Deciphering Car Loan Terms |
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If you are in the process of buying a new or used car, it's important to get to know the jargon and car loan terms you're about to face so that you can get the best deal possible.
If you default on your car loan, or have a string of late payments, an acceleration clause allows the lender to shorten the time you have to pay the loan off. In many cases, this requires that the entire balance be paid immediately or risk repossession. Agreement of Sale Quite obvious, this is the sales or purchase agreement that you'll sign that states what you are buying, for how much, and what other terms might apply. Both you and the seller will sign this, whether buying from an individual or a dealer. Amortization Amortization is a process that calculates the monthly loan payment you'll have for the car loan. This will include interest and the principal outstanding balance, along with a defined length of time (usually 24, 36 or 48 months). Annual Percentage Rate (APR) Unlike your interest rate, the APR refers to the actual "cost" of the car loan's credit over the course of a year. It is represented as a percentage and is calculated using the amount financed, any additional charges, and the term of the car loan in the equation. Collateral Collateral is personal property offered by a borrower to secure a loan. If you default on your car loan, this collateral can be seized. In many cases, the car you are borrowing against and any down payment you made acts as the collateral. Cosigner A cosigner is someone who signs your loan and agrees to assume an equal responsibility for its repayment. If you default on the car loan then the lender can legally go after the cosigner to collect the debt. Default If you fail to make payments on time, you are considered in "default" and you risk violating the terms of your car loan credit agreement as well as repossession. Delinquency Delinquency is similar to default, and means you have failed to make your car loan payments on time. Disclosures Critical in any car sale, disclosures include a series of informational tidbits about a vehicle's history, accidents or major repairs. You are legally entitled to receive these when buying a car, so make sure you obtain them. Down Payment This reflects the amount of money you initially put down on the car to reduce the amount financed through the car loan. For example, a $2,000 down payment on a $10,000 car would mean you are financing $8,000. Earnest Money Earnest money is typically given to a seller by the buyer to bind the transaction or to ensure payment. Finance Charge This is the total dollar amount that it will cost you to borrow money for the car loan over the length of the term. General Warranty Deed This shows you what interest the lender has in your property and also warrants that if the title is defective or has a claim, tax lien, judgment, or mechanic's lien against it, you may hold the lender liable. Interest This is a percentage charged by the lender on the money loaned and is wrapped into the repayment of the loan. Prepayment penalty While rare, a prepayment penalty is charged by some lenders if you pay your loan off before the maturation date. This is done to make up for the income they will lose by not collecting full interest on the car loan. You will want to see if your lender has a prepayment penalty. Refinance When you refinance a loan, you get a new loan that pays off the existing loan. The purpose is to get a lower interest rate or extend the term of the previous loan. Term This is the length of time that you will have the car loan. The term is the period of time between the beginning of the loan and the pay-off date. Title A title is a document that proves your ownership of the car. You will receive a title in your name but the lender will be listed as the lien holder because the lender will still have rights to the car financially should you default or sell. |
