Auto loan- (key terms)

What is an Actual Cash Value (ACV)?

An Actual Cash Value (ACV) is the value of the car according to widely recognized independent sources such as the National Automobile Dealers Association or Kelley Blue Book .

This value is important for insurance and loan-to-value computations.

What is amortization and how could it affect my auto loan?

Amortization describes the process of gradually paying off your auto loan. In an amortizing loan, for each of your monthly payments, a portion is applied towards the amount of the loan – the principal – and a portion of the payment is applied towards paying the finance charge – the interest.

A greater percentage of your monthly payment is applied to interest early in the life of the loan, and a greater percentage is applied to the principal at the end. Thus, the principal balance decreases slowly at first and more quickly closer to the end of the loan term.

Annual Percentage Rate (APR)The Annual Percentage Rate (APR) is the cost you pay each year to borrow money, including fees, expressed as a percentage. The APR is a broader measure of the cost to you of borrowing money since it reflects not only the interest rate but also the fees that you have to pay to get the loan. The higher the APR, the more you’ll pay over the life of the loan.

An auto loan’s APR and interest rate are two of the most important measures of the price you pay for borrowing money. The federal Truth in Lending Act (TILA) requires lenders to give you specific disclosures about important terms, including the APR, before you are legally obligated on the loan. Since all lenders must provide the APR, you can use the APR to compare auto loans. Just make sure that you are comparing APRs to APRs and not to interest rates.

What does the base price of a vehicle mean?

The base price is the price of the vehicle without options.

The manufacturer’s base price excludes charges for optional equipment (like a sunroof) and excludes mandatory charges for taxes, title, and registration. The base price also excludes the cost of optional add-ons such as credit insurance, service contracts, window etching, and rustproofing.

What is a buy rate for an auto loan?

A buy rate is the interest rate that a potential lender quotes to your dealer when you apply for dealer-arranged financing.

Your dealer may offer you an interest rate that is higher than the buy rate. The rate the dealer offers you is called the “contract rate.” Sometimes the lender pays the dealer a fee for arranging the financing that is based on the difference between these two rates. Dealers may have discretion to charge you more than the buy rate, so you may be able to negotiate that interest rate.

Ask the dealer if you qualify for a loan with better terms. In general, dealers and lenders are not required to offer the best rates available. You can save money over the life of the loan by getting quotes from multiple lenders, comparing offers, and negotiating for the best interest rate available to you. This could save you hundreds or thousands of dollars over the life of the loan.

TIP:The dealer may offer you a higher interest rate than you can get directly from a bank, credit union, or other lender. Shop around to find out who offers the best interest rate and use that information to negotiate the best rate for you.

Co-signer

A co-signer is a person—such as a parent, close family member, or friend—who pledges to pay back the loan if you do not. This can be a benefit both to you and your lender. A co-signer takes full responsibility to pay back the loan. Having a co-signer on your loan gives your lender additional assurance that the loan will be repaid. If you do not repay your loan, your co-signer will be liable for repayment even if the co-signer never drove your vehicle. If you’ve been asked to co-sign a loan, you should consider how it will impact your finances.

Credit insurance

Credit insurance is optional insurance that may make your auto payments to your lender in certain situations, such as if you die or become disabled. If you are considering credit insurance, make sure you understand the terms of the policy being offered. If you decide you need insurance, there may be cheaper ways for you to obtain coverage than to buy credit insurance and add it to your auto loan. For example, life insurance may be less expensive than credit life insurance and allow your family to pay off other expenses in addition to your auto loan.

What are debt cancellation or debt suspension products offered with an auto loan?

Some auto dealers as well as banks and credit unions offer “debt cancellation” and “debt suspension” products or insurance under various names. These products are similar to credit insurance in terms of their function, but fees and other features may be different.

In general, debt cancellation promises to eliminate the debt if you die or cancels the monthly payment if you become disabled, unemployed, or suffer some other specified hardship. You have to meet the qualifications and avoid the exclusions.

Debt suspension is different. It temporarily postpones all or part of your monthly payment while you are facing a specified hardship. You are still expected to make the suspended payments in the future.

TIP:

If you decide you need these products or insurance, there may be cheaper ways for you to obtain coverage. For example, life insurance may be less expensive and allow your family or estate to pay off more than just the amount of your auto loan. If you have a complaint or a concern about this product, you can contact your state insurance department or commissioner .

Deficiency balance

If your vehicle is repossessed and sold, you may be responsible for paying the difference between the amount left on your loan (plus repossession fees) and the sale price. This is known as a “deficiency balance.

Down payment

A down payment is an initial, upfront payment you make toward the total cost of the vehicle. Your down payment could be cash, the value of a trade-in, or both. The more you put down, the less you need to borrow. A larger down payment may also reduce your monthly payment and your total cost of financing.

What is an extended warranty or vehicle service contract?

An extended warranty or vehicle service contract covers the costs of some types of repairs in addition to or after the manufacturer’s warranty ends.

Extended warranties and vehicle service contracts typically exclude routine maintenance such as oil changes and tire replacement. Consider the cost of the warranty, and what is covered and excluded, as well as how you plan to use the vehicle before purchasing an extended warranty or vehicle service contract. You may find that the additional warranty coverage is not worth the additional cost.

What is a Finance and Insurance (F&I) department?

If you purchase a vehicle at a dealership, the salesperson may refer you to someone in the F&I or business office. This is the part of the dealership that markets loans and optional add-ons to customers after they have agreed to buy a vehicle at the dealership.

At the F&I department, you may be asked if you want to buy optional add-ons like an extended warranty, auto service contract, credit insurance, or guaranteed asset protection (GAP) insurance. Before deciding to buy any of these products, think about your needs and the costs. If you finance optional add-ons as part of your loan, this will increase your loan amount. You will pay more interest on the loan since you will be borrowing more money over the life of the loan. Remember, the dealer is not the only seller of most of these products. Shop around to find the best price if you decide you want one of these add-ons.

You don’t have to finance your auto loan through the dealership, and you should find out if you can obtain better interest rates through a bank, credit union, or other lender, that you contact separately from the dealer.

Fixed-rate financing

Fixed-rate financing means the interest rate on your loan does not change over the life of your loan. With a fixed rate, you can see your payment for each month and the total you will pay over the life of a loan. You might prefer fixed-rate financing if you are looking for a loan payment that won’t change. Fixed-rate financing is one type of financing. Another type is variable-rate financing.

What is force-placed insurance?

In order to get a loan to buy a vehicle, you must have insurance to cover the vehicle itself. If you fail to obtain insurance or you let your insurance lapse, the contract usually gives the lender the right to get insurance to cover the vehicle. This insurance is called “force-placed insurance.”

This insurance protects only the lender, not you, but the lender will charge you for the insurance. Force-placed insurance is usually a lot more expensive than what you can obtain by finding an insurance policy yourself.

If you have a complaint or a concern about this product, you can also contact your state insurance department or commissioner .

Guaranteed Auto Protection (GAP) insurance

GAP insurance covers the difference (or gap) between the amount you owe on your auto loan and what your insurance pays if your vehicle is stolen, damaged, or totaled. You don’t have to buy this insurance, but if you decide you want it, shop around. Lenders may set varying prices for this product.

Interest rate

An auto loan’s interest rate is the cost you pay each year to borrow money expressed as a percentage. The interest rate does not include fees charged for the loan.

Loan term or duration

This is the length of your auto loan, generally expressed in months. A shorter loan term (in which you make monthly payments for fewer months) will reduce your total loan cost. A longer loan can reduce your monthly payment, but you pay more interest over the life of the loan. A longer loan also puts you at risk for negative equity, which is when you owe more on the vehicle than the vehicle is worth.

What is a loan-to-value ratio in an auto loan?

A loan-to-value ratio (LTV) is the total dollar value of your loan divided by the actual cash value (ACV) of your vehicle. It is usually expressed as a percentage. Your down payment reduces the loan to value ratio of your loan.

Your loan terms may be affected by the loan-to-value ratio, because the vehicle is the collateral for the loan, which means that if you default on your loan, the lender can take the vehicle. The lender may seek a down payment to reduce the size of the loan and make it less likely that the amount you owe on the loan will be more than the vehicle is worth.

Your vehicle’s actual value is often lower than what you paid, especially immediately after you purchase a new vehicle. The value of a new vehicle typically goes down sharply when you drive off the lot, and then declines more slowly as you continue to use it.

TIP

Increasing the amount of your down payment may decrease the interest rate on your loan.

What is mandatory binding arbitration?

By signing a contract with a mandatory binding arbitration provision, you agree to resolve any disputes about the contract before an arbitrator who decides the dispute instead of a court. You also may agree to waive other rights, such as your ability to appeal a decision or to join a class action lawsuit.

Many auto finance contracts contain mandatory binding arbitration clauses. Some dealers may also ask you to sign separate binding arbitration agreement.

What are manufacturer incentives?

Manufacturer incentives are special deals, like 0% financing or cash rebates that you may have seen advertised for new vehicles. Often, they are offered only for certain models.

Manufacturers offer these deals many times when they are having campaigns to sell certain models, or because they have a large inventory that they want to sell more quickly.

If you are interested in these types of offers, read the fine print to see if you qualify. Sometimes promotional interest rates are limited to people with high credit scores or to loans of a shorter duration.

What is a Manufacturer Suggested Retail Price (MSRP)?

The Manufacturer Suggested Retail Price (MSRP) is the price that the automaker – the manufacturer – suggests that the dealer ask for the vehicle.

It does not have to be the actual price that you pay. Many consumers negotiate to purchase the vehicle for a price below the MSRP.

Tip: When you’re shopping for a vehicle, you should ask for quotes that include the vehicle and all of the options that you want to purchase. You should shop around for the best deal on the price, the interest rate on your loan, and any trade-in. Shopping at multiple dealers can help you get a better price. Shopping around with multiple lenders before you purchase can help you get the best interest rate available to you on your auto loan.

Negative equity

If you owe more on your current auto loan than the vehicle is worth—referred to as being “upside down”—then you have negative equity. In other words, if you tried to sell your vehicle, you wouldn’t be able to get what you already owe on it. For example, say you owe $10,000 on your auto loan and your vehicle is now worth $8,000. That means you have negative equity of $2,000. That negative equity will need to be paid off if you want to trade in your vehicle and take out an auto loan to purchase a new vehicle.

What is a “no credit check” or “buy here, pay here” auto loan?

A “no credit check” or “buy here, pay here”auto loan is offered by dealerships that typically finance auto loans “in-house” to borrowers with no credit or poor credit.

You may see signs like “no credit – no problem” or “military E-1 and up.” The interest rate on loans from these dealerships can be much higher than loans from a bank, credit union, or other lender.

Normally, a bank, credit union, or other lender will limit the amount it will lend for the purchase of a vehicle based on the vehicle’s value. Those lenders will not loan more than the value because the vehicle in question simply isn’t worth it. But when a dealer acts as its own “bank,” it may not set such limits. So you may end up paying thousands of dollars more than the actual value. In other words, with “buy here, pay here,” there is a bigger risk that you will borrow to pay more than the vehicle is worth.

Don’t be fooled into thinking that you have no choice. Even if you have poor or no credit, there may be other lenders that are willing to finance your vehicle purchase. Knowing your options for financing before you start negotiating to buy a vehicle can help you get the best overall deal.

Principal

Principal is the money that you originally agreed to pay back.

Generally, any payment made on an auto loan will be applied first to any fees that are due (for example, late fees). Next, remaining money from your payment will be applied to any interest due, including past due interest, if applicable. Then the rest of your payment will be applied to the principal balance of your loan.

What is risk-based pricing?

Risk-based pricing occurs when lenders offer different consumers different interest rates or other loan terms, based on the estimated risk that the consumers will fail to pay back their loans.

This means, for example, that lenders will generally offer a higher interest rate to you if they view you as a higher risk borrower – say, because you recently declared bankruptcy, lost a job, or are several payments behind on a mortgage. For the same exact loan, lenders will generally offer a lower interest rate if they view you as a lower risk – say, because you have a good credit score and are employed.

Each lender uses its own process to determine the risk that you will default on a loan, but most use your credit score, employment status, income, and other outstanding debts, among other factors.

If a lender relied on a credit report in making a lending decision about you, you should get a Risk-Based Pricing notice if you receive less favorable terms than other borrowers based in any part on your credit report. This notice includes information about how to get your free annual credit report, your credit score, the score range, and the negative factors affecting the score.

Lenders may NOT use certain legally prohibited factors to decide whether to give you a loan or how much to charge you, such as your race, gender or age.

Total cost

This is how much you will pay to buy your vehicle, including the principal, interest, and any down payment or trade-in, over the life of the loan.

Truth in Lending disclosure

The federal Truth in Lending Act—or “TILA” for short—requires that borrowers receive written disclosures about important terms of credit before they are legally bound to pay the loan. Learn more about the information included in your TILA disclosure and when you should receive and review it.

Variable-rate financing

Variable-rate financing is where the interest rate on your loan can change, based on the prime rate or another rate called an “index.” With a variable-rate loan, the interest rate on the loan changes as the index rate changes, meaning that it could go up or down. Because your interest rate can go up, your monthly payment can also go up. The longer the term of the loan, the more risky a variable rate loan can be for a borrower, because there is more time for rates to increase. Variable-rate financing is one type of financing. Another type is fixed-rate financing.

What is Vendor’s Single Interest (VSI) insurance?

VSI insurance protects the lender, but not you, in the event that the vehicle is damaged or destroyed.

The cost of the insurance may be passed on to you in the overall cost of your loan or may appear as a separately itemized charge.

Auto Financing Basics