Car News

Guide to Finance Terminology

Toyota cars, trucks and SUVs Ford cars, trucks and SUVs Honda cars, trucks and SUVs Chevrolet cars, trucks and SUVs Jeep cars, trucks and SUVs Nissan cars, trucks and SUVs BMW cars, trucks and SUVs Volkswagen cars, trucks and SUVs Mercedes-Benz cars, trucks and SUVs
Acura cars, trucks and SUVs Alfa Romeo cars, trucks and SUVs AMC cars, trucks and SUVs Aston Martin cars, trucks and SUVs Audi cars, trucks and SUVs Bentley cars, trucks and SUVs BMW cars, trucks and SUVs Bugatti cars, trucks and SUVs Buick cars, trucks and SUVs Cadillac cars, trucks and SUVs Chevrolet cars, trucks and SUVs Chrysler cars, trucks and SUVs Daewoo cars, trucks and SUVs Datsun cars, trucks and SUVs DeLorean cars, trucks and SUVs Dodge cars, trucks and SUVs Eagle cars, trucks and SUVs Ferrari cars, trucks and SUVs FIAT cars, trucks and SUVs Fisker cars, trucks and SUVs Ford cars, trucks and SUVs Freightliner cars, trucks and SUVs Genesis cars, trucks and SUVs Geo cars, trucks and SUVs GMC cars, trucks and SUVs Honda cars, trucks and SUVs HUMMER cars, trucks and SUVs Hyundai cars, trucks and SUVs INFINITI cars, trucks and SUVs Isuzu cars, trucks and SUVs Jaguar cars, trucks and SUVs Jeep cars, trucks and SUVs Kia cars, trucks and SUVs Lamborghini cars, trucks and SUVs Land Rover cars, trucks and SUVs Lexus cars, trucks and SUVs Lincoln cars, trucks and SUVs Lotus cars, trucks and SUVs Maserati cars, trucks and SUVs Maybach cars, trucks and SUVs Mazda cars, trucks and SUVs McLaren cars, trucks and SUVs Mercedes-Benz cars, trucks and SUVs Mercury cars, trucks and SUVs MINI cars, trucks and SUVs Mitsubishi cars, trucks and SUVs Nissan cars, trucks and SUVs Oldsmobile cars, trucks and SUVs Plymouth cars, trucks and SUVs Pontiac cars, trucks and SUVs Porsche cars, trucks and SUVs RAM cars, trucks and SUVs Rolls-Royce cars, trucks and SUVs Saab cars, trucks and SUVs Saturn cars, trucks and SUVs Scion cars, trucks and SUVs smart cars, trucks and SUVs SRT cars, trucks and SUVs Subaru cars, trucks and SUVs Suzuki cars, trucks and SUVs Tesla cars, trucks and SUVs Toyota cars, trucks and SUVs Volkswagen cars, trucks and SUVs Volvo cars, trucks and SUVs Yugo cars, trucks and SUVs

author photo by Autotrader October 2007

You don't need a translator to master the language of automotive financing. All you need is a quick look at the following key terms:

Amount Owed on Trade-In
The total amount of money you still owe on the current financing for a trade-in vehicle if you're still making payments. To get your exact payoff amount, contact your lender.

Buy Here Pay Here (BHPH)
Buy Here Pay Here financing means that you arrange a loan and make payments on it at the dealership. You typically finance the car through the dealership versus through a third party, such as a bank or an automotive finance company. For more information, read Buy Here Pay Here Financing Basics.

Capitalized Cost
The amount of money you finance in a lease. Also referred to as "cap cost." If you make a down payment in a leasing situation, it is often called a "cap cost reduction."

Car Credit Wizard
An educational tool that gives you an easy way to estimate your credit and get connected to dealers that can help you with the right type of financing. Try the Car Credit Wizard.

Closing Costs
The fees you usually have to pay at the start of a home equity loan. These can include an application fee, points (a percentage of the amount you borrow), attorney's fees, and additional expenses. Also known as "settlement costs." To get the exact closing costs you might be charged, please contact your lender.

Credit Report
A detailed record of your credit history maintained by one of three main US credit reporting agencies. Think of it as a file folder that holds information about your financing activities. When you apply for a loan, the lender requests your report from the agencies to understand if you are capable of handling more credit. The lender will then send the agencies details about that particular transaction. When you open up a new credit card, make a payment or miss a payment, all that information is added to your folder. For more information, read Quick Guide to Credit Reports.

Credit Score
A numerical value lenders use when assessing whether they are willing to offer you credit. Lenders and financing companies take a variety of factors into consideration when making that decision, but a credit score gives them a fast, fairly objective indication of your credit risk. One of the most commonly used scores is the Fair, Isaac & Co., or FICO, score. This score is built from both the positive and the negative information found in your credit report. For more information, read The 5 Building Blocks of a Credit Score.

Down Payment
When you purchase a vehicle with a loan, this represents the money you pay at the beginning of the financial agreement to lower the total amount you finance.

Fair Credit Reporting Act (FCRA)
Legislation from the Federal government that protects the accuracy, privacy and handling of the information about consumers that all of the credit reporting agencies keep. The FCRA was enacted by Congress in 1970.

Features & Options
Services that dealerships offer to enhance your shopping experience. These can range from the languages spoken to the special credit situations they support such as Bad Credit or No Credit. You will see the Features & Options when you use the Car Credit Wizard or Quick Path and receive a list of dealers in your area.

First-Time Buyer Program
A special program typically offered by new car dealers to people who have challenges getting a loan because of limited credit or no credit history at all. In addition to offering competitive interest rates and payment plans, programs such as these can serve as the first step to establishing a solid credit history. For more information, read The 3 No-Credit Myths.

Gap Protection
Gap protection covers the difference between the amount received for your vehicle from your insurance company and the amount of money you still owe on a loan or lease if the vehicle is totaled or stolen.

Identity Theft
A crime in which someone uses your personal information, such as your Social Security number or credit card number, to commit fraud.

Interest Rate (APR)
When you purchase a vehicle with a loan, this is the percentage dollar amount that determines the yearly cost of credit. For instance, if you took out an $8,500 loan with an interest rate of 7.9% and a 36-month term, at the end of the loan your total payments would equal $9,575.03. The difference between the initial amount of your loan and what you paid, which in this example is $1,075.03, is the cost of using credit which was established by the interest rate.

A lease is similar to renting a car for a longer term. It is a financing agreement in which you promise to pay back any up-front costs, make monthly payments and maintain a car over a fixed period of time in exchange for the use of that car. At the end of the lease period, you return the car and settle any financial obligations stipulated at the beginning of the lease. For more information, read Leasing Basics.

Length of Loan or Lease
How long you make payments to a loan or lease, most commonly expressed in months. Also referred to as a "term." A lease with a term of 36 months, for instance, indicates that you will make 36 monthly payments during the life of the lease.

A financial arrangement through which you borrow an amount of money from a lender to buy a vehicle from a seller. You agree to pay back the total amount, plus an interest charge, through regular installments over a set period of time. For more information, read Loan Basics.

Money Factor
When you lease a vehicle, you may be given a "money factor" instead of an interest rate. This number helps establish the finance charges you will pay during the course of a lease. To convert an interest rate to a money factor, divide the interest rate by 2400. For example, a rate of 9% would be presented as having a money factor of 0.00375. If the dealership gives you the money factor, simply multiply that by 2400 to arrive at the interest rate.

Monthly Payment
The approximate amount of money you will be required to pay each month on a loan or lease.

No Credit or New-to-Credit
A financial situation in which you do not have any credit history. Your credit isn't bad or good; you just haven't made purchases that establish a credit history. For more information, read The 3 No-Credit Myths.

Quick Path
An educational tool that allows you to choose one of four possible credit situations and go directly to a list of dealers who can help you with the right type of financing. Try the Quick Path.

Incentives, usually cash based, that a manufacturer gives you toward the purchase or lease of a vehicle. Rebates are typically applied as a down payment that reduces the vehicle price and can vary based on the financing method you choose.

Residual Value
The dollar amount the leasing company predicts the vehicle you select will be worth at the end of the lease. This future value is determined by estimating how much the vehicle will depreciate during the time you drive it. A vehicle with a high residual value is expected to maintain a considerable amount of its original value and may have a lower monthly payment than a vehicle that is expected to depreciate significantly.

Sales Tax
The percent of state sales taxes that will be applied to the vehicle price. Remember, this could be based on the state and locality where you register the vehicle, not necessarily where you purchase it.

Trade-In Value
The amount of money your current vehicle is worth toward the purchase or lease of another vehicle.

Upside-Down Loan
An upside-down loan is when you owe more money on a car loan than the car is actually worth. For instance, let's say you owe $6,000 on a loan for a minivan with an estimated value of $4,000. If you tried to trade the car in, you might owe $2,000 more than it's worth. This is often referred to as negative equity.

Vehicle Price
The dollar amount you pay for the vehicle before sales tax and additional factors, such as rebates, are applied.

© 2007, Inc. All Rights Reserved.
"" is a registered trademark of TPI Holdings, Inc. used under exclusive license.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
Guide to Finance Terminology - Autotrader