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Car Financing Glossary: Finance Terminology Explained

Buying a new car can be a little scary. You’re talking about committing much of your hard-earned money, which is bad enough. It’s even worse when you hear unfamiliar words and complicated jargon used in car financing and leasing. We’ve prepared a list of standard car finance terms with definitions for you to help make buying a new or used car less intimidating.

  • Bill of sale: This legal document outlines and confirms the vehicle’s description and vehicle identification number (VIN), the odometer reading at the time of purchase, the purchase price, and other important details.
  • Cashback: This incentive is a gift or rebate from the manufacturer for purchasing its vehicle. Cashback offers often have restrictions, such as only being available to buyers who secure financing through the dealership.
  • Co-signer: A co-signer is someone with a good credit score who can guarantee the loan payments in case the primary borrower can no longer meet the agreement terms. Co-signers, typically friends or relatives, are legally responsible for repaying the loan.
  • Depreciation: When a car loses value, it’s called depreciation.
  • Down payment: Also known as “money down,” a down payment refers to the cash you pay upfront before financing a vehicle. The more money you put down reduces the amount you finance, and therefore reduces your monthly payment.
  • Equity: The difference between what you owe and what your car is worth is called equity.
  • Finance: Financing a car means borrowing money to buy a vehicle and paying back that loan over time with interest. At the end of the loan period, you own the car.
  • Interest or interest rate: Interest is how much your lender charges for the loan. It may also be called a “finance charge.” This amount is calculated as a percentage, typically referred to as a “rate.”
  • Lease: A lease is a contractual agreement in which you pay a monthly fee to borrow a car for a set time period. You can return the vehicle at the end of the term or buy it for a predetermined amount.
  • Lien: When you finance a car, the lender puts a lien on the vehicle. This means it owns the asset (the car) until you fulfill your debt obligation.
  • Loan: A loan is the amount of money you borrow from a lender to finance a car. Loans are typically repaid in monthly installments until you settle the balance.
  • Monthly payment: Your monthly car payment is a set amount of money you give to your lender to repay an auto loan. The payment includes the “principal” and “interest.”
  • MSRP: This is an initialism for the manufacturer’s suggested retail price. You might also hear people call the price an automaker recommends the dealer sell the car for the “list price” or “sticker price.”
  • Negative equity: You have negative equity when you owe more on your car loan than the vehicle is worth. It’s sometimes called being “underwater” or “upside down” on a loan.
  • Principal: The principal is how much money you borrowed for your auto loan. Your monthly car payment includes a portion of the loan principal and some interest the lender charges you for borrowing its money. Paying down the principal builds your equity in the vehicle.
  • Rebate: Car companies sometimes offer buyers discounts on their vehicles in the form of rebates. Other promotional incentives are cashback deals, $0 down, or low-interest rates for financing.
  • Refinance: Sometimes shortened as “refi,” refinancing means transferring your car loan from one lender to another to obtain a lower interest rate and reduce monthly payments. This transaction isn’t common with the rising interest rates in today’s market.
  • Repossess: A “repo” can happen if you default on your loan and the lender reclaims possession of the vehicle.
  • Term: In financing terminology, “term” refers to the length of the loan or how long it will take to pay the balance, in total, according to its payment schedule.
  • Title: Also called a “certificate of title” or “pink slip,” this legal document establishes proof of vehicle ownership.
  • Trade-in: If you’re giving up your old car and asking the dealership to incorporate it into your deal to buy a new one, that means you’re trading it in. In most cases, your trade-in won’t be worth as much as your new car, so you’ll need to spend additional money to get your new vehicle.

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What does it mean to finance a car?

Financing a car means you take out a loan to cover the cost of your vehicle. The loan is repaid in installments over a set number of months.

What is a lien?

A lien is a legal claim to an asset or piece of property. If you’re financing a car, the vehicle is the asset, and the lender is the “lienholder.” When you pay off the loan, it releases the lien and you own the asset free and clear.

Is it better to buy or lease a car?

There are pros and cons to leasing a car or purchasing a vehicle. Consider how much you’re able to budget for monthly payments, and how much you can afford to put down. Do you care about owning the vehicle as an asset after a set number of years? If so, you should probably buy. If you prefer to regularly “upgrade” to the latest model year, leasing may be the better option. Either way, never exceed your budget for an automobile.

Chantel Wakefield
Chantel Wakefield
Chantel Wakefield is an Advice Contributor, specializing in finance, electric vehicle, and state regulation content. She joined the editorial team in June 2022 and offers over a decade of experience writing instructional content and managing social media strategies. She was previously a DIY contributor at The Home Depot and freelance writer for various publications. Chantel also has experience as... Read More about Chantel Wakefield

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