Whether you’re shopping for your first car or a newer model, the first thing you should do before visiting the dealership is establish your financing options. Enlighten yourself with these basic auto financing terms so you know exactly what you’re agreeing to when signing the paperwork to fund your new vehicle:
Auto loan
This term refers to the contract between you and the financial institution that is helping you fund the vehicle purchase, as U.S. News & World Report’s John Vincent shares. The contract also specifies that the bank holds the vehicle’s title until you pay off the loan amount, as well as the agreed-upon interest.
Interest
When securing an auto loan, interest is the amount the bank adds to the cost of the vehicle fee to cover the financial institution’s cost and profit margin. Or to put it more simply, it’s the cost the financial institution charges you for borrowing the money you need for your new vehicle.
Annual Percentage Rate
Often known by its acronym, APR, this term is the annual cost you pay to borrow the amount you need to cover your new car’s cost. This rate is expressed as an annualized percentage of the loan. According to the Consumer Financial Protection Bureau, the higher the APR, the more you’ll have to pay over the duration of the loan.
Loan Term
The loan term is the length of the loan, expressed in months. Per Edmunds’ Philip Reed, auto loans typically have 36-, 48- or 60-month loan terms. But it is becoming more common to see longer loan terms in the 72- to 96-month range.
Manufacturer Suggested Retail Price (MSRP)
If you’re new to auto financing, MSRP is another acronym that can be confusing. It stands for the Manufacturer Suggested Retail Price and represents the price a dealership is asking for a certain vehicle.
Down payment
As its name suggests, this term refers to the amount of money you put down when you sign an auto lease. This amount goes toward the total price of the vehicle. The bigger the down payment you make, the lower your monthly payments will be.
Principal
This term is another name for the dollar amount of the loan balance. Each month you make a payment on your loan, this overall balance will gradually go down.
Fixed-rate financing
Fixed-rate financing means the loan’s interest rate stays the same during the loan term. If you value paying the same amount each month on your car loan, look for this type of financing.
Variable-rate financing
This is the opposite of fixed-rate financing. It means the interest rate on your loan can fluctuate based on the prime rate. This can result in lower or higher monthly payments.
Title
A vehicle’s title is a legal document that states who owns it. The lender keeps this document for the life of the loan, then transfers it to you once you’ve finished paying off the balance.
DMV fees
When signing your lease contract at the dealership, you’ll likely encounter this term. These are Department of Motor Vehicle-related expenses — such as license and title fees —you are responsible for paying before you can drive your new car off the lot.
Buying a car is a major commitment you should make only after doing some careful research and planning. If you have more questions about vehicle financing, don’t hesitate to contact your local financial institution to speak with an expert.