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10 Common Auto Financing Terms
09/07/2017

10 Common Auto Financing Terms

Defining the essential vehicle finance jargon you should know

10 Common Auto Financing Terms.

Purchasing a vehicle from a dealership—be it a brand new or moderately used model—is rarely as simple as you would hope. What should be a basic transaction can quickly become a complicated discussion rife with uncommon phrases you wouldn’t hear elsewhere.

In preparation for the next time you intend to shake hands and sign on the dotted line to purchase a car, familiarize yourself with the following information.
 

Understanding pricing

Even before you step foot on a car lot and introduce yourself to a sales representative, it is crucial that you understand how each vehicle is given a price. If you’re researching vehicle prices, you will likely come across these terms.

The manufacturer’s suggested retail price of a vehicle (MSRP), also known as list price, is the manufacturer’s recommended price at which to sell a brand new vehicle. It’s not required that a dealer adhere to this amount, but according to the experts at Bankrate.com, it is required by law to be posted on the vehicle window’s Monroney sticker, along with the destination (freight/shipping) charge.

This differs from the invoice price, which is the amount the manufacturer initially charges the dealership to obtain and, in turn, sell the car to a buyer. The invoice price can be lowered by rebates, incentives, holdbacks and other ways to ensure the dealer makes a profit.

According to the DMV.org’s guide to understanding car financing, incentives and rebates can also be offered to retail customers looking to purchase the vehicle. The dealer may launch a short-term program to offer financial enticement to buyers in order to sell certain models. Manufacturers can also temporarily reduce the price of a model in a rebate program to make the cost accessible to more buyers.


Understanding financing

Once you negotiate and agree upon a fair price for the vehicle, the process moves to financing the purchase. Since most people don’t pay the entire bill up front, the transaction will be financed, distributing the cost across multiple years to be paid back with interest in monthly installments.

The Federal Trade Commission’s Consumer Information guide explains that the annual percentage rate (APR) measures how much the loan will cost the buyer and expresses it as a negotiable percentage. The APR includes not only the basic interest rate but also other fees involved with making a loan. The APR can be affected by many factors, from your credit history to local competition among dealerships. If you have poor credit history—based on an inconsistency of bill payment and financial dependability—you may be deemed a non-prime lender and receive a higher rate.

Interest rates can either be fixed—remaining the same throughout the entire repayment term—or are variable and fluctuate based on the current index.

Once you pay the initial down payment on the vehicle, the remaining balance will be financed and will consist of the principal—the amount of the vehicle cost still owed—the interest charges and any other fees.


Understanding your future

Ideally, you will continue to make monthly payments until you repay your auto loan on time. If you happen to pay it off early, Bankrate.com experts warn that you might be charged a prepayment penalty by the dealer, so inquire beforehand.

If, down the road, you believe you could get a better deal on the loan than you currently have, you can refinance the loan, either with the current lender at a new rate or with a different lender. Refinancing allows your loan to be reevaluated and potentially adjusted to a better rate.

According to DMV.org, there are two things you don’t want to have happen to your new car: be upside-down or have it repossessed. If you are upside down or underwater on a loan, the vehicle has negative equity and you owe more on it than it is worth. If you fail to make your payments on the vehicle, your lender might repossess your car—taking the vehicle from you without warning or court involvement.

Hopefully by understanding how the auto financing process works and what these common phrases mean, you can avoid any penalties or pitfalls and purchase your next car without issue.
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Published by North Shore Bank. Includes copyrighted material of IMakeNews, Inc. and its suppliers.

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