As much fun as travelling can be, it can sometimes feel awkward when don’t understand the language being spoken around you. This is also one of the reasons financing a car can be uncomfortable.
After all, every business has its own language too.
With that in mind, here are some car loan terms you’ll need to know before you sign a sales contract.
APR – Annual Percentage Rate
This is the yearly rate of interest charged for a loan. In some cases, interest payments can be quoted on less than a twelve-month basis. The annual rate is what those increments will add up to over the course of a year.
Default
A loan is considered to be in default if either the lender or the borrower does not fulfill the loan agreement. In most cases, it means the borrower did not make payments as agreed upon and is therefore considered to be in default — at which point the car can be repossessed. However, lenders can also be in default if they fail to provide financing as agreed upon; or violate the terms of the deal in some other way.
Interest Rate
This is the percentage of the loan amount a lender charges for providing the loan. Sometimes confused with the annual percentage rate, interest rates aren’t always quoted on an annual basis.
That’s why it’s critical to read the fine print of an advertisement touting an extraordinarily low rate. The ad could be promoting a biannual interest rate — cutting the annual percentage rate in half to make it look more attractive.
Let’s say the APR is five percent. A lender can legally advertise a 2.5 percent interest rate — as long as they say it’s biannually.
Lender
As you have probably surmised, the lender is the entity putting up the money for the purchase. This is also where your payments will go. However, the lender might not be who you think they are at first glance.
“Dealership financing” seldom comes from the dealership. They have deals with banks and other lending institutions to fund their sales. Here’s the thing though: Dealers charge fees for providing loans you could get on your own for less money.
This can be particularly critical for people seeking auto loans with bad credit. Companies like RoadLoans can provide a more favorable interest rate than you’ll find through a dealer.
Maturity Date/Loan Term
Typically ranging from as few as 12 months to a maximum of 96 — this is the amount of time you have to repay the loan. In other words, you’ll have from one to eight years to pay off your car. However, experts agree anything over 60 months is a bad idea for a number of reasons.
Many people are tempted to stretch loans out as far as possible to make payments more affordable. This is false economy. You’ll pay far more for longer loans when you calculate the added interest payments. If you need to finance a car for more than 60 months to make the payments doable, you can’t afford that car.
Pink Slip/Title
Issued by the state motor vehicle department certifying ownership of the car, you’ll be granted title in your name if you pay cash. The lender will be listed as the owner of the car if you take out a loan. Title will then be transferred to you when you’ve satisfied the financial obligation to which you agreed when you took possession of the car.
Principal
This refers to the actual amount of money borrowed; less rebates, your down payment and the value of your trade-in (if you have one).
Let’s say the sale price of the car is $35,000. You have a $7,000 down payment, you’re given $3,000 for your trade-in and the car has a $5,000 rebate.
(We’ve omitted fees and taxes here to make the math easy.)
You’ll need a loan of $25,000 to purchase the car after all of those factors are taken into consideration. This principal loan amount will be the figure against which your interest payments will be calculated.
Understanding these car loan terms you need to know will make it easier to see what is being expected of you in exchange for loaning you the money to purchase the car. This, in turn, will help ensure you get the best deal possible for your situation.