Auto Loan Glossary
Below you'll find some of the most common auto loan terms in the industry.
Please understand this glossary is meant to help you better understand certain auto loan terms, but it isn't an all-encompassing list. For more details specific to your car-buying experience, speak with your dealership, bank or credit union, or other financial lender.
An acceleration clause is an auto loan agreement term that requires the buyer to pay off the entire loan balance, including any interest, immediately. For example, getting behind on a certain number of monthly payments might trigger an acceleration clause.
Note that usually it's up to the lender whether to invoke the clause; not all acceleration clauses automatically trigger.
When it comes to leasing a vehicle, the acquisition fee is the fee you pay the leasing company when establishing the lease. Acquisition fees can be paid up front or over the duration of the loan.
Adjusted Capitalized Cost
Your adjusted capitalized cost refers to your monthly payment foundation and is based on factors such as rebates and other money that's been applied to lower the capitalized cost.
An adverse action is one that denies the potential buyer a line of credit; in terms of auto loans, the denial is usually based on that person's credit history.
Adverse Action Notice
An adverse action notice is the notice that explains to the potential buyer that he or she has been denied the loan (i.e., an adverse action) and the reason for the adverse action. Generally, these notices can be oral or written.
NOTE: If your loan was denied due to your credit history, the Fair Credit Reporting Act (FCRA) requires the lender to provide all information about the credit bureau used (i.e., name, address, and phone number). Learn more about the Fair Credit Reporting Act on our page about Credit Reports.
Paying off a car loan with a fixed monthly payment schedule over a specific period of time is called amortization. Amortization involves the amount of interest you pay toward the beginning of your auto loan (generally high) and the end of your auto loan (generally low).
Simply put, part of your payment goes to interest and part goes toward paying off the principal loan.
An amortization table, also called an amortization schedule, is a document that shows the details of your amortization loan as determined by an amortization calculator. Basically, the amortization table determines how much of your monthly payments go toward paying interest and how much go toward your actual auto loan principal.
Annual Percentage Rate (APR)
The annual percentage rate (APR) calculates the amount of interest you pay during an entire year, instead of just the monthly fee. The APR is calculated from the auto loan amount you finance.
Auto Loan Calculator
An auto loan calculator is one that helps you determine factors related to car loans, such as how much money you'll need to finance and your estimated monthly payments, based on other factors including the retail price, sales tax, annual interest rate, and more.
For more, visit DMV.org's auto loan calculator page.
Your balance due is the amount you owe after subtracting all expenses and adding any payments or cash advances.
Making a balloon payment refers to making the larger payment at the end of your auto loan term to finally pay off the car loan. Balloon payments help keep the rest of the regular monthly payments low. Generally, balloon payment systems don't involve amortization.
Also known as the “sticker price" or “manufacturer's suggested retail price" (MSRP), the base rate is the standard price of a vehicle before any additions. Generally, the base rate includes standard equipment, a factory warranty, and the destination charge.
When you use the buydown technique, it means you pay a specific amount of money for a vehicle up front in order to lower your interest rates during the first few years (or duration) of your auto loan. You're not actually saving money when you buydown; rather, you're paying more up front.
Capitalized Cost Reduction
A capitalized cost reduction occurs when an up front payment reduces the cost of financing. Such reductions can come in forms such as cash, trade-in vehicles, and rebates.
Most auto loans are closed-end credit, meaning the borrower must pay back the loan, interest, and finance charges by a specific date.
Additional costs to the vehicle's purchase price are called closing costs. Such costs can include title searches and appraisal fees.
When you have collateral, it means you have something of value that can be forfeited should you not pay back your loan. In terms of auto loans, your collateral would be your vehicle.
Sometimes referred to as a co-buyer, a co-signer is someone who, along with the loan applicant, signs off on the auto loan agreement in order to help the applicant obtain financing. If the main applicant fails to meet the loan terms and agreements, the co-signer must pay the debt and fulfill the agreement.
Your credit history is a record of your financial history, including information about your borrowing and repayment histories as well as any bankruptcies. Lenders use your credit history to help determine how big a risk it would be to lend money to you.
Your credit score is a three-digit number usually ranging from 300-850 that is based on your credit history. The higher your credit score, the better your chances of getting an auto loan with good interest rates. Generally, people obtain credit scores from one or all of “The Big 3" reputable credit agencies: Equifax, Experian, and TransUnion. The majority of auto lenders use a car buyer's FICO credit score to assess risk.
The creditor is the entity that finances your auto loan.
Simply put, the dealer invoice is how much the dealer paid for the vehicle. Knowing this price can help you negotiate a better auto loan than working from the manufacturer's suggested retail price (MSRP).
The debtor is the person who borrows money (i.e., the recipient of the auto loan).
Your debt-to-income ratio refers to the amount of money you owe as compared to the amount of money you bring in. Often, lenders use your debt-to-income ratio when determining whether to give you a loan.
When a debtor defaults, it means he or she has done something to violate the terms and conditions of the auto loan, such as failing to make monthly payments on time or at all. Often, this is referred to as “defaulting on a loan." Because auto loans are considered secure loans, your car can be repossessed for defaulting on the loan.
Deferred Down Payment
When you sign on for a deferred down payment, it means you'll make payments on the entire down payment when you purchase the car, rather than paying the full down payment up front. Although being given the opportunity to pay a bigger down payment over time might sound appealing, some experts advise not taking on a bigger down payment than you can immediately afford.
If the borrower or debtor is late paying auto loan fees, the loan is considered delinquent.
Direct financing takes place when there is a loan directly between a lender (creditor) and borrower (debtor) without the involvement of the dealership.
When you make a down payment, you pay a certain amount of money (usually a percentage of the purchase price) up front. When it comes to auto loans, generally the higher the down payment, the lower your monthly payments.
Your due date is the day by which you must make your car loan payment; failing to meet this deadline could throw your loan into delinquency.
The finance charge is the cost of the loan to the borrower (or debtor), including accrued interest and all financial transaction fees.
Fixed Rate Loan
A fixed rate loan, also known as a flat rate or a fixed interest rate loan, is one that doesn't fluctuate during the term of the loan. The interest rate stays the same. Almost all car loans are fixed rate loans.
If you have a grace period, it means you have a certain amount of time after your car payment is due to make the payment without incurring a penalty.
Guaranteed Auto Protection (GAP) Insurance
Also referred to as guaranteed asset protection insurance, guaranteed auto protection insurance (or GAP insurance) is a type of insurance coverage that takes care of the remaining auto loan balance for a vehicle that's been totaled after the insurance payout. GAP insurance is attractive because it makes sure the borrower isn't left to pay off a loan for a vehicle he or she no longer operates.
You can learn more by visiting our Gap Insurance page.
Sometimes, a dealer will offer an incentive, or reward, in the form of a cash-back rebate or a lower loan payment to buyers. The goal of these incentives is to get you to purchase a car through the dealership.
An indirect financing loan originates with the dealership and gets assigned to a financial institution (generally, one that isn't the buyer's personal bank or credit union).
An installment loan is one you pay off in a specified number of scheduled payments ranging anywhere from a few months to years.
Interest is the cost you incur when you borrow money. The amount of interest you pay is determined by your interest rate (see below).
Your interest rate is the percentage that determines how much money (or interest; see above) you're paying to borrow money from someone else—in this case, the institution lending you money to buy a car.
A late fee is a penalty assessed by the lender if you, the debtor, fail to submit your auto loan payment by the deadline.
A lien is when the financial institution owns your vehicle until you pay off your auto loan in full.
The lienholder is the financial institution that loaned you the money to purchase your vehicle; your lienholder owns your vehicle until you pay off the car loan in full.
A loan (in this case, a car loan or auto loan) is a certain amount of money you borrow from some financial institution in order to purchase your car. You must pay back your car loan with interest (see above).
The loan balance is the amount of money left to pay on the loan; it takes into account all the payments made to date.
You might be able to get low-interest financing as an incentive from a vehicle manufacturer. Generally, low-interest financing is substantially less than standard car loan interest rates -- sometimes as low as 0%.
Your monthly payment is the money you give to your auto loan lender each month. Typically, this payment is a set amount and must be received by a specific date each month. The monthly payment covers portions of both the auto loan principal and the interest.
If your vehicle has negative equity, it means you owe more on it than what it's worth. At this point, you must pay extra special attention to dealership promises about paying off your current auto loan, as some or all of the conditions might not apply to you because of your vehicle's negative equity.
A non-prime lender (also known as a subprime lender, near-prime lender, and second-chance lender) is one that lends money to borrowers with less-than-stellar credit scores. For buyers with bad credit, car loans can be tough to get, and non-prime lending might sound attractive; however, be aware that non-prime lending often comes with higher interest rates and other less favorable auto loan terms and conditions.
During owner financing, the owner of the vehicle -- whether a private seller or a dealership -- agrees to personally finance the vehicle for the buyer. Unlike with traditional auto loan payments, owner financing means the buyer makes payments to the seller, rather than to a bank, credit union, or some other financial institution.
An auto loan's principal is the amount of the loan you still owe, minus interest charges and other fees.
When a lender says he needs to pull credit, it means he is checking your credit to determine whether you're eligible for a car loan.
Whether you qualify simply means whether you're eligible for an auto loan.
A rebate is a selling tool manufacturers use to attract car buyers. If a vehicle comes with a rebate, it means you get a partial refund on a new or used car purchase.
Refinancing means you decide to finance your car loan again, but with a different lender. Basically, the auto refinance loan is used to pay off the balance on your existing car loan. Some perks to refinancing include lower interest rates and more manageable monthly payments.
Your remaining term is how much time you have left to pay off your existing car loan.
A secured loan is one that is backed by collateral, such as a vehicle. Typically, auto loans are secured loans because the vehicle acts as collateral—meaning if you break the terms and conditions of your car loan, the lender or creditor can repossess the vehicle.
Simple interest is a method for calculating interest by applying a periodic rate to a loan's outstanding balance on a daily basis. This method involves the interest (I), principal (P), interest rate (R), and time (T) and looks like: I = P x R x T.
A stipulation is a factor that's required or specified as part of an agreement.
The term is the length of the auto loan, and is often referred to in months. For example, a two-year term is 24 months, a four-year term is 48 months, etc. and so forth.
Depending on the dealership and your vehicle's condition, when you trade in your current vehicle, you could get compensation to put toward your next vehicle purchase. A trade-in value will be evaluated for your current vehicle, and you can use that value as a part of or an entire down payment on the next vehicle.
Unlike secured loans, which require collateral, an unsecured loan requires no collateral and is based entirely on the creditworthiness of the borrower; thus, unsecured loans often are considered riskier.
You're considered upside down (or sometimes “underwater) if you owe more on your vehicle loan than your vehicle is worth.
Usury laws set forth regulations that govern how much interest can be charged on a loan.
Variable Interest Rate
A variable interest rate is one that changes over time based on the current rate index.
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