Common Auto Finance Terms & Definitions

1. Auto Financing Basics

APR (Annual Percentage Rate)

The annual cost of borrowing money for a vehicle, expressed as a percentage. APR can include the interest rate plus certain fees associated with the loan, making it useful when comparing financing offers.

Interest Rate

The percentage charged for borrowing money to finance a vehicle. Unlike APR, the interest rate does not include other loan fees.

Finance Charge

The dollar amount representing the cost of credit, including interest and certain fees charged as part of the loan.

Principal

The amount of money you borrow to purchase a vehicle, before interest and other applicable charges.

Loan Term

The length of time you have to repay an auto loan, usually expressed in months, such as 36, 48, 60 or 72 months. A longer term can lower the monthly payment but may result in paying more interest over the life of the loan.

Monthly Payment

The amount you are scheduled to pay each month toward your auto loan. Your payment can depend on the amount financed, APR, loan term and other factors.

Down Payment

Money you pay upfront toward the purchase of a vehicle. A down payment reduces the amount you need to finance and may reduce your monthly payment and total financing costs. A trade-in can also contribute toward the upfront amount.

Amount Financed

The amount of credit being provided to purchase the vehicle after applicable amounts are accounted for. This is one of the key figures included in federal Truth-in-Lending disclosures.

Total of Payments

The total amount you would pay over the life of the loan if you make all scheduled payments as agreed.

2. Buying a Vehicle

MSRP (Manufacturer's Suggested Retail Price)

The price a manufacturer recommends for a new vehicle before applicable taxes, registration, dealer fees, optional equipment and other charges.

Out-the-Door Price

The total price you pay to purchase a vehicle before financing, including the vehicle price and applicable taxes and fees.

Trade-In Value

The amount a dealership offers for your current vehicle when you trade it toward another vehicle. Your trade-in value can be applied toward your next purchase.

Positive Equity

When your vehicle is worth more than the amount you still owe on your auto loan. For example, if your vehicle is worth $20,000 and you owe $15,000, you have $5,000 in positive equity.

Negative Equity

When you owe more on your current auto loan than your vehicle is worth. For example, if your vehicle is worth $15,000 but you owe $18,000, you have $3,000 in negative equity.

Amount Due at Signing

The amount a customer is required to pay when completing a vehicle purchase or lease. The exact amount depends on the transaction and contract terms.

3. Credit & Getting an Auto Loan

Credit Score

A numerical representation of information in your credit history that lenders may use when evaluating a credit application. Credit score is one factor lenders may consider when determining financing terms.

Credit History

A record of your borrowing and repayment activity. Lenders may review your credit history along with other information when evaluating an auto loan application.

Pre-Approval

A preliminary indication from a lender that you may qualify for financing up to a certain amount and under specified terms. A pre-approval is not necessarily a final loan approval.

Co-Signer

A person who agrees to share responsibility for repaying a loan. If the primary borrower does not make payments as agreed, the co-signer can be responsible for the debt.

4. Leasing Terms

Lease

An agreement that allows you to use a vehicle for a specified period of time in exchange for scheduled payments, subject to the terms of the lease.

Lease Term

The length of the lease agreement, typically expressed in months.

Mileage Allowance

The number of miles included in a lease agreement. Driving beyond the agreed mileage allowance may result in an excess-mileage charge.

Residual Value

The estimated value of a vehicle at the end of a lease term, as established in the lease agreement.

Excess Mileage

Mileage driven beyond the amount permitted under a lease agreement. Additional charges may apply according to the terms of the lease.

Lease-End Options

The choices available when a lease ends, which may include returning the vehicle, purchasing it if a purchase option is available, or leasing another vehicle. Visit our Lease End Options page to learn more!

5. Protection & Optional Products

GAP (Guaranteed Asset Protection)

GAP coverage can help cover the difference between the amount owed on an auto loan and what an insurance company pays if the vehicle is stolen or declared a total loss. Availability, terms and exclusions vary, so customers should review the specific product agreement.

Vehicle Service Contract

A service contract that may cover certain vehicle repairs beyond what is covered by the manufacturer's warranty. Coverage, exclusions and duration vary by contract.

Extended Warranty

A common term used for additional vehicle protection beyond the original manufacturer's warranty. At dealerships, this may refer to a vehicle service contract, so customers should review exactly what is covered.

Finance & Lease FAQ’s

What's the difference between APR and interest rate?

The interest rate represents the cost of borrowing money, while APR is a broader measure that can include the interest rate plus certain fees associated with the loan. When comparing financing offers, compare APRs with other APRs rather than comparing an APR with an interest rate.

Does a larger down payment lower my monthly payment?

Generally, putting more money down means you borrow less, which can reduce your monthly payment and potentially the total amount of interest you pay. Your actual payment depends on the full terms of the loan.

What happens if I owe more on my trade than it's worth?

The difference is called negative equity. Depending on the transaction and financing arrangement, that remaining balance may need to be paid separately or could potentially be included in financing for another vehicle. Rolling negative equity into a new loan increases the amount financed.

Does a longer loan term mean a lower payment?

A longer loan term can result in a lower monthly payment, but you may pay more interest over the life of the loan. It's important to consider the total cost of financing rather than looking only at the monthly payment.

What factors affect my auto loan rate?

Lenders may consider factors such as credit history and scores, income and debts, loan amount, loan term and down payment when determining financing terms. Different lenders may evaluate applications differently.