Auto Loan Glossary
Please note that these definitions are for general informational purposes only, and not meant to be complete descriptions. Contact your loan provider or financial institution for more detailed information on these terms.
Acceleration ClauseThis gives your lender the green light to speed the rate up in which you pay back the loan, or even request immediate full payment in the case of default.
Adverse ActionRefers to when a creditor denies an applicant’s request for a loan.
Adverse Action NoticeThe official document that explains why a loan request was not accepted.
AmortizationPertains to repaying a loan with regular payments to cover the loan's interest and principal.
Amortization TableA graphic showing the amount of principal and interest due throughout the life of the loan; it also reveals the decreasing amount owed by the borrower as the payments occur.
Annual Percentage Rate (APR)A standardized method of expressing the interest rates on a loan, including the miscellaneous fees associated with obtaining the loan.
AppreciationRefers to an increase in a vehicle's value.
AssetAnything owned by you with significant monetary value. Examples include stocks and property.
Balloon PaymentRefers to a large payment due at the end of your loan. It's a favored option for keeping monthly payments small.
Base PriceThe price of a car, stripped of all options. Also known as "sticker price" and "MSRP."
Blue BookRefers to Kelley Blue Book. One of the main sources used for establishing a car's value. Hence, the term "Blue Book Value."
Capitalized Cost ReductionAny trade-in credit, cash down payment or rebate credit used in reducing a loan amount.
Caveat EmptorLatin term for "buyer beware." Or, in other words, "buy at your own risk."
Clear TitleAny title without liens or legal ownership questions.
Closed-End CreditAn agreement where you agree to pay the auto loan and any finance charges in full over a predetermined period of time.
CollateralRefers to a borrower’s asset (such as a car) that could be forfeited if a loan isn’t repaid.
Comprehensive InsuranceCoverage that protects your vehicle against any other damage not resulting from a collision. Examples include fire, theft, vandalism, flooding, and hail storms.
Co-SignerAn individual who signs the loan agreement along with the loan applicant to help the applicant obtain the financing. If the applicant fails to meet the terms of the loan, the co-signer is legally obligated to pay the debt and fulfill the agreement.
Credit Disability InsuranceProtection that covers your car payments in the event you become disabled; the terms vary according to the policy.
A record of your debt payments, as well as the debts you still owe; this information is used by lenders to help determine the amount of risk associated with providing you with a loan.
CreditorAnother name for lender.
Dealer InvoiceThe price a dealer pays the manufacturer for an auto.
DebtorAnother name for borrower.
DefaultRefers to when the debtor violates the terms of the loan agreement; doing so may force the creditor to seize the loan collateral and sell it to pay off the loan.
DelinquentWhen a loan payment isn’t made by its due date.
Direct FinancingLoans made from the lender to the borrower without a third-party (such as a dealer) involved.
Down PaymentThe money you pay initially towards the purchase price of the vehicle; down payments are not funded by your loan.
Due DateThe date each month by which your payment must be made; if you fail to make your payment by its due date, you’ll likely be penalized with a late fee.
Early Termination ChargeThe fee a dealer charges if you return a leased vehicle early.
EndorserA person who signs ownership interest over to another party.
Excess Wear ChargeThe price a dealer charges if your leased vehicle suffers from excessive wear and tear. Definitions of this are explained when signing the lease. Examples may include torn seats and stained floor carpeting.
Extended WarrantyAn extended warranty optional contract offered by the dealership or a third-party company that covers unexpected car problems after purchase for a designated period of time.
Fair Credit Reporting Act
A federal law that regulates the disclosure of consumer credit ratings by credit reporting agencies.
Fair Market ValueRefers to the current price to buy a vehicle, based on market averages.
Finance ChargeThe cost of the loan to the borrower, expressed in dollar amounts.
Fixed Rate LoanA loan with a rate that remains constant throughout the life of the loan.
Guaranteed Auto Protection (GAP) InsuranceCoverage that pays the difference between what you owe on an auto loan and the fair market value of the vehicle.
Indirect FinancingA loan that originates with the dealership and gets assigned to a financial institution.
InterestThe cost of borrowing money from a lender.
Interest RateA predetermined rate added on to your loan or credit. This is part of the annual percentage rate (APR) equation.
Late FeeA penalty assessed by the lender if you fail to submit your payment on time.
LienA legal, secured interest in a loan.
Lien HolderAn individual or institution with a legal, secured interest in a loan.
Loan BalanceThe amount of money left to pay on the loan; it takes all the payments made to date into account.
Low-Interest FinancingA loan with a below-market interest rate.
Manufacturer's Suggested Retail Price (MSRP)The price a manufacturer suggests for a vehicle, usually shown on the vehicle's window sticker.
Maturity DateThe date by which your loan must be paid in full.
Mileage AllowanceThe number of miles you're allowed to drive as stipulated in a lease agreement.
Mileage ChargeThe fee a dealer will charge for exceeding your lease agreement's mileage allotment.
Mint ConditionTerm used for describing a vehicle that's just like new.
Mop and GlowIndustry term used by dealerships describing add-ons that make a car shine, but add little or no value. Paint sealant, for example, falls into this category.
Negative EquityThe difference between a trade's value and the amount owed.
Refers to financial institutions that provide loans to those with inferior credit histories; these loans carry higher interest rates due to the increased risks involved with the loan.
Owner FinancingA deal in which the owner agrees to lend the buyer all or part of the money.
Price ProtectionAfter announcing a price increase on a vehicle, the manufacturer will guarantee the original price if you purchase it before a certain date.
PrincipalThe amount of the loan, minus interest charges and other fees. If you buy a car worth $20,000, make a $2,000 down payment, and finance the rest with a loan, the principal on your loan is $18,000.
QualifyYour standing, in the eyes of the lender, for loan eligibility.
RebateA selling device used by manufacturers, lowering a vehicle's price.
Remaining TermThe time it will take to pay off the remainder of an existing loan.
Secured LoansLoans that are backed by some sort of collateral.
Service ContractAnother name for a vehicle's extended warranty.
Simple InterestA method for calculating interest by applying a periodic rate to a loan's outstanding balance on a daily basis.
Sticker PriceAnother name for a vehicle's base price.
TermThe length of the loan; a two-year term means your loan is for 24 months.
Trade-In ValueThis is the amount a dealership will credit you for the car you give for partial or full-payment for another vehicle in the lot.
Truth-In-Lending ActA federal law that forces lenders to disclose the terms of the loan in a uniform manner; doing so makes it easier consumers compare loans.
UnderwaterWhen you owe more on your vehicle than its actual worth. Also known as "upside-down."
UnderwritingFancy term describing the process of verifying information needed for approving a loan or insurance policy.
Unsecured LoanA loan that does not require collateral.
Up-Front CostsA fee you must pay at the time of signing a car lease agreement. Examples of this include first month's payment, a down payment and a refundable security deposit.
Usury LawEstablishes the maximum interest rate that can be charged on a loan.
Variable Interest RateThe percentage you must pay on a loan (usually as described as an annual percentage) and which fluctuates with the current rate index.
Walk-Away LeaseThe most common type of car lease in which the lender/dealer assumes the risk of predicting the vehicle's value at the end of the lease's term. This is also known as a "closed-end" lease.Other Topics in This SectionFind Your
Local DMV Office