Auto Loan Glossary

Familiarize yourself with some common terms associated with auto loans. We'll define the most relevant terms here.

APR

Acronym for annual percentage rate. This number is associated with, but not identical to, the interest rate of your auto loan. Your lender calculates your APR by multiplying your interest rate by the number of periods per year. For instance, if your interest rate is 3% every quarter, your APR would be 12%. The APR is a much more valid way to compare loans than interest rate alone because it factors in the total cost of borrowing. The APR of the loan will be listed in bold on your consumer loan agreement. Be careful not to overemphasize APR when comparing auto loans because hidden charges and fees can either inflate or depress this figure.

Balance

How much is left to be paid on the auto loan. The balance will decrease every time you make a payment.

Credit

The ability to borrow money. If you have good credit, it means lenders will be more willing to give you auto loans because you represent less of a risk.

Down Payment

The amount you pay in cash toward the purchase price of your vehicle. A higher down payment will lower the monthly payment on your auto loan.

Finance

To borrow money to pay for a car. When you finance a car, you take out an auto loan to pay for a car as you drive it rather than paying cash outright. Financing means that you do not officially own the car until the auto loan is completely repaid. Until then, the bank retains the title to the vehicle.

Interest Rate

The fee you pay to your lender for borrowing money. Interest rates are expressed as a percentage of the auto loan amount.

Lender

Any institution that loans money. Remember that auto loans don't necessarily have to come from banks. Credit unions and car manufacturers also sometimes issue loans.

Sales Tax

The fee, expressed as a percentage, that you pay for state sales tax. This percentage varies tremendously from state to state and can also vary from region to region within a state. Typically, the sales tax consists of both a local and state tax.

Term

The length of auto loans. Common terms are 36, 48, and 60 months. Avoid longer-term loans if possible because they will cost you more in interest expense.

 

Still confused about auto loans and have some unanswered questions? See if they have been answered in our frequently asked questions.