Common Auto Financing Terms


Whether you’re shopping for your first car or a newer model, the first thing you should do before visiting the dealership is to establish financing options. Enlighten yourself with these basic auto financing terms so you know exactly what you’re agreeing to when signing the paperwork to fund your new vehicle.

Auto loan

This term refers to the contract between you and the financial institution that is helping you fund the vehicle purchase, as U.S. News & World Report’s John Vincent shares. The contract also specifies that the bank holds the vehicle’s title until you pay off the loan amount, as well as the agreed-upon interest.

Interest

When securing an auto loan, interest is the amount the bank adds to the cost of the vehicle fee to cover the financial institution’s cost and profit margin, per Vincent. Or to put it more simply, it’s the cost the financial institution charges you for borrowing the money you need for your new vehicle.

Annual Percentage Rate

Often known by its acronym, APR, this term is the annual cost you pay to borrow the amount you need to cover your new car’s cost. This rate is expressed as an annualized percentage of the loan. According to the Consumer Financial Protection Bureau, the higher the APR the more you’ll have to pay over the duration of the loan.

Loan Term

The loan term is the length of the loan, expressed in months. Per Edmunds’ Philip Reed, auto loans typically have 36-, 48- or 60-month loan terms. Though, it’s becoming more common to see longer loan terms in the 72- to 96-month range, per Vincent.

Manufacturer Suggested Retail Price (MSRP)

If you’re new to auto financing, MSRP is another acronym that can be confusing. It stands for the Manufacturer Suggested Retail Price and represents the price that a dealership is asking for a certain vehicle, as the CFPB confirms.

Down payment

As its name suggests, this term refers to the amount of money you put down when you sign an auto lease, as the CFPB explains. This amount goes toward the total price of the vehicle. The bigger the down payment you make, the cheaper your monthly payments will be.

Principal

This term is another name for the dollar amount of the loan balance. Each month you make another payment on your loan, this overall balance will gradually go down, as Vincent reports.

Fixed-rate financing

If you value paying the same amount each month on your car loan, look for one with this type of financing. Per the CFPB, fixed-rate financing means that the loan’s interest rate stays the same during the loan term.

Variable-rate financing

This is the opposite of fixed-rate financing. It means that the interest rate on your loan can fluctuate based on something called the prime rate, according to the CFPB. This can result in lower or higher monthly payments.

Title

A vehicle’s title is a legal document that states who owns it. Per Reed, the bank keeps this document then transfers it to you once you’ve finished paying off the loan balance.

DMV fees

When signing your lease contract at the dealership, you’ll likely encounter this term. Per Reed, these are DMV-related expenses — such as license and title fees — that you’re responsible for paying before you can drive your new car home.

Buying a car is a major commitment that you should make only after doing some careful research and planning. If you have more questions about vehicle financing, don’t hesitate to contact your local financial institution to speak with an expert.

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