Special Finance Car Loans for Bad Credit

Auto Financing Terminology

Installment Credit

Loans that have a fixed monthly payment for a fixed period of time. These items are the most important items on your credit report when you apply for an auto loan. Examples include auto loan and mortgages.

Interest rate
Annual interest rate for your loan or your lease.

Investment rate of return
Rate of return on investments. This is the return that you would make if you were to invest your down payment or security deposit instead of using it in your auto purchase or lease. The actual rate of return is largely dependant on the type of investments you select. For example, from January 1970 to February 2003 the average compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 11%. Savings accounts at a bank pay as little as 2% or less. It is important to remember that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment.

Fees
Fee charged for title transfer. Also include any other fees that may be due at delivery.

Finance Charges
A set percentage charged to the borrower by a lender. To calculate this subtract the total of payments from the amount borrowed.

Fixed Interest Rate
A fee charged for the use of borrowed money, based upon a set percentage rate.

Life Insurance
Credit life insurance pays off the balance of your loan upon your death.

Loan amount
The total dollar amount for this loan.

Loan term
The number of years over which you will repay this loan. The most common terms are 15 years and 30 years. If this loan has a "balloon" payment, the loan term will be shorter than the number of years to amortize the loan. For example, a loan with a 5-year term amortized over 30 years will have the same monthly payment as a 30-year loan with the same interest rate. The difference is the 30-year loan will have equal payments for 30 years. The 5-year loan will have equal payments for 5 years and then a very large, or balloon, payment for the remaining balance.

Loan length (months)
Total length, or term, of your original auto loan in months.

Lost interest on buy option
This includes any interest you would have earned at your investment rate of return on the buy option's down payment and other fees. If the monthly payment for leasing is less than the monthly payment for buying, this also includes any lost interest due to the higher monthly payments. If leasing is more expensive than buying, your interest costs for buying are reduced by the amount of interest you would earn on the difference.

Lost interest on lease option
This includes any interest you would have earned at your investment rate of return on the lease option's down payment, security deposit and other fees. Please see the definition for "Lost interest on buy option" for an explanation on how we account for any interest you might earn by having a lower monthly lease payment.

Loan to Value (LTV)
The amount financed relative to the published book value of the vehicle. Lower LTV's have a better chance of approval. Lenders usually use Trade of Wholesale Value Book Value when calculating LTV.

Debt Ratio
How much you earn compared with how much you owe. The lower your debt ratio, the more disposable income you have.

Deficiency Balance
A deficiency is any amount you still owe on your contract after your creditor or lessor sells the vehicle and applies the amount received to your unpaid obligation. This also applies to lease turn-ins with over mileage charges.

Delinquency
Failure to make one or more installment payments by the due date(s).

Disclosure Statement
A statement of the total amount and cost of a loan, including the principal loan amount, interest rate and any additional finance charges or loan fees. The disclosure statement is contained within a bold box on the retail installment (finance) contract.

Disability Insurance
This insurance pays your monthly payment if you are unable to work due3 to illness or injury. There is normally a waiting period:

• 14 Day Retro -If you are disabled for 14 days before a claim is made. With a doctor’s certificate the first payment is retroactive to the day the disability took place. Payments cease when you return to work.
• 30 Day Retro - If you are disabled for 30 days before a claim is made. With a doctor’s certificate the first payment is retroactive to the day the disability took place. Payments cease when you return to work.
• 30 Day Elimination - If you are disabled for 30 days before a claim is made. With a doctor’s certificate the payments begin after the waiting period. Payments cease when you return to work.

Down payment
Amount paid as a down payment, which for leases is often called a capital reduction.

Open Credit
Loans that must be paid in full each month.

Other costs
Any other costs that should be included in the APR calculation.

Other fees
Any fee, other than a capital reduction or down payment, required to be paid at the close of the lease or loan. This may include license, title transfer fees, fees included in the APR calculation. etc.

Original loan amount
The original amount financed with your auto loan, not to be confused with the remaining balance or principal balance.

Origination fee
The dollar amount charged as a loan origination fee, which is included in the Annual Percentage Rate (APR) calculation. For many loans a 1% origination fee is common. For example: a 1% fee on a $120,000 loan would cost $1,200.

Balloon payment
This is the total final payment for all loans that are amortized over a period of time longer than the loan term. The balloon payment is total interest and principal balance due at the end of the loan term. (If the loan term is the same as the amortization, this amount is always zero.)

Book Value
The published valuation of a vehicle. There are three nationally recognized vehicle valuation services; NADA®, Kelly Blue Book®, and Black Book.

Buyers Order
This form is the legal contract between the Buyer and the Seller.

Buyers Guide
The Federal Trade Commission's (FTC) Used Car Rule requires dealers to post a Buyers Guide in every used car they offer for sale. The Buyers Guide must tell you:

• Whether the vehicle is being sold "as is" or with a warranty.
• What percentage of the repair costs a dealer will pay under the warranty.
• That spoken promises are difficult to enforce.
• To get all promises in writing.
• To keep the Buyers Guide for reference after the sale.
• The major mechanical and electrical systems on the car, including some of the major problems you should look out for.
• To ask to have the car inspected by an independent mechanic before you buy.

Rate of depreciation
The rate of depreciation gauges how fast your new automobile will lose its market value. A high depreciation rate is about 20% per year, medium is 15% per year and low is 10% per year.

Residential Lease Agreement
Some Lenders require proof of your monthly rental or lease obligation. Often the landlords phone number is required for verbal verification

Residual percent
For leases, this is remaining value after the lease term expires. The higher this amount, the lower your lease payment will be.

Revolving Credit
Loans that do not have a fixed monthly payment nor a fixed period of time. Examples include credit cards and home equity lines of credit.

Taxable fees
Any additional fee that is subject to sales tax. This usually includes title transfer fees or any other fees that may be due at delivery and are taxable.

Telephone Bill
Some lenders require proof of home phone service. Many lenders are now accepting cell phone service as well.

Term in months
Term in months for your lease or your loan.

Total savings
Total amount you would save in interest if you made the accelerated payment until your contract was paid in full.

Total purchase price (before tax)
This is the total cost of your vehicle purchase. Include the sale price, any additional options and any destination charges. Don't include sales tax in this amount. Sales tax will be calculated for you and included in your total after tax price.

Trade allowance
The total amount that you are given for any automobile that you trade-in as part of the purchase. In some states a trade-in can also reduce the amount of sales tax you will owe. See the definition for "Sales tax deduction for trade-in" for more information on trade-in vehicles and sales tax.

Trade Equity
The difference between the value of your trade and the lenders lien payoff.

Unapplied for Credit
Items that you did not initiate a request for credit. These items only show up on your credit report if you don't pay them. Example include utility and medical bills, bad checks, and collection agency accounts.

Upside-Down
The difference between the lien payoff and the value of your trade. This is a Negative Number

Write Off
Items that the original creditor has given up on trying to collect. Often these Write Offs will show up twice on a credit report, once from the original creditor as Applied for Credit, and once from a collection agency as Unapplied for Credit.

Sales tax rate
Percentage sales tax to be charged on this purchase. Sales tax is included in each lease payment. Sales tax for buying is charged on the total sale amount.

Simple Interest
A flat rate of interest that is not compounded, generally expressed as an annual rate. One day of simple interest is calculated by: loan balance x interest rate = daily amount of interest 365 (days in a year).

State and Federal tax rates
Your state and federal marginal income tax rates. These rates are used to determine the tax savings associated with a home equity loan.

Stipulations (STIPS)
Documentation may be required to prove items on your initial credit application.

Market value of vehicle
Value of your auto after the lease term is over.

Minimum Down Payment
Few lenders will approve an auto loan for someone with bad credit without a down payment.

Monthly accelerated payment
Scheduled payment plus additional monthly payment.

Monthly loan payment
Monthly principal and interest payment (PI).

Monthly scheduled payment
Monthly principal and interest payment based on your original loan amount, term and interest rate.

Mortgage Statement
Lenders may require a photocopy of your most recent mortgage statement is to verify your monthly mortgage obligation.

Payment to Income Ratio
Your monthly car payment compared to your gross monthly income. Most lenders prefer this ratio to be less than 15%.

Payment
Payments received are first applied to (collection) fees, then to accrued interest, and finally to the outstanding principal balance.

Percent of purchase price
Check this to put a percent of the purchase price as your cash down. This money will be used for fees and your down payment.

Principal
The amount borrowed, or the amount on which you pay interest and must pay back, which may increase as a result of capitalization of interest.

Principal Balance
The portion of the original loan, plus capitalized interest, which the borrower has not yet satisfied through payment or cancellation.

Proof of Address (POR)
Acceptable forms of POR include utility bills, credit card statements or anything received through the mail which contain the following:

• W2 Income
  • This type of income is most important to a lender because it is attachable (it can be garnished).
    • Acceptable POI includes:
      • Computerized pay stubs with year-to-date calculations.
      • Four consecutive handwritten pay stubs and previous years'  W-2. Often, cancelled checks from the employer are required.
  • Self Employment or 1099
    • This type of income must be verified with tax returns prepared by a professional tax service. Lenders require two years' tax returns. It is rare for a lender to approve a person with bad credit that has been self employeed for less than two years.
    • Lenders use a customer's adjusted gross income. That is income net of all expenses. This can be found on Schedule C of a tax return, or line 31 of the 1040.
  • Child Support
    • A copy of the court order and a recent check or check stub will likely be required. Lenders may not count this type of income if it will not last for the length of the car loan.
  • Social Security
    • Form SSA 1099 and a bank statement showing deposits will likely be required.
  • Unreported Income
    • Income from cash jobs is not counted when calculating income.
  
  Purchase price
  Total purchase price. Price should be after any manufacturer's rebate.
  
  Additional monthly payment
  Your proposed extra payment per month. This payment will be used to reduce your principal balance.
  
  Amortization
  The number of years used in calculating the monthly payment. Loans that are amortized over a longer period than their loan term have a balloon payment. See "Loan term" for more information.
  
  Amount owed on trade
  Total loan balance still outstanding on the trade-in.
  
  Annual percentage rate (APR)
  A standard calculation used by lenders. It is designed to help borrowers compare different loan options. For example: a loan with a lower stated interest rate may be a bad value if its fees are too high. Likewise, a loan with a higher stated rate and very low fees could be an exceptional value. APR calculations incorporate these fees into a single rate. You can then compare loans with different fees, rates or different terms.
  
  Annual interest rate
  Annual interest rate. Maximum interest rate is 20%.
  
  Applied for Credit
  Items on your credit report that you actually initiated the request for credit.
  
  Assignment
  The transfer of your loan from one lender to another. Or from the automobile dealership to the lender.
  
  Auto loan interest rate (APR)
  Annual percentage rate for the auto loan.
  
  Non-taxable fees
  Any additional fee that is not subject to sales tax. This usually includes document fees or any other fees that may be due at delivery and are not taxable.
  
  No sales tax deduction for trade-in
  In some states sales tax is calculated on your full purchase price. Others calculate tax based on the purchase price less trade in. Currently California, the District of Columbia, Hawaii, Maryland, Michigan allow no deductions for trade-ins when calculating sales tax. In addition, Alaska, Delaware, Montana, New Hampshire, and Oregon have no sales tax on new vehicles.
  
  Negative Trade Equity
  The difference between the lien payoff and the value of your trade in. This is a Negative Number
  
  Cash down
  Total amount of cash used in this purchase. The larger your cash down payment the smaller the loan you will need to finance this purchase.
  
  Charge Off
  Items that the original creditor has given up on trying to collect. Often these Charge Offs will show up twice on a credit report, once from the original creditor as Applied for Credit, and once from a collection agency as Unapplied for Credit.
  
  Co-Buyer
  Unlike a Co-Signer a Co-Buyer's income is combined with the Buyer's. This option is normally limited to a spouse or a person closely related residing at the same residence.
  
  Co-Signer
  Someone who assumes legal responsibility for repayment of a loan in the event the borrower does not pay. A Cosigner may be considered for a Buyer who does not comply with all the credit requirements. The income of the Buyer, however, must meet all the income and budget guidelines without reliance upon the income of the cosigner.
  
  Credit Bureau
  An agency that compiles, maintains and provides credit and other personal information to creditors. There are three major credit reporting agencies:
  
  • Equifax®
    • P.O. Box 740241
      Atlanta, GA 30374-0241
      Phone: (800)685-1111
  • TransUnion®
    • P.O. Box 19022
      Chester, PA 19022
      Phone: (800)916-8800
  • Experian® (formerly TRW)
    • P.O. Box 2002
      Allen, TX 75013
      Phone: (888)397-3742
  
  Credit Report
  A historical document that may include payment habits, number of credit or loan accounts, balance of those accounts, place and length of employment, and records of financial transactions. The following items normally appear within the credit report.
  
  Credit Score
  A statistical formula that assigns a numerical value to your credit worthiness. There are many different score models. When you apply for an auto loan the lender is most likely viewing your "Car Enhanced Score". This score may be higher or lower than your regular credit score. Scores can vary widely among all three credit bureaus.
  
  Credit Scoring
  A system used by banks and other lending institutions to determine whether or not you are creditworthy. Each lender uses their own score card to determine if they will approve an auto loan.
  
  Commitment fee
  An upfront fee included in the APR calculation.
  
  Judgments
  A court order to repay a debt. A creditor with a judgment in their favor may request a wage garnishment to repay the debt.
  
  Employment Insurance
  Not available in every state. This insurance pays your monthly car loan payment if you involuntarily loose you job.
  
  Extended Service Contract
  Covers the cost of unexpected auto repairs. Service contracts normally have a per visit deductible and most do not cover normal wear items such as break pads.
  
  Home equity interest rate (APR)
  Annual percentage rate for the home equity loan.
  
  Home equity closing costs
  Any additional costs to the home equity loan. This should include any appraiser fees, points paid or other misc. fees.
  
  GAP Insurance
  If your vehicle is totaled for any reason the amount your insurance company pays may be a whole lot less than the actual amount you still owe on your loan. GAP Insurance pays the difference. This product is highly recommended if you are adding negative equity to your new loan.