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Auto Loan Terms to Understand (In Plain English)

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Getting a car loan for the first time? Then you must learn the various terms used in every auto loan transaction. Many car buyers are just at a loss whenever they encounter certain words used by the lender or in the contract. To help you, we defined some commonly used terms below.

 

APR – or annual percentage rate. It is the total cost of the loan expressed as an annual rate. It is not the same as the interest rate charged monthly.

 

Cosigner – is someone who is willing to share in the responsibility of making payments for the loan.

 

Credit Bureau – an agency that keeps records of your credit accounts and from where you can request a copy of your credit report. The most trusted credit bureaus in the country are Experian, Equifax and TransUnion.

 

Credit History – a record of your credit accounts which lenders look at to assess your ability to repay the loan

 

Credit Report – the document that contains your credit history and other information which you need to show lenders upon loan application. It is a crucial requirement because it greatly impacts the lending decision.

 

Credit Score – a three-digit number suggesting your overall credit rating.

 

Creditworthiness – refers to your ability to repay loans. Your creditworthiness depends on your overall credit standing and income, among other factors. The more creditworthy you are, the more likely you can get approved for an auto loan.

 

Dealer Invoice – It is the price paid by the dealership to the manufacturer for the vehicle. It is also called invoice price.

 

Default – A loan default happens when you fail to comply with the payment terms of the loan as written in the contract.

 

Down Payment – the initial payment required upon car purchase

 

DTI – stands for debt to income. It is a ratio that compares how much you owe with how much you earn.

 

Interest Rate – This term often refers to the monthly interest rate or the percentage charged in addition to your monthly payments.

 

LTV – stands for loan to value. A ratio that compares the loan amount with the value of the vehicle

 

Monroney Sticker – refers to the window sticker. It lists all the vehicle options and indicates the MSRP, dealer invoice and other information that should be disclosed as required by law.

 

MSRP – stands for manufacturer’s suggested retail price. It is the price recommended by the manufacturer for which the vehicle can be sold. It is also referred to as the sticker price.

 

Refinancing – is financing your existing car loan with a new lender. Refinancing is one way to lower the interest rate or change the terms of the deal.

 

Repossession – the taking back of the car by the lending party when you fail to make payments

 

Term – refers to the length of the loan or the repayment period. Common auto loan terms range from 24 to 96 months.

 

Trade-in Value – the value of your vehicle when you sell it a dealership

 

Upside-Down – a situation where you owe more than the value of your vehicle. Though it normally happens in every auto loan, being upside-down longer empties your wallet.

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