Financing can be a confusing topic for anyone. Car loans can be difficult to understand if you have never been involved in the industry. By knowing the lingo, you can help ensure that you get the right price and the best deal. Without knowing the terminology behind your auto loan, you can be taken for a ride. Here are some handy tips to maximize your buying power.
Term: This is the length of time that you will finance your car. Usually, these are delineated in months. 36-month loans and 60-month loans are very common. 72-month loans are also available, though the longer the term of your loan, the more you will shell out in interest payments.
Credit: This is a measure of your purchasing power. The term combines your credit score and history into your credit worthiness, or ability to borrow money. The better (stronger) your credit is, the more money you will be able to borrow (not always a good thing).
APR: This is the annual percentage rate of your loan. While most consumers believe that this is the actual interest rate, it is slightly different. In actuality, the APR is the interest rate multiplied by the number of periods in a single year (4). This is a handy way to determine the annual cost of interest to your loan.
DMV Fees: This applies to various fees found throughout the contract. You’ll find these consist of title and registration fees (sometimes tax is lumped in here, as well). These fees are annual fees paid to your state or county for the luxury of owning and operating a vehicle.
Down Payment: This is the amount of money that you “put down” on the car. This amount reduces the total amount financed through the lending company. The more money used as a down payment, the lower the financed price of the vehicle will be and the less you will pay in interest fees through the life of the loan.
Title: This is a document declaring that you are the legal owner of the vehicle. If you are financing your car, you will not receive the title until the vehicle is paid off. Until that point, the bank or finance company effectively owns the vehicle. If you fall behind on payments, the vehicle will be repossessed by the finance company.
Balance: This is the unpaid remainder of your auto loan. The balance is reduced with each payment, though different finance options (and interest rates) affect how quickly the balance is reduced. In many cases, paying off the balance at one time is not sufficient to pay off the loan (interest fees often apply for early loan payoff).
Sales Tax: This is the sales tax set by your state or county. Some states charge a different sales tax on the purchase of a new vehicle than on other items purchased. This amount is usually lumped into the loan payment. Knowing how much you will pay in tax can help you get a better loan; in addition, a larger down payment can reduce the amount of tax paid.