Key Car Finance Terms
An acceleration clause is a provision in a loan contract that allows the lender to require the borrower to pay off the rest of the loan (the “outstanding balance”) before the term ends under certain circumstances. The contract explains what those circumstances are.
One common reason that lenders would accelerate (or speed up) repayment is if the borrower misses too many payments or makes too many late (“delinquent”) payments.
Federal law requires creditors to send applicants an official notice if they deny credit based on information in the applicant’s credit report.
That notice must include the name, address, and phone number of the credit reporting agency that the creditor used in making their credit decision and inform the applicant of their right to obtain their credit report and to dispute any inaccuracies.
In Latin, “mort” means death (like mortuary or immortal, or even Voldemort). So what does that have to do with car loans? Amortizing is a finance term which means to “kill” the loan off over time with installment payments. Some percent of the payments a borrower makes each month go toward paying off the principal balance, with the rest allocated to interest.
Most loans are structured so that the borrower pays more in interest first, and only pays down the principal toward the end of the loan term. An amortization schedule shows exactly how much the borrower pays in principal and interest each month. Use our car loan amortization schedule to learn more!
The amount financed means the total amount you’re borrowing to buy your vehicle and any related products. It includes the cost of the vehicle you’re getting the loan for (minus down payment, trade-in allowance, and any incentives or rebates), plus any other costs and fees you’re paying for with the loan (like taxes, title, registration fees, and any ancillary products).
It’s helpful to think of the amount financed as equal to the price you’d pay if you were buying your vehicle with cash because it doesn’t include the cost to borrow money (“finance charges”), including interest and loan fees.
Ancillary products are any extra products you can buy with your vehicle. The most common ones are Vehicle Service Contracts, GAP Waiver policies, Tire & Wheel, and Dent & Ding.
Lenders will often allow you to pay for the products with your loan. (For our take on which products are valuable and which ones are a waste, check out Four to Get, Five to Forget).
Sometimes known as the contract rate, the APR is the average amount of interest you’ll pay each year for your loan. It’s not the same as the interest rate because the APR includes lender fees and other costs to borrow money, and the interest rate does not. That’s why the APR is higher than the interest rate for the same loan. Because it’s more comprehensive, the APR is a better way to compare between loan offers.
For example, imagine two lenders each offer a $10K loan at a 6% interest rate for 60 months. Lender A charges $1,000 in financing charges, and Lender B charges $500. The APR for Lender A would be 10.04%, while the APR for Lender B would be 8.05%. That’s a pretty big difference!
In a legal sense, assigning a contract means handing it to another person (or company), who takes over all of the responsibilities and benefits of the contract as if they had entered it in the first place. When it comes to auto loans, the assignee is the person or company that buys your loan.
For example, if you decide to have your dealership arrange financing for you through an indirect financing, you most likely won’t make your monthly car payments to your dealership. Instead, the dealership typically sells (or “assigns”) your contract to a bank or other financial institution. You then owe your payments to the bank, and the bank will have the right to repossess your vehicle if you don’t pay.
A balloon payment is a large payment made at the end of a loan. Usually, monthly payments are lower on a balloon loan (also known as a residual payment loan), but the risk is not being able to afford the big payment at the end. And if your vehicle doesn’t keep its value, you can’t necessarily sell or trade-in the vehicle to come up with that payment.
If you’re stuck with a balloon loan that you can’t afford, refinancing your car loan might be a good option.
The base price of a vehicle is the manufacturer’s suggested price for the lowest trim model, not including any options, destination charges, or other dealer fees. (If you add in those costs, you get the MSRP). If you hear a commercial advertising a car for a price “as low as,” chances are it’s referring to the base price.
Unlike MSRP for new cars, there’s not usually one agreed-upon price for a used car. That’s because each used car has its own unique history. For example, a 10 minute commute puts a lot less strain on a car than a 2 hour daily round-trip.
When you go to trade in or sell your vehicle, the dealer or buyer is going to need a way to figure out how much it’s worth, taking into account the year, make, model, trim, mileage, and condition.
A number of companies publish value ranges, from estimates of trade-in values to values you can use as the starting point for private party negotiations. Kelley Blue Book is probably the most well-known value estimator, but there are a number of other companies (including NADA, Black Book, and Carfax) that publish values.
Each one uses a slightly different formula to arrive at its calculations, so the values for the same vehicle can vary. The book value is the car term used for any one of those values. These same companies also frequently publish values for new cars. Those values can be different than the MSRP, typically depending on how common the vehicle is and how much demand the companies estimate there will be for it.
The book-out sheet provides all of the data that a lender needs to know about a used vehicle, including the VIN, year, make, model, trim, options and features, and mileage. It’s important to make sure that the book-out sheet accurately reflects the vehicle you’re buying.
A common scam, known as power booking, occurs when a dealer claims that the vehicle has more bells and whistles than it really does so the lender will be willing to lend more money.
The “box” is the slang term for the dealership’s Finance & Insurance (“F&I”) office, also known as the “back office.”
When a dealer receives a loan offer from a lender, it comes with an interest rate known as the buy rate. Depending on the agreement between the dealer and the lender, the dealer can then mark up or increase that rate and keep most of the difference. That new marked-up rate, known as the contract rate, is what the dealer will present to you as your interest rate. To find out a lot more about loan markups, check out the Outside Financial Markup Index.
Buydowns are basically a way of prepaying interest on a loan; the borrower pays extra money upfront to reduce the interest rate for a period of time. The loan term and principal amount stay the same. Sometimes, dealers use (undisclosed) buydowns as a tactic to make the interest rate appear low, while making up for it in charging a higher price for the vehicle, under-valuing the trade-in, or both.
A buyer’s order (also known as a purchase order or sales contract) contains all the essential details about the vehicle you’re buying, including the VIN, year, make, model, trim, sales price, taxes, dealer fees, the value of your trade-in, your down payment, and any options you’ve chosen to add on. (It does not contain any details about your loan, though, since the buyer’s order is the same whether or not you’re financing the vehicle through the dealer).
Some dealers call the same document a buyer’s order before it’s signed and a sales contract once you’ve finalized all the details. The most important thing to remember is to carefully read through each line of your buyer’s order to make sure that all of the details are exactly what you’ve agreed to; never sign a blank buyer’s order or one that contains inaccurate info.
Captive lenders, like Toyota Financial Services, Volkswagen Credit, and Hyundai Motor Finance, are the financing arms of vehicle manufacturers.
It sounds too good to be true: you get a new, better loan on your vehicle and cash to do whatever you want with. And for some borrowers, a cash-out refinance (or cash-back refi) can be a great deal.
If you have equity in your vehicle (meaning your vehicle is worth more than you owe on your loan), you might be eligible to get a new loan that will pay off your existing loan and give you cash on top of that.
Keep in mind, though, that nothing is totally free; you will eventually have to pay back the cash, with interest. Also keep in mind that not all lenders are willing to provide cash-out refinance loans, and the availability of any loan depends on your credit history.
Just like it sounds, a co-borrower (or “joint applicant”) is someone you borrow money with. When it comes to auto loans, a co-borrower is also someone you buy (and own) your vehicle with. In general, applying with a co-borrower may help increase the amount you’re able to borrow and increase your chances of being approved.
Lenders consider the ratio of the debts you owe to the income you make in order to determine how much they’re willing to lend to you. If you divide your debts by two incomes instead of one, you may be able to qualify for a better rate, or with more lenders, than if those same debts were divided by just your income. Also, many lenders merge credit scores when using a co-borrower or even use only the higher of the two scores, leading to a better loan for you.
A co-borrower is not the same as a co-signer. A co-signer is someone who agrees to pay off the loan if the primary borrower doesn’t, but the co-signer doesn’t actually own the collateral. The most common example of a co-borrower is a spouse; a co-signer is more likely to be a parent helping a teenager or young adult to establish credit.
Collateral is any property that secures a loan. When you get an auto loan, your vehicle is the collateral; if you stop repaying the loan, your lender can repossess your vehicle in order to pay off the debt.
The condition of a vehicle describes what shape a vehicle is in. Different companies that evaluate vehicle values use different grades or tiers. KBB, for example, rates vehicles in one of four conditions: excellent, good, fair, and poor. A vehicle rated as poor will be worth less than one rated excellent, even if they both have the sameyear, make, model, trim, and mileage.
The contract rate is the interest rate offered to you by the dealer. It’s usually higher than the buy rate, the interest rate that the lender provides to the dealer, because the dealer marks up the loan and keeps most of the difference. To find out a lot more about loan markups, check out the Outside Financial Markup Index.
Used vehicles can range from real junkers to good-as-new dream rides. Manufacturers obviously want you to pay more for the higher-quality ones, and one way of doing that is to give them a special status.
Each brand sets its own rules for CPO cars, but generally, they require the vehicle to be relatively recent (5-7 model years or younger), have a low number of miles, and pass a rigorous inspection.
The CPO vehicle will usually come with a warranty and other perks, like free roadside assistance. You’ll pay a little more for that piece of mind, but a CPO vehicle can be a good deal if you want a car that’s like new but isn’t.
Some dealers offer their own “certification,” which isn’t necessarily the same as a manufacturer’s CPO program. Make sure that you know what you’re getting before you agree to buy any vehicle.
A credit bureau’s job is to compile information about borrowers from lenders – including credit card companies, auto lenders, and student loan companies – and then sell it back to those lenders so they can make lending decisions.
The three major credit bureaus in the U.S. are Equifax, Experian, and TransUnion. If you’ve ever opened up any credit account, chances are the big three bureaus will have a file with your name on it and your payment history in a credit report.
The Fair Credit Reporting Act (FCRA) is a federal law that regulates credit bureaus and credit reporting. The FTC provides a guide to your rights under the FCRA here
When you apply for a loan, the potential lender needs to know information about your borrowing history to determine whether to lend to you, how much, and at what rate. To do that, the lender will request your credit report and credit score from one of the credit bureaus. That request is called a credit inquiry.
Inquiries come in two flavors: hard inquiries (or “hard pulls”) or soft inquiries (“soft pulls”). Hard inquiries will be noted on your credit report and could decrease your credit score by a few points. That’s because shopping for too much credit at one time could indicate a problem.
It’s a red flag to a lender if a borrower needs a car loan, mortgage, and three new credit cards all at the same time. BUT that same logic doesn’t apply to rate-shopping for one loan. In fact, lenders know that it’s smart to compare offers, so there’s no penalty for multiple hard inquiries for the same type of loan in a short period of time.
For example, the main credit scoring company, FICO, considers all inquiries related to auto loans within a 45-day period as one single credit inquiry.
Soft pulls don’t affect your credit, and they aren’t recorded on your credit report. When you apply to be pre-qualified for an auto loan through Outside Financial, we do a soft pull of your credit on Experian. That helps us to determine whether we can match you with one of the lenders on our platform. If you request your own credit report, that would also be considered a soft pull.
A credit life policy pays off a borrower’s debts if they die. It won’t pay out to the borrower’s beneficiaries like life insurance; instead, it pays the lender directly. Although everyone’s financial situation is different, credit life insurance usually isn’t a good deal because most debts die with the borrower anyway.
A credit report is a detailed account of your credit history. Each of the three major credit bureaus (Equifax, Experian, and TransUnion) compiles its own proprietary list of your borrowing and payment record, so they can vary a little.
Each report should include the details of accounts you currently have open or recently closed, whether for revolving credit (like credit cards) or installment credit (like auto loans). Any bankruptcies, tax liens, repossessions, or foreclosures will also appear, typically for 7 years.
By law, you can access each of your credit reports for free once a year at annualcreditreport.com before applying for a loan, it’s a good idea to check your credit reports to make sure all of the information is accurate and up-to-date, because lenders typically use credit reports to make lending decisions.
One surprising thing not included on your credit report is your credit score, a number assigned to your credit history that lenders use in evaluating the risk of lending money to you.
Credit scores are a quick shorthand for a lender deciding how risky it is to lend money to a borrower. They’re essentially like a GPA for a borrower’s credit history. The higher your credit score, the better, because it means you’ve been rated as a lower risk to borrow money.
Credit scoring seems simple, but it’s actually pretty complicated. For starters, there are many different credit scoring models offered by different companies. (FICO invented the credit score and is still probably the best-known provider). Each model weights your credit history slightly differently;
For example, some models may put more importance on certain types of debt; others may weigh delinquencies higher or lower.
Although you cannot see your credit scores in your free credit report, a number of companies provide free access to credit scores. Many credit card providers, banks, and credit unions offer free scores as a perk; check out your financial service company’s website to see if they’re one of them. Discover also offers free scores, even to non-customers. Sites like Credit Karma and Nerd Wallet will also monitor your credit score.
These scores may or may not be the same that lenders use when evaluating your credit application, but they will give you some indication of your credit profile.
Most lenders divide credit scores into five different buckets or “tiers”: super-prime, prime, near- or non-prime, subprime, and deep subprime. Which scores fall into which buckets depends on the credit bureau or lender.
As an example, Experian uses the following buckets for its FICO scores:
Credit unions seem like banks: they offer savings and checking accounts and lend money. But credit unions and banks aren’t the same thing. By law, credit unions are not-for-profit financial cooperatives, which means they must be managed to serve the needs of their members/owners.
Because credit unions are designed to serve their members, they often are able to offer better rates and lower fees than banks.
Credit unions are regulated by the National Credit Union Administration (NCUA), which insures credit union deposits much like the FDIC insures bank deposits. All credit unions have eligibility requirements. Some credit unions are made up of employees of a certain company; others accept anyone who lives, works, or worships in a certain community. To find a credit union near you, check out this helpful resource from NCUA.
A creditor is someone who is owed a debt by a borrower (or “debtor”). Creditors could be individuals (“Mom, can I borrow $20?”), companies (like a bank that extends an auto loan), the government or other organizations.