15 key terms to know when buying or leasing a car

Think back to the last time you bought a vehicle. Did you feel, at times, like the salesperson or finance manager was speaking a different language? It can happen. Luckily, learning just a few of the terms can help. *

Here are some key words to help you get started.

With any simple interest loan, you are amortizing, or paying down, the loan amount as you make your regular, monthly payment. A portion of every payment goes toward the loan principal, and a portion goes toward interest. The amount going toward principal is smaller than interest at first, but gradually grows larger as the loan moves along.

Annual Percentage Rate (APR)
This is the cost of borrowing funds as a yearly rate including the interest rate and additional fees charged with the loan.

Buyer’s Order or Purchase Order
Similar to making a purchase at a store and receiving a receipt, the buyer’s order is your bill of sale or “receipt” for the vehicle. It has all the details of the sale, including your (the buyer’s) information, the vehicle information, the purchase price, taxes and fees.

Destination Charge
Just like it sounds, the destination charge is the fee charged for transporting the vehicle to the dealer from the manufacturer or port of entry. Generally this charge is passed on to you, the buyer.

Down Payment
Typically, a down payment is considered cash. But it can also be equity from a trade-in. The cash or trade equity is subtracted from the cash price of your new vehicle to reduce the amount you need to finance.

Excess Wear and Tear
This means a vehicle is damaged, poorly maintained or shows signs of age that is worse than what is normally expected and not repaired or replaced. Some examples of excess wear and tear can include cracked windshields, body damage and broken or missing equipment. If you plan to lease a vehicle, don’t forget to ask about this one, as your lease lender may charge extra fees for excess wear and tear when it’s time to return the vehicle.

Extended Service Contract**
Also known as Vehicle Service Contract (VSC), this is added coverage that you may choose to purchase at the time you purchase your vehicle. What is covered can vary widely depending on the terms and conditions of each agreement, so it’s important to thoroughly understand the coverage before you buy. It’s important to note that buying a service contract is not required in order for you to obtain a vehicle loan.

GAP Coverage**
You can choose to purchase Guaranteed Asset Protection (GAP) when you finance a vehicle. If you purchased GAP and your vehicle is ever stolen or destroyed, GAP pays the difference between what is owed and what the vehicle is worth. GAP is an optional product, and you aren’t required to purchase it to secure financing.

Invoice Price
Simply put, this is what the dealer pays the manufacturer for the vehicle, including the destination charge. The invoice price does not include any add-ons that may have been installed by the dealer or requested by a customer.

The Manufacturer’s Suggested Retail Price (MSRP) represents the manufacturer’s recommended selling price for a vehicle.

Negative Equity
Also known as being “upside down,” this occurs when the amount you owe on a vehicle is greater than what the vehicle is worth.

Different from a title in that it must be renewed on a regular basis, registration shows proof that appropriate fees have been paid in the driver’s state of residence and the vehicle can be legally driven and properly identified.

Simple Interest
Simple interest is interest that is applied only to the original (principal) amount of money that was borrowed. So, with a simple interest loan, as your principal goes down, so does the amount of interest that is charged.

When you pay on your scheduled due date, you pay exactly the amount of interest agreed on in your contract. If you pay late, even by a day, more interest will have accrued since your last payment, so more of the payment will go toward interest. Pay early, however, and a larger part of the payment will be applied to principal and a smaller part to interest. This may enable you to save and potentially pay off the vehicle quicker.

The title of the vehicle is the ownership document. When a vehicle changes ownership, the title is transferred to the new owner’s name within a specified period of time, depending on state rules and regulations.

Trade Equity
Also known as positive equity, this is when the amount owed is less than the market value of a vehicle. If you’re trading your vehicle and you have trade or positive equity, you can use that toward a down payment on your new vehicle.

How do you apply these terms to your loan?

Understanding some of the most common terms that come up while you’re at the dealership can be helpful. But don’t be afraid to ask your salesperson or the finance manager questions too.

It’s important to feel comfortable when you’re buying or leasing a vehicle, and that includes understanding the terms of your purchase.

*These statements are informational only and should not be construed as legal, financial, tax or other professional advice.
**Voluntary products like service contracts or GAP insurance are not required to obtain financing. In addition, there are many products out there, so make sure you’re educated about which ones you might want to purchase, if any.

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