Auto Finance Glossary
If you have ever felt intimidated by the wide world of auto financing, this quick glossary can give you a basic lesson in what every potential car buyer needs to know before purchasing a new vehicle or applying for a loan. To ensure that you make the best possible financial decision when shopping for your next vehicle, you should know precisely what your finance options are and what common auto finance terms mean. Here are a few terms we think you should know. Feel free to contact us at Mercedes-Benz of Centerville if you have any questions you want to ask our finance team.
Annual Percentage Rate (APR):
The APR of an auto loan refers to its interest rate but expressed as the percentage added to the loan annually rather than on a month-by-month basis. This additional percentage added to the cost is how lenders make money off their investments.
A separate fee added to the price of the vehicle that covers the cost of transporting the vehicle from the factory to the dealership.
A lump sum of money paid upfront towards the full cost of a vehicle that decreases the amount owed through monthly payments.
The process of leasing involves a contract between lessee (the person leasing a vehicle) and a lessor (typically the dealership leasing the vehicle to the lessee) that allows the lessee to keep and drive a vehicle for an agreed-upon period of time, typically around three years. Over this course of time, a down payment and subsequent monthly payments will cover the cost of depreciation rather than the full price of the vehicle.
Manufacturer’s Suggested Retail Price (MSRP):
Also sometimes called the “sticker price,” this is the price suggested for a new vehicle by the original manufacturer. However, dealerships may ask for more, and customers will often negotiate for a lower price, so this is often used as a guideline rather than a hard-and-fast rule.
The price a dealer is willing to pay for a vehicle when selling you a new one. Often, this will be below current market value for your vehicle, but the cost covers the convenience of exchanging your old vehicle at the same time as a brand-new vehicle.
Amortization simply means how you pay off your auto loan on a fixed monthly payment schedule over a defined loan period. Amortization concerns how much of your monthly payment pays towards the principal amount of your loan (what you borrowed) and the amount you pay towards interest (percentage fee of borrowing money, determined by your interest rate). Typically, at the beginning of your auto loan, more money goes towards interest, and near the end of your loan, more money goes towards your principal.
A credit bureau is an institution that keeps a record of your current credit activity and credit history. Credit bureaus score you numerically and give you a credit score.
Credit history refers to your financial history and includes information like your history of receiving loans and paying back debts, the current value of your debt, and how many lines of credit you have open. Lenders use this to determine if you reliably pay back your debts and how risky it is to lend to you.
Fixed Interest Rate & Variable Interest Rate
An interest rate is the percentage fee you pay for taking out a loan. Interest rates can be fixed or variable: a fixed interest rate stays the same for the duration of the loan, whereas a variable interest rate changes over time based on the current rate index.
Guaranteed Auto Protection (GAP) Insurance
If you total your car, GAP insurance is what covers the remaining balance on your auto loan so that you don’t have to continue paying off a loan for a vehicle that you no longer have. If this sounds appealing to you, you should look into GAP insurance.
If you have any questions about automotive financing, contact the team at Mercedes-Benz of Centerville in Centerville, OH.