Understanding vehicle financing terms can feel overwhelming, especially with all the different words and phrases thrown around. If you're having a hard time making sense of it all, you're definitely not alone! Many people find themselves confused by terms like APR, co-signer, and MSRP. To help you out, we’ve put together a quick breakdown of some of the most common vehicle finance terms. Still feeling curious and want to learn more? Check out our helpful articles where we dive deeper into each of these topics, breaking them down even further for you.
APR is the yearly cost of borrowing money, including both the interest rate and any extra fees. It tells you how much it will cost to borrow money on a loan each year. The higher the APR, the more expensive the loan is. For example, if you borrow $1,000 with a 10% APR, you’ll owe an extra $100 a year in interest, on top of the money you borrowed.
An assignment is when a lender decides to transfer the loan to another lender. This means that you might end up paying the new lender instead of the original one, but your loan's terms (like how much you owe and how long you have to pay it back) stay the same. It's like selling your homework to another student, and they’re now responsible for turning it in.
The base price is the starting price of a car without any optional features or extras, such as leather seats or a sunroof. It only includes the car with its standard features, plus the cost of getting it to the dealership. For example, the base price doesn’t include any special upgrades or taxes.
A Certificate of Title is a legal document issued by the state that proves who owns a car. When you buy a car, the seller gives you the title, which says you're the official owner. It's important because it shows you're allowed to drive and sell the car. If you ever want to sell it, you’ll need this document to transfer ownership to someone else.
A co-signer is someone who agrees to help you pay back a loan if you’re unable to. They are usually someone who trusts you, like a parent or close relative. If you don’t make your car payments, the co-signer will be responsible for paying the loan. It’s a way for someone with less credit to get approved for a loan by having someone else back them up.
Default happens when you fail to follow the rules of your loan, like not making the required payments on time. If you don’t pay your loan as agreed, the lender might take action to get their money back, like repossessing the car or even suing you. Defaulting can seriously hurt your credit and make it harder to get loans in the future.
Interest is the money you pay to borrow money. When you take out a loan, you don’t just pay back the amount you borrowed. You also pay extra money, called interest, as a "fee" for using the lender's money. Interest is usually shown as a percentage of the loan amount, and it can add up over time. For example, if you borrow $1,000 at 5% interest, you’ll owe $50 extra for the year.
The MSRP is the price the car maker recommends a dealership should sell a car for. It doesn’t include things like taxes, fees, or optional features. It's the "sticker price" on the car when you first see it on the lot. Dealers sometimes offer discounts, but MSRP is the starting point for pricing.
Refinancing means getting a new loan to pay off an old one. People refinance loans when they want to get better terms, like a lower interest rate or a longer time to pay it off. For example, if you originally borrowed money at 10% interest but find a new loan at 5%, you can refinance to lower your monthly payments or pay less interest over time.
The term is the length of time you agree to pay back the loan. It can be a number of months, such as 24 months (2 years), 48 months (4 years), or 60 months (5 years). A longer term might mean smaller monthly payments, but you’ll end up paying more in interest in the long run. A shorter term means higher payments, but you’ll pay less interest overall.
Underwriting is the process that lenders use to check if you qualify for a loan. It involves looking at your financial information, like your credit score, income, and any other debts you might have, to decide if you’re a good candidate to borrow money. Think of underwriting as the lender’s way of deciding if they trust you to pay back the loan.
