Auto Financing: 10 Terms to Know

Buying a car can be a complicated process. First, you have to find your preferred make and model, then figure out where to purchase it, and finally work through how to finance it. Auto financing jargon can also be confusing, so here are ten terms you should know if you want to finance a car.

1. Base Price

This term refers to the basic price of the vehicle, meaning that it only includes standard options and the manufacturer’s warranty. Any price going above the base price will include optional features for the car and special services from the dealership itself.

2. APR

APR stands for Annual Percentage Rate and is used when discussing most loans, not just auto loans. It is a way of simplifying the discussion of interest rates by stating the total annual interest. For example, if a loan accumulates 4% interest every quarter then it would be said to have 16% APR, because that is the total accumulation for a year.

3. Blue Book

This is a pricing guide that includes most vehicles to give you an idea of the approximate value for any given vehicle. Originally called Kelly Blue Book, there are many sources available now that serve this purpose. The important thing to remember is that these sources will give you the fair value of a vehicle, so you can use them to make sure you are not taking out a loan for more than the vehicle is worth.

4. Term

The term of a loan is the length over which it will be paid. A term is usually expressed in months instead of years. 60 month (5 year) loans are fairly common, but shorter or longer loans may be used. Other loan terms used are 48, 72, and 84 months (4, 6, and 7 years respectively). The length of the term of your loan will help to dictate what your monthly payments will be.

5. MSRP

This is the manufacturer’s suggested retail price. This number will show the price of the vehicle along with the optional add-ons offered. If the price goes above this then it may be including dealer add-ons and/or warranties.

6. Dealer Preparation

This is a fee that may be added to the price of a car by the dealer. Simply put, dealer preparation fees are charges incurred by the dealer for preparing the car to be sold. Be wary if dealer preparation fees are added on, as manufacturers often have already paid the dealer to prepare the car. In these cases, these fees will represent straight profit for the dealer.

7. Prepayment Penalty

This is an extra fee added to a loan if you choose to pay off your loan early. If you do plan to pay your loan early, be sure to factor in this penalty if it applies to your loan.

8. Rebate

A rebate is a reduction in the price of a car made by the manufacturer. Dealers use rebates as an incentive for buyers, targeted mostly at first-time buyers who have little cash for a down payment or to buyers with bad credit who do not qualify for the best loans.

9. Add-on Interest

Functioning much like normal interest, add-on interest is calculated based on the amount of your loan. The difference is that add-on interest is applied to the principal at the beginning of the loan, so it must be paid even if the loan is paid off early.

10. Acquisition Fee

Dealers will charge a buyer an acquisition fee for the costs of a lease application. Loans won’t have this fee, only leases, so be sure to examine both options when looking at new cars.