Auto Loan Glossary
Below you’ll find definitions on all things related to auto loans. And there are a lot of them! To help you find what you need, use the following alphabet to jump to the correct section.
Notice that some are red? That’s a good thing; it means there are no terms in that section that you need to know.
Acceleration Clause — This is a contract that requires the borrower to pay off the loan, with interest, in full on an expedited timeline. This clause, however, can only be activated under certain conditions (normally when the borrower has missed too many payments on the loan), and then only if elected by the lender.
Acquisition Fee — What leasing companies charge to customers who lease a car rather than buy; often bundled into monthly payments rather than charged as a single fee upfront.
Adverse Action — Refusal of an auto lender or dealership to extend credit, in part or in whole, to a borrower. Dealerships and auto lenders are required to give notice of an adverse action (see below) when they do not submit a credit request to a bank or other finance company, if an applicant is denied financing by creditors, or even when the borrower declines to use available credit.
Adverse Action Notice — A statement that informs the borrower/applicant that their application for credit or insurance has been denied. The notice usually allows the person to see the credit score used in the decision, which credit reporting agency provided the score, and how they can be contacted.
Amortization — The process of paying off debt with a fixed repayment plan schedule over a period of time.
Annual Percentage Rate (APR) — The interest that will be applied to an auto loan, expressed as a percentage and typically applied to the outstanding balance (including unpaid interest and principal) monthly.
Automated Clearing House (ACH) — An electronic network that’s used for financial transactions by different agencies. In other words, this network allows agencies to collect money electronically while also reducing the amount of financial errors made during the transaction process. This online system deals with direct deposits, funds-transfers, and tax payments.
Auto Equity Loan — Also called a Title Loan; A type of short-term, secured loan in which the borrower uses a vehicle as collateral. If the borrower doesn’t make a payment on time or otherwise defaults, the lender can repossess the car.
Bad Credit — Generally, if a person’s credit score is low (500 to 579), the individual’s credit is considered “bad” or “poor.” This increases their chances of being denied an auto loan.
Balance Due — The amount of money owed to a lender and/or dealership for a vehicle on a repayment schedule.
Balloon Payment — A large, lump sum payment made as the final installment of a loan. Typically used to reduce monthly installments over the life of a loan, as well as to reduce interest on the loan, which is only applied to a select portion of the principal (the remainder is included in the final payment).
Bill of Sale — Used as a way to certify the transfer of ownership of personal property (like a car) at the conclusion of a sale. Different from Title (see below).
Black Book — Also called the Kelley Black Book; a reference guide cataloging car resale values for use by dealerships and those planning to sell, rather than operate, a vehicle; prices generally reflect an average of prices for a given make and model at auctions across the country, and vary according to condition; similar to Blue Book (see below).
Blue Book — Also called the Kelley Blue Book; an industry standard car price reference guide aimed explicitly at consumers, rather than dealers and retailers; usually based on local sales and pricing data (determined by zip code), rather than national averages.
Base Rate — The lowest APR or interest rate available for auto financing; the interest available to the most qualified buyer with the optimum credit score and down payment.
Buydown — Prepaid interest. A financing technique used by the buyer to lower their interest rate, by paying a certain amount up front that does not change the principal amount of the loan, or the loan’s duration.
Certificate of Title — A state issued document used to legally identify the owner (or owners) of a particular vehicle. Also called Vehicle Title, Car Title, or Pink Slip; generally issued by the state DMV, and required to be updated reflecting the sale or purchase of a car.
Co-Signer — A person who signs a formal document that states if the vehicle owner fails to make payments on their car, the co-signer is by default financially responsible.
Credit — Financing; either a score or a set amount approved by a lender for a loan.
Creditor — The lender providing financing, and the body to whom payments on a loan are due.
Credit Bureau — An agency that collects statements, records, and other documents related to individuals’ loans, debts, and payment histories, in order to provide a credit score quantifying a person’s financial history and likelihood of repaying future debt
Credit History — A detailed report that analyzes how a borrower repays their debts.
Credit Scoring System — This is a statistical number that determines an individual’s creditworthiness. Dealerships use this number to evaluate the likelihood of the borrower paying off their debt. (Also see Creditworthiness, below.)
Creditworthiness — The likelihood of an individual repaying debts, and the basis for limiting or increasing the amount a person is approved to borrow; generally expressed as a three-digit score provided by a credit bureau.
Dealer Invoice — The price paid by a dealer, usually to a manufacturer, for a vehicle (also see Sticker price).
Debt-to-Income Ratio — A measure of a consumer’s ability to manage monthly payments on their vehicle, based on the relationship between outstanding debts and monthly income; used along with credit scores to approve and/or set auto loan and interest amounts
Debtor — Borrower; a person that owes money and/or services to another party.
Deferred Down Payment — A procedure used when a consumer interested in buying a car doesn’t have enough to pay the entire down payment, and instead pays installments on top of the loan principal and interest; Allows buyers to expedite the purchase, but often results in the consumer paying more in total than if a traditional down payment was made.
Depreciation — A reduction in a car’s value, due to the passage of time, wear and tear, neglect, or transferring in ownership. Calculated based on the original purchase price. Unlike most other assets, cars do not generally appreciate under normal circumstances, but can rapidly depreciate (a new car immediately loses value upon purchase, for example, as it is no longer considered “new” once ownership has transferred, regardless of actual condition or use).
Direct Financing — This is a process in which the borrower takes a loan from a financial institution or other lender without any intermediary, or without first going to a dealership for assistance. This gives the borrower more control over the choice of lender as well as the terms of the loan, but can add time to the purchasing process. (Also see Indirect Financing)
Down Payment — The use of the borrower’s own money toward the total cost of a vehicle at the time of purchase, provided in order to reduce the principal loan amount needed to finance the total purchase.
Escrow — Money or documents held by a third party in order to add security to the sale of a car (for both buyer and seller). Often used in online auto sales to protect the buyer and seller from fraud or misrepresentation of any element of the transaction.
Finance Charge — Fees that not only represent the total cost of obtaining credit/loans, but using it as well (like interest).
Fixed Rate Loan — Interest that remains constant over the life of the loan, unless the loan is refinanced or the terms of the deal are altered.
Grace Period — Time a borrower is given before their payments are considered past-due, or before overdue payments incur fees or interest. During this time a borrower’s credit scores aren’t affected.
Hard Pull — Usually involves lenders taking the first step in evaluating a customer’s loan application. The lender checks the customer’s credit history, and/or credit report. A hard inquire in most cases, can have a negative impact on an individual’s credit report.
Indirect Financing — This is a process in which borrowers receive help from the dealership or another third party in order to secure an auto loan; often used by dealerships to expedite the purchase process by working with their preferred lenders, but may come at the expense of better interest rates or other advantageous loan conditions for the borrower/consumer. (Also see Direct Financing)
Installment Loan — A repayment plan designed to allow the borrower repay a loan over a predefined span of time. The repayment plan is usually set up with a specific number of payments needed to repay the loan in either a few months or years.
Interest — The charges added on by a lender after an individual has borrowed money from them. The charges are typically shown as an annual percentage rate, based on the outstanding amount of the loan. (Also see Annual Percentage Rate)
Late Fee — These are additional charges customers pay for failing to pay the required loan installments on time.
Lease — An alternative to auto ownership, in which a consumer borrows a vehicle for a specified period of time, on the condition of regular monthly payments being made to the dealership, and the car being returned at the end of the lease. Unlike a traditional loan, leasing does not allow the consumer to build equity or gain ownership of the vehicle, but it does often entail lower monthly payments than a loan. Lease payments are designed to cover depreciation during the term of the lease, along with interest and other fees.
Lien — A legal document that grants lenders the rights to use a borrower’s car as collateral if they fail to meet their obligations. The lien is terminated when the final loan payment is received.
Loan Principal — Simply the total amount of money being borrowed by an individual, not including interest or other fees.
Maintenance — Costs associated with both leasing and/or owning a car; includes cleaning, repairs, oil changes, and other routine functions necessary to keep a vehicle running and compliant with traffic laws. Maintenance can help mitigate depreciation, and is a common requirement of lease agreements.
Non-Prime Lender — A financial entity that specializes in serving consumers with poor credit, or who are unable to secure loans from traditional lenders. Non-prime credit scores are typically higher than sub-prime scores, which are the lowest and therefore represent the highest-risk borrowers.
Owner Financing — Also called seller financing. The process of the seller of a car also acting as a lender, rather than working with the buyer to secure a loan from a traditional lender like a bank. This usually occurs when the buyer doesn’t have sufficient credit or funds to go through a conventional lender, doesn’t want to pay the interest rates offered by traditional lenders, or simply to expedite the transaction process.
Qualify — To meet the minimum requirements set by the bank, dealer and/or lender. Qualifying for a loan requires a strong credit rating.
Remaining Balance — This is simply the outstanding money owed after a payment has been made to a lender.
Sticker Price — The vehicle cost being advertised to consumers, or used as a starting point for negotiation of the final sale price; the retail price of a car, generally not including any additional fees.
Title Fee — The cost associated with having a transfer of title conducted as part of a car sale or purchase; generally, this is handled by a dealership, and the fee is included in the final sale price.
Title Loan — see Auto Equity Loan.
Trade-in — A method that involves a buyer purchasing a car and using another vehicle he/she owns as a part of the payment. The buyer and seller must agree on the value of the trade-in vehicle, which will then be deducted from the final purchase price of the car being sold.
Trade-in Value — The amount of money being offered to the buyer by the dealer for their old car. This is generally not the same as the retail value, but can reduce the need for a down payment or even a loan to finance the purchase.
Unsecured Loan — Financing without the use of other property as collateral; generally only available to borrowers with greater credit scores
Usury Law — Laws that are designed to govern the amount of interest a lender charges to their customers. The law specifically targets lenders that charge high rates on loans.
Variable Interest Rate — Use of market benchmarks to periodically adjust the interest rate applied to a loan; such a loan can be refinanced in order to secure a fixed interest rate and add predictability to payments and the lifetime cost of the loan.
VIN — (Vehicle Identification Number) This is the vehicle’s unique serial number (DNA) that allows it to be tracked in case the car is stolen, and/or damaged in an accident. Each car has a specific vin number that’s composed of 17 characters.