Car Loan Glossary

Auto Financing Terminology


The number of years used in calculating the monthly payment on an auto loan. It should be noted that loans that are amortized over a longer period than their loan term have a balloon payment attached at the end.

Amount Owed on Trade

An outstanding balance on a vehicle that is being traded in toward the purchase of a different vehicle.

Annual Percentage Rate (APR)

The amount that a lender charges for borrowing money to pay for a vehicle purchase. The APR, or interest rate, is expressed as a percentage that represents the yearly cost of funds over the loan term.

Balloon Payment

The total and final payment for all loans that are amortized over a period of time longer than the loan term (balloon loans). This payment is typically much larger than the other monthly payments made on this type of loan. If a buyer doesn’t want to make a balloon payment, they can refinance the remaining loan balance and continue to make smaller payments over a period of time.

Book Value

The published valuation of a vehicle. There are three nationally recognized vehicle valuation guides; NADA Guides, Kelley Blue Book and Black Book.

Buyer’s Guide

A document that the Federal Trade Commission’s (FTC) Used Car Rule requires dealers to post in every used vehicle they offer for sale. The Buyer’s Guide must tell you:

Buyer’s Order

The form that serves as the legal contract between the car buyer and the seller.

Charge Off

Items that the original creditor has given up on trying to collect. These charge offs will often 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.


A person whose income is combined with, or “co-mingled” with, the primary buyer’s income. Normally, this role can only be filled by a spouse or a person related to the buyer who occupies the same residence.

Commitment Fee

The amount charged by a lender that compensates them for their commitment to lend. This fee is normally associated with unused lines of credit or undisbursed loans.


Someone who assumes legal responsibility for repayment of a loan in the event that the primary borrower does not pay. A co-signer may be considered for a buyer who does not meet all of the lender’s credit requirements. The income of the buyer, however, must meet all of the income and budget guidelines without reliance upon the income of the co-signer.

Credit Bureau

An agency that collects, maintains and provides credit history and other personal information to and from creditors. There are three major credit reporting agencies in the United States:

Credit Report

A document that contains a consumer’s credit history. A credit report normally includes a person’s payment history, number of credit or loan accounts, balances of these accounts, employment details and records of financial transactions. Lenders use this information in order to determine a consumer’s creditworthiness.

Credit Score

A numerical value, based on credit history, assigned to a person to indicate their creditworthiness. It should be noted that there are many different scoring models, but most lenders will look at an applicant’s FICO score when making an approval decision. When you apply for an auto loan, the lender will most likely pull your “Auto Enhanced Score,” which may be higher or lower than your regular credit score because it heavily weighs your car payment history.

Credit Scoring

A system used by banks and other lending institutions to determine whether or not an applicant is worthy of receiving credit. Each lender uses its own score card when making an approval decision.

Debt to Income (DTI) Ratio

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

Deficiency Balance

After a repossession due to non-payment, any amount that you still owe on your contract after your creditor sells the vehicle and applies the amount received to your unpaid obligation.


Failure to make one or more installment payment(s) by the due dates(s).

Disability Insurance

A type of policy that gives you a set amount of money every month if you are unable to work due to illness or injury. There is normally a waiting period with disability insurance:

Disclosure Statement

A statement containing 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.

Down Payment

The amount of cash that you pay upfront on a financed car purchase. With a leased vehicle, the money that you put down on the contract when you sign is called the capital reduction.

Employment Insurance

Elective coverage that pays your monthly car loan payment if you involuntarily lose your job. This type of insurance is not available in every state.

Extended Service Contract

Purchased coverage that covers the cost of unexpected auto repairs. Service contracts normally have a per visit deductible and most contracts do not cover normal wear items such as brake pads. These are sometimes referred to as "extended warranties."

GAP Insurance

A type of coverage that can be purchased by a car owner to cover the difference between the current value of the vehicle and their loan balance in the event that the car is totaled in a collision. GAP stands for “Guaranteed Asset Protection.”

Home Equity Closing Costs

Any additional costs associated with a home equity loan. These should include any appraiser fees, points paid and other miscellaneous fees.

Installment Credit

Loans that have a fixed monthly payment for a fixed period of time. Your payment histories with these types of loans are the most important items on your credit report when you apply for an auto loan. Examples of installment credit include mortgages and auto loans.

Interest Rate

The amount charged by a lender for the use of their assets. Expressed as a percentage of the principal, this is basically a fee that you’re charged when you borrow money to make a large purchase.

Investment Rate of Return

The amount of money that you would make if you were to invest your down payment or security deposit instead of using it on your auto purchase or lease. The actual rate of return is largely dependent on the type of investments you select. 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 return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment.


A court order to repay a delinquent debt. A creditor with a judgment in their favor may request a wage garnishment or bank account levy in order to be compensated.

Life Insurance

How your loan may be paid off upon the occasion of your death. Some life insurance policies offer this kind of coverage.

Loan Amount

The total sum of money that is borrowed from a lender to pay for a vehicle.

Loan Term

The number of years over which a loan is repaid. Popular loan terms are 48 and 60 months, and some buyers may even take out auto loans for as long as 84 months.

Loan to Value (LTV)

The amount financed relative to the published book value of the vehicle. Lower LTVs usually have a better chance of approval, and lenders typically use Trade of Wholesale Value when calculating LTV.

Lost Interest on Buy Option

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

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.

Market Value of Vehicle

The average price paid for a particular vehicle at any given time.

Monthly Accelerated Payment

A sum paid by a car buyer that includes the scheduled payment plus an additional monthly payment.

Monthly Loan Payment

The amount that a lender expects a consumer to pay on a financed vehicle every month. Part of each payment will go toward the principal and the remaining portion is put toward the interest.

Mortgage Statement

A document that details the most recent version of your existing mortgage obligation. Some lenders will require a copy of this statement in order to approve your loan request.

Non-Taxable Fees

Any fees that are associated with a vehicle purchase that are not subject to sales tax. These usually include documentation and cleaning charges.

Open Credit

Loans that must be paid in full each month.

Original Loan Amount

The amount of money that was originally financed with your auto loan, not to be confused with the remaining balance or principal balance.

Origination Fee

The amount charged by a lender to cover the cost of processing the loan.

Payment to Income Ratio

Your monthly car payment and insurance payment compared to your gross monthly income. Most lenders prefer this ratio to be less than 15-20%.


The amount borrowed from a lender to purchase a vehicle. You will pay back this amount plus interest charges over a set period of time.

Principal Balance

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

Proof of Residence (POR)

A document that verifies your physical address. Acceptable forms of POR include utility bills, credit card statements or any other type of bill bearing your address that you receive in the mail.

Purchase Price

The total retail cost of a vehicle that is purchased. The purchase price should be calculated after any manufacturer’s rebates are subtracted.

Rate of Depreciation

A number (expressed as a percentage) that gauges how fast your new vehicle will lose its market value. For example, a high depreciation rate is around 20% per year, medium is 15% per year and low is 10% per year.

Residential Lease Agreement

Proof of your monthly rental or lease obligation, required by some lenders. Often, the landlord’s phone number is also required for verbal verification.

Residual Percent

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

Revolving Credit

Credit that does not have a fixed monthly payment or a fixed timeframe. Examples include credit cards and home equity lines of credit.

Sales Tax Rate

The percentage of a car’s selling price that goes to the state in which it was sold. Sales tax is also included in monthly lease payments.

Simple Interest

A flat rate of interest that is not compounded, generally expressed as an annual rate. One day of simple interest is calculated this way: loan balance x the interest rate = daily amount of interest for 365 days (a full year).

Stipulations (STIPS)

Any documentation that is required to verify the information provided on an auto loan application.

Taxable Fees

Any additional fees that are subject to sales tax. These usually include title transfer fees or any other fees that may be due at delivery.

Telephone Bill

Proof of home phone service, required by subprime lenders. Most lenders are now accepting proof of cell phone service (from a major provider) as well.

Term in Months

The number of months that it will take to pay off an auto loan or the number of months that are covered by a leasing agreement.

Title Transfer Fee

Fee charged when a title is transferred from the dealer to a buyer. This is one of several fees due at delivery when a car is sold.

Total Purchas Price (Before Tax)

The total cost of a vehicle purchase. This includes the sale price, any additional options and any destination charges. Sales tax is not included in this amount, but it will be calculated and added to produce the Total After Tax Price.

Trade Allowance

The total amount that you are given for any vehicle that you trade in as part of the purchase of another car. In some states, a trade-in can also reduce the amount of sales tax you will owe.

Trade Equity

The difference between the value of your trade and the lender’s lien payoff.

Unapplied for Credit

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

Upside Down

A term used to describe the situation when your lien payoff amount is higher than the current value of your vehicle. Other terms that might be used for being upside down include being underwater or having Negative Trade Equity.

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