Loan Calculator to see how the interest rate can affect the overall cost of your loan.
Lease
Leasing is like renting a car for a set period of time. You make monthly payments, but you don't own the vehicle at the end of the lease.
Loan Term
The length of time you have to repay your loan is typically expressed in months. A longer loan term means lower monthly payments, but more interest paid overall. Use our Auto Loan Calculator to see how the loan term can affect the overall cost of your loan.
Manufacturer's Suggested Retail Price (MSRP)
This is the sticker price suggested by the car manufacturer, not necessarily the final price you'll pay. Negotiate to get a price that you believe is fair.
Pre-approval
Getting pre-approved means you’ve been approved for a loan amount before you shop for a car. This shows dealerships you're a serious buyer, which could give you bargaining power.
Principal
The actual amount of money you borrow to buy the car, not including interest.
Repossess
If you fail to make your loan payments, the lender can take back your car.
Title
A legal document that proves you own the car. You'll typically get the title from the lender once you've paid off the loan.
Total Cost
This includes all the costs associated with buying a car, including the price of the car, taxes, fees, and the total amount you'll pay in interest over the life of the loan. Use our Auto Loan Calculator to see the total cost you could afford for a new car.
Truth in Lending Act (TILA)
A federal law that requires lenders to disclose all loan terms, including the APR, in a clear and concise format.
Vehicle Identification Number (VIN)
A unique code that identifies your specific car. It's like a fingerprint for your automobile.
Warranty
A guarantee from the manufacturer to repair or replace certain parts of your car for a set period of time.
Cruise into summer with confidence
To see the size of auto loan you could afford, crunch the numbers with our Auto Loan Affordability Calculator. Also, check out auto loan rates and see what you may qualify for on our site. As always, if you have a question, don’t hesitate to give us a call at 816.241.7800.
