We Reveal All You Need To Know About Auto Financing Terminology

When auto financing experts get together, oftentimes, they might as well be speaking Greek. Many of the words they use are beyond the average car buyer’s comprehension, which can be a big problem, considering the direct impact they have on your financing terms.

But don’t worry, our list of important auto financing terminology will help you understand what’s going on so you won’t be left out of the conversation and can negotiate a great rate on your auto loan when you’re ready for that new car.

Annual Percentage Rate (APR) – The total cost of credit for one year, expressed as a percentage. It includes interest rate and other expenses, such as loan origination fee and discount fees.

Credit insurance – Optional protection that covers your remaining debt in case of death or disability.

Credit grantor – Entity issuing the car finance loan.

Credit report – Statement issued by a credit bureau detailing your past and present credit obligations, payment records and personal information.

Credit score – A number that summarizes your creditworthiness based on the credit report’s information.

Debt-to-income ratio – Your total monthly debt divided by total monthly income.

Dealer finance income – A portion of the finance charge that is paid to the dealer as compensation for his involvement in providing financing for the buyer.

Down payment – Amount paid at the time of purchase, which is not part of the financed amount (and reduces the amount you will need to finance).

Fixed rate financing – An APR that remains the same throughout your loan term.

Guaranteed Auto Protection (GAP) – Optional protection that covers the difference between what you owe and what you get from the insurance company if your car is stolen or totaled.

Off-site financing – Offered by entities other than the car dealership, such as banks, credit unions and online lenders.

On-site financing – Offered directly by the car dealership.

Prime borrower – Borrower with an excellent credit score.

Subprime borrower – Borrowers with lower credit scores.

Subprime lender – Financing entity that specializes in car finance loans for subprime borrowers.

Variable Rate Financing – APR that varies every year.

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