Auto Finance Terms
Car Financing Terminology
Here's a list of auto finance terms you should know:
Add-on interest -- Interest that is computed at the beginning
of the loan, then added to the principal, so that all must be
repaid, even if the loan is paid off early.
Base price -- The cost of a car without options. This price
includes standard equipment and the manufacturer's warranty and is
printed on the Monroney sticker.
Blue Book -- Formally, it refers to the Kelley Blue Book, an
industry guide dealers use to estimate wholesale and retail vehicle
pricing. In common parlance, "the blue book price" can actually
refer to a price looked up in one of the many guides to pricing. The
books now come in a variety of hues, are issued by many
organizations, and are commonly available online or in the reference
sections of public libraries.
Dealer holdback -- An allowance, usually between 2 percent
and 3 percent of manufacturer's suggested retail price, that
manufacturers provide to dealers. A holdback allowance may allow the
dealer to pay the manufacturer less than the invoice price. A buyer
could obtain a car below invoice price and the dealer would still
make a profit.
Dealer incentives -- Programs offered by manufacturers to
increase the sales of slow-selling models or to reduce excess
inventories. Dealers may elect to pass on the savings to the buyer.
Dealer preparation, or dealer prep or preparation charges -- An
additional charge that dealers try to impose on buyers. It
represents pure profit for the dealers, who have already been paid
by the manufacturer for the cost of preparing the car for sale.
Destination charge -- The fee charged for transporting the
vehicle to the dealer from the manufacturer or port of entry. This
charge is to be passed on to the buyer without any markup.
Extended warranty or Service contract -- A contract that
covers certain car repairs or problems after the manufacturer's or
dealer's warranty expires. Extended warranties are sold by car
manufacturers, dealers and independent companies. With a new car,
the extended warranty usually must be purchased by the end of the
first year of ownership.
Invoice price -- The manufacturer's initial charge to the
dealer. The price may not be the dealer's final cost because dealers
receive rebates and other incentives from the manufacturer. The
invoice price always includes freight, also known as the destination
charge.
Dealer sticker price -- The sticker on the car window that
shows the base price, the manufacturer's installed options with the
manufacturer's suggested retail price, the manufacturer's
destination charge, and the car's fuel economy (mileage). This label
is required by federal law and it is only removed when the car is
sold by the purchaser.
Prepayment penalty -- A lender's charge to the borrower for
paying off the loan before the end of the term.
Rebate -- A manufacturer's reduction on the price of the car
as an incentive to buyers. Rebates appeal to people with no credit
or less-than-perfect credit who cannot qualify for the lowest-rate
loan. A rebate may also appeal to first-time buyers who don't have a
lot of cash for a down payment or another car to trade in.
Rule of 78s -- A mathematical formula that was devised in the
days before modern calculators. The formula was a quick way for
lenders in the 1920s and 1930s to estimate payoff amounts when a
customer paid ahead on an installment loan. Some auto lenders still
use the "Rule of 78s" formula to calculate a rebate of finance
charges when a customer pays off a pre-computed loan early.
For a borrower looking to end an auto loan early, there isn't a
worse way a lender could calculate your payoff amount. The Rule of
78s formula packs extra interest charges into the early months of a
loan. Using Rule of 78s, a lender typically collects three-quarters
of a loan's interest in the first half of a loan term. The Rule of
78s can only be applied to pre-computed loans that are paid ahead of
schedule. The formula cannot be applied to simple interest loans.
Title -- A legal document containing specific information
about the vehicle and stating who owns it. If you borrow money to
get a car, the title will be held by the lender until the vehicle is
paid off.
Trade-in value -- The amount that the dealership will credit
you for the vehicle you provide as partial or full payment for
another vehicle. Amount credited is frequently about 5 percent below
the wholesale value of the vehicle.
And don't forget the most important auto finance point. Avoid dealer financing
tricks by getting your auto loan pre-approved at E-Loan.
You'll not only get the best rate, you won't have to negotiate your
car loan when you're trying to buy a car.
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