Auto Financing Terms can be intimidating

Take a moment and brush up on some of the more commonly used auto financing terms

Acceleration Clause

Allows the lender to speed up the rate at which your loan comes due or even to demand immediate payment of the entire balance of the loan should you default on you loan.

Amortization

Loan payment calculated to pay off the debt at the end of a fixed period, including interest on the outstanding balance.

Annual Percentage Rate (APR)

The cost of credit as a yearly rate. The percentage results from an equation considering the total amount financed, the finance charges, and the term of the loan. Usually not the same as the interest rate.

Appraisal

An estimate of the value of property, made by a professional appraiser.

APR

Annual Percentage Rate. A way of expressing the cost of credit on a loan. Under federal law, all consumer loans must disclose the Annual Percentage Rate.

Asset

Property that can be used to repay debt, such as stocks and bonds or a car.

Blue Book

A publication of Kelley Blue Book, Inc. and one of several standard references used to determine the value of used vehicles. The value is sometimes called the "Blue Book Value." Blue books typically show a wholesale value and a retail value for each vehicle.

Broker

An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself.

Buydown

When the lender and/or the home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

Caps (Interest)

Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan.

Caps (Payment)

Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.

Collateral

Property offered to support a loan that can be seized if you default.

Depreciation

Decline in value of a vehicle due to wear and tear or any other reason.

Lien

A claim upon a piece of property for the payment or satisfaction of a debt or obligation.

Lock Term

A lender's guarantee of an interest rate for a set period of time. The time period is usually that between loan application approval and loan closing. The lock-in protects you against rate increases during that time.

Margin

The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

Monroney Sticker

The price sticker required by federal law for all new vehicles. The Monroney Sticker lists all the vehicle's options along with the manufacturer's suggested retail price (MSRP).

MSRP

Stands for Manufacturer's Suggested Retail Price. It represents the manufacturer's recommended selling price for a vehicle and each of its options.

Negative Amortization

Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the homebuyer ends up owing more than the original amount of the loan.

Net Effective Income

The borrower's gross income minus federal income tax.

Origination Fee

The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of face value of the loan.

Open-End Lease

A lease which may involve a balloon payment based on the value of the property when it is returned.

Principal

The amount of debt, not counting interest, left on a loan.

Rebate

A special payment from the manufacturer to the customer to promote sales of slow-selling models. Also called a "Customer Incentive".

Refinancing

The process of the same mortgagor paying off one loan with the proceeds from another loan.

Snake Oil

Products or services sold by dealerships that can be added on to the vehicle. Some examples include rust-proofing, upholstery treatments, alarm systems, and extended warranties. Remember that these add-ons will increase the price of the vehicle, and your monthly payment. Also these items are normally marked up outrageously. Also referred to as snake oil by dealers,because it bites you.

Special Warranty Deed

A deed in which the grantor conveys title to the grantee and agrees to protect the grantee against title defects or claims asserted by the grantor and those persons whose right to assert a claim against the title arose during the period the grantor held title to the property. In a special warranty deed the grantor guarantees to the grantee that he has done nothing during the time he held title to the property which has, or which might in the future, impair the grantee's title.

Sticker Price

The manufacturer's suggested retail price for a vehicle. Also called "List Price" or "MSRP."

Term

The period of time between the beginning loan date on the legal documents and the date the entire balance of the loan is due.

Title

A document that gives evidence of an individual's ownership of property.

Trade-in Value

The value of a used vehicle that you trade in to a dealership as part of a purchase.

Trustee

A party who is given legal responsibility to hold property in the best interest of or "for the benefit of" another. The trustee is one placed in a position of responsibility for another, a responsibility enforceable in a court of law.

Truth-in-Lending

A federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan.

Wraparound

Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.