Car Buying Terms You Need to KnowMar 2nd, 2015
When buying a new or pre owned vehicle, there can be a lot of terms thrown around that can make the experience less than enjoyable. To make the overall process easier, here is a list of some of the important terms and keywords you should know before buying a vehicle.
Annual Percentage Rate (APR): This is the interest rate on a loan or the percentage of the amount borrowed that a lender charges for use of its money.
Balloon Payment: A loan that pays off a portion of a vehicle and requires a large sum (balloon) payment at the end of the loan.
Buyout Price: The price of buying a vehicle at the end of a lease term. You should ask the dealer about the buyout price and options if you intend to buy the vehicle at the end of your lease.
Capitalized Cost Reduction: Anything that reduces the amount to be financed through a lease (down payment, trade etc).
Dealer Incentives: Special offers from the manufacturer to their dealers which are passed on to the customer and encourage sales.
Dealer Invoice: The amount a manufacturer chargers its dealers for a vehicle.
Default: Failure to make payments or otherwise abide by the terms of a financing contract.
Destination Charge: The amount charged for transporting the vehicles from the factory to the dealership.
Documentation Fee: Charges that cover the cost of processing the paperwork involved with the sale of a vehicle.
Down Payment: Cash paid up front by a borrower to reduce the amount financed in a lease or loan.
Early Termination Fees: Penalties for withdrawing from a lease or loan ahead of the scheduled end date. Be sure to ask about any fees associated with this.
Extended Warranty: An agreement to cover certain repairs and services beyond the life of the factory warranty.
Financing Costs: A charge for using the bank’s (or another lender’s) money to lease or finance the vehicle.
Finance Rate: Also known as annual percentage rate, it is the interest rate of a loan.
Lease: A dealer buys a vehicle and allows the lessee to use it for a specific period of time while making monthly payments. At the end of the lease period the lessee can either return the vehicle or buy the car, depending on the type of lease.
Mileage Allowance: The maximum distance a vehicle can be driven during a lease. Additional charges may apply to mileage over the allowance.
MSRP: Manufacturer’s Suggested Retail Price. This is base price of the vehicle with all additional features and add-ons.
Open-End Lease: A lease where the lessee is responsible for the difference between the residual and the fair market value of the vehicle at the close of the lease.
Pre-Qualify/Pre-Approved: To have the lender confirm you are eligible for a loan without you committing to accepting it.
Principal: The amount to be borrowed.
Residual Value: Estimated value of your vehicle when it is returned from a lease.
Subprime Loan: Loans given to borrowers who represent a particularly high risk to the lender.
Term: The length of a loan or lease.
Trade in Value: The price a dealer will give you for your current vehicle when selling you a new one, which is then subtracted from the amount you owe on the new vehicle.
Up Front Costs: The total of all costs to be paid at signing of your vehicle.
Upside Down: When you owe more on your vehicle than it is worth. A rapid depreciation in your vehicle, combined with a long finance term can lead to this situation. It is very dangerous and can be damaging to your credit. Try to reduce the length of your finance term and/or increase the amount of your down payment to prevent this.