So you’re buying a car. Before heading to the dealership, it’s important to understand some financial jargon — it’s kind of like speaking another language. That’s why we’ve partnered with the experts to translate 10 must-know terms for understanding auto loans.
🚗 The basics
- Principal — The original sum of money borrowed in a loan.
- Collateral — Any asset you use to secure a loan, such as a home, car, or bank account.
- Loan term — The period over which a loan agreement is in effect. Think: 24, 36, 48, 60, 72, or 84 months.
- Maturity — The date your final loan payment is due.
- Co-signer — A person who is added to the loan and agrees to pay back the loan if you’re unable to. Psst... A co-signer with good credit history may increase your likelihood for better loan terms.
💸 Costs and rates
- Down payment — An initial payment of the total amount due to secure a loan. It’s typically recommended to pay at least 20% of a new car’s purchase price or at least 10% for used cars.
- Annual Percentage Rate (APR) — The interest rate plus any additional fees charged by the lender, including origination charges and other fees charged when the loan is made.
- Guaranteed Asset Protection (GAP) — An optional insurance product used to cover the difference between the amount you owe on your auto loan and the amount the insurance company pays if your car is stolen or totaled.
🛞 Conditions
- Loan-to-value ratio — Your loan amount divided by the vehicle’s actual cash value. Lenders use this formula when deciding whether to lend you money for a car or vehicle.
- Refinancing — Getting a new loan to pay off and replace your current one, usually for a more favorable rate or terms.
Pro tip: Get pre-approved before you shop.
