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Auto Loan Glossary

Definitions for Common Automotive Finance Terminology

When buying a car, have you ever wondered what a particular term or phrase means? Our automotive finance glossary has definitions for all of the common terminology. Use your scroll bar to move down the page, or simply click on one of the following letters (definitions are grouped alphabetically).



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A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

Accrue
To accumulate interest charges.

Add-Ons
Refer to Options.

Adverse Action
The refusal to grant credit either in the amount or according to the terms requested by the applicant.

Adverse Action Notice
A document that explains to an applicant the reason(s) credit has been denied.

Amortization
The repayment of a loan by installments with regular payments to cover the principal and interest.

Amortization Table
A table showing the amount of a principal and interest due at regular payment intervals and the corresponding unpaid balance of the loan after each payment.

Amortization Term
The amount of time required to amortize the loan. The amortization term is expressed as a number of months. For example, for a 3-year fixed-rate loan, the amortization term is 36 months.

Amount Financed
The amount of credit provided by a lender.

Annual Percentage Rate (APR)
The Annual Percentage Rate (APR) is a yearly rate of interest that includes all of the fees and expenses paid to acquire the loan. A term used in the Truth-in-Lending Act to represent the percentage relationship of the total finance charge to the amount of the loan.

Application
An initial written statement of personal and financial information required for an evaluation of creditworthiness.

Asset
Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on).

Auto Test Drive
A hands-on research tool in which the potential buyer drives the auto to test for overall handling, feel, and performance.

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B

Bankrupt
A person, firm, or corporation that, through a court proceeding, is relieved from the payment of all debts after the surrender of all assets to a court-appointed trustee.

Bankruptcy
A proceeding in a federal court in which a debtor who owes more than his or her assets can relieve the debts by transferring his or her assets to a trustee.

Base Price
The cost of an auto before a franchised dealer adds options. Includes the standard equipment and the manufacturer's warranty.

Basis Point
An interest rate or yield expressed as 1/100 of one percent.

Before-tax income
Income before taxes are deducted.

Beneficiary
The person designated to receive the income from a trust, estate, or a deed of trust.

Black Book
Refer to Book Value.

Book Value
The value of a used auto in a specific market area. A recognized wholesale appraisal guidebook provides guidance on the auto's value at any given time. Examples of these guidebooks include Black Book, Kelley Blue Book, or NADA Guides.

Borrower
The individual that obtains credit from a lender with the understanding that it will be repaid, with interest, within a clearly defined schedule.

Branded Titles
A title labeled by a state titling agency with one of the following comments: Not Actual Mileage, True Mileage Unknown; Reconditioned, Salvage; Rebuilt, Flood, Manufactured Buyback; Lemon Law Buyback; Warranty Return; Exceeds Mechanical Limits; or Reconstructed Prior Collision.

Breach of Contract
A violation of any legal obligation.

Broker
A person who, for a commission or a fee, brings parties together and assists in negotiating contracts between them.

Buyer
An individual who purchases an auto. This individual is primarily liable for repayment of the loan and has ownership rights in the property purchased.

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C

Cash Price
The price at which a seller offers to sell the property or service that is the subject of the transaction.

Certificate of Title
A document issued by a state to provide evidence of motor vehicle ownership and any lien holder's security interest.

Clear Title
A title that is free of liens or legal questions as to ownership of the property.

Co-Buyer
An individual who purchases an auto (property) jointly with a Buyer. This individual is jointly liable for repayment of the loan and has ownership rights in the property purchased.

Co-Owner
A second owner of the auto (property).

Co-Signer
An individual who agrees to pay the amount due (payment) and to perform all the agreements stated on the contract if the buyer fails to meet contractual obligations.

Collateral
An asset (such as an auto) that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract.

Collection
The efforts used to bring a delinquent account current and to file the necessary notices to proceed with foreclosure when necessary.

Collision Coverage
See Collision Insurance

Collision Insurance
Insurance that provides coverage against the loss or damage to property arising out of the ownership or use of property. Collision coverage would cover any loss associated with a collision.

Comprehensive Coverage
See Comprehensive Insurance

Comprehensive Insurance
A coverage, which pays for property loss, caused by force other than collision, such as fire, theft, vandalism, flood, hail and glass breakage.

Consumer Credit
Credit offered or extended to a consumer primarily for personal, family or household purposes.

Consumer Credit Protection Act
See Truth-in-Lending Act.

Consumer Reporting Agency (or Bureau)
An organization that prepares reports used by lenders to determine a potential borrower's credit history. The agency obtains data for these reports from a credit repository, as well as from other sources.

Credit
An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date.

Creditor
A person or institution who extends credit and to whom the obligation is payable.

Credit Bureau
An organization that gathers consumer credit information. There are three major credit bureaus: Equifax, Experian, and TransUnion.

Credit Disability Insurance
An insurance policy that provides protection to the borrower in the event the borrower becomes medically disabled and is not capable of making their loan payment. The insurance company will make payments on a monthly basis according to the terms of the policy.

Credit History
A record of an individual's open fully repaid and unpaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.

Credit Life Insurance
An insurance policy that may be purchased by the borrower to provide protection in the event of death. The insurance company may pay off the account according to the terms of the policy. This protects the borrower's estate from the liability of the debt.

Credit Report
A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.

Credit Score
A numeric assessment used to evaluate the amount of "risk" involved in a credit transaction. It involves the evaluation of credit quality based on the information provided in the consumer's application, the proposed loan structure and the consumer's credit report.

Creditworthiness
Determination of a consumer's eligibility to borrow money. This information is based on the number of accounts opened, the types of accounts, payment history and account balances.

Customer Incentive
Refer to Rebate.

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D

Dealer Invoice
The amount the dealer pays the manufacturer for an auto.

Dealer Sticker Price
The total price of the auto. Dealer sticker price is also known as sticker price, or MSRP.

Debt
An amount owed to another.

Default
Failure to comply with the terms of a loan contract. If a borrower defaults on a loan, the lender may seize the collateral, liquidate (sell) it, and apply proceeds to the loan balance.

Delinquent
The failure to make a loan payment on time.

Department of Motor Vehicles (DMV)
A state agency that oversees the process of registering, titling and licensing autos for a particular state. The Department of Motor Vehicles is also referred to as the Department of Transportation.

Department of Transportation
Refer to Department of Motor Vehicles.

Depreciation
A decline in the value of an auto (property) over time.

Destination Charge
The price added into the dealer invoice for moving the auto from the manufacturer to the dealer.

Direct Financing
A loan is originated directly between a lender and a consumer. Compare to Indirect Financing.

Down Payment
The part of the purchase price that the buyer pays in cash and does not finance with a loan.

Due Date
The date in a given month that a loan payment is due.

Duplicate Title
The request by an applicant to reissue a Certificate of Title when the original has been lost or destroyed.

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E

Effective Gross Income
Normal annual income including overtime that is regular or guaranteed. The income may be from more than one source. Salary is generally the principal source, but other income may qualify if it is significant and stable.

Electronic Funds Transfer (EFT)
A process that allows either the lender or the borrower to transfer funds or payments electronically between respective bank accounts.

Endorser
A person who signs ownership interest over to another party.

Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Extended Warranty
A contract that covers specified breakdowns after a manufacturer's warranty expires. Manufacturers and independent companies sell extended warranties.

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F

Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one's credit record.

Fair Market Value
The amount that a willing buyer would pay at a given point in time for the auto (property) in a realistic transaction.

Finance Charge
The cost of consumer credit expressed as a dollar amount.

Finance Company
An institution that finances purchases repayable in installments.

Fixed Rate Loan
A loan in which the interest rate remains constant throughout the life of a loan.

Franchised Dealership
An automobile dealership authorized by a manufacturer to sell the manufacturer's products.

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G

Guarantee of Title (GOT)
A letter that guarantees delivery of a properly completed Certificate of Title.

Guaranteed Automobile Protection (GAP)
A product that pays any remaining balance owed on a loan after payment of a total loss insurance claim.

Guarantor
One who agrees to pay the debt of another.

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H

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I

Indirect Financing
A loan that is originated by a dealership and subsequently assigned to a financial institution.

Inspection
The mechanical and physical evaluation of an auto.

Installment Plan
A method of buying an auto (property) on credit and making payments at regular intervals for a specific period of time.

Insurance
The assumption of risk of another party's financial loss.

Insurance Premium
The payment made to an insurance company to cover the cost of insurance.

Interest
The cost of borrowing money, usually stated in terms of a percentage.

Interest Rate
The interest rate is a part of the annual percentage rate (APR) equation. Interest is the annual rate of return that the lender receives on the Principal of the loan.

Invoice Price
Refer to Dealer Invoice.

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J

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K

Kelley Blue Book
Refer to Book Value.

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L

Late Fee
A charge assessed by a lender for payments received after a specific due date.

Lemon Law
A blanket term used to refer to various state laws that protect consumers against the purchase of an auto found to be persistently defective.

Lender
The individual or organization that lends funds to a borrower with the understanding that those funds will be repaid, with interest, based on a clearly defined schedule. It can be a bank, credit union, or finance broker offering or referring the loan.

Liability Insurance
Protection for the policyholder, up to an agreed amount, for sums payable to another for personal (bodily) injury or property damage.

Lien
A security interest in property, such as an auto, to secure the payment of an obligation.

Lien Holder
The individual or company holding a security interest in collateral to ensure repayment of a loan.

Lien Perfection
The process of ensuring that the lien holder is correctly identified on the title.

Loan
Money lent to a consumer to be repaid over a period of time.

Loan Balance
The amount owed on a loan after deducting the amount of payments made.

Loan Contract
The written agreement between a borrower and a lender that identifies the terms of the loan.

Loan Term
This is the length of the loan, usually broken down into months (24, 36, etc.). While it is true that the longer the "Loan Term", the lower the monthly payment; increasing the length of the loan to lower the monthly payment should be done with a great deal of caution as the total amount repaid will be higher due to interest accrued. It is calculated by dividing the sales price or appraised value of an auto by the loan amount.

Loan-to-Value Ratio (LTV)
A ratio used to determine the amount of money a lender will loan based on the value of the auto. It is calculated by dividing the loan amount by the Retail Value or Manufacturer's Suggested Retail Price (MSRP).

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M

Manufacturer
The original producer of an auto. A few examples include Ford, Chevrolet, Honda, BMW, or Dodge.

Manufacturer's Rebate
Refer to Rebate.

Manufacturer's Suggested Retail Price (MSRP)
The auto sales price suggested by the manufacturer.

Maturity Date
The date on which the balance of the loan becomes due and payable.

Monthly Payment
The amount of principal and interest the borrower is obligated to pay each month.

Motor Club
Motor Clubs provide multiple products and services to enhance member benefits. From 24 Hour Roadside Assistance to Travel Services, maintenance reminders and so on, the assortment is extensive and varies from Motor Club to Motor Club.

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N

Non-Prime Lender
A lending institution that loans money to individuals with a financially challenged credit history. The risk factor on this type of loan is greater, thus resulting in higher interest rates in order to compensate for the high risk factor.

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O

Obligation
The legal responsibility of a borrower to repay a loan.

Options
Features that are added to a base model. For automobiles, examples include a sunroof, standard or automatic transmission, and bucket seats. Options are also referred to as add-ons.

Other Owner
A person whose name is on the collateral title; however, this person is not responsible for the debt. The Other Owner signs an acknowledgement, which indicates that the lending institution holds a security interest in the auto.

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P

Preferred Placement Form
The form that is completed with an individual's financial information in order to submit and search for the best matched lender to the individual's specific credit needs.

Principal
The amount of the auto loan without the interest factored in. In other words, the amount you are financing and will be paying interest on.

Principal Balance
The unpaid balance (remainder) of a loan.

Promise to Pay
The agreement by the borrower to repay the current payment amount and date to be paid.

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Q

Qualify
The ability to meet a lender's criteria for granting credit.

Quote
A price that represents the cost of a specific item, such as a loan rate, service contract, price of an insurance policy and so on.

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R

Rate
The annual rate of interest on a loan, expressed as a percentage of 100.

Rebate
A manufacturer's reduction to the price of an auto, which serves as an incentive to buyers. May also be referred to as a manufacturer's rebate or customer incentive.

Regulation Z
A regulation that implements the Truth-In-Lending Act. It applies to all lenders and requires disclosure of credit terms.

Retail Blue Book Value
The value of a used auto in a specific market area. See Book Value.

Retail Price
The amount the buyer pays the seller for an auto.

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S

Secured Loan
A loan that is secured by collateral.

Security
Assets or personal property pledged as collateral to secure a loan.

Security Interest
An interest in property that secures performance of a credit obligation.

Service Contract
These are contracts that provide financial coverage to repair or replace any failure or breakdown within the limits of the policy.

Simple Interest
A method of calculating interest due by applying a periodic rate to the outstanding balance on a daily basis. As payments are received they are applied first to the accrued interest and then to the principal amount.

Sticker Price
Refer to Dealer Sticker Price.

Substitution of Collateral
The substitution of a comparably valued auto (property).

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T

Tax
A percentage of the final sales price that is required to be paid to local, state, and/or federal government entities.

Term
The period of time which covers the life of the loan. For example, a 3 year fixed loan has a term of 3 years or 36 months.

Title
The evidence one has of right to possession. See Certificate of Title.

Total Sales Price
The total price of a credit purchase including any down payment equal to the total of payments plus any down payment.

Trade-In
An auto exchanged for a credit amount on the purchase of a new (auto) item.

Trade-In Allowance
A credit amount given to a customer upon purchase of a new auto, in exchange for their old auto (property). This credit amount may reduce the cash price of the new purchase.

Truth-In-Lending Act
A federal law requiring a disclosure of credit terms using a standard format. This is intended to facilitate comparisons between the lending terms of different financial institutions.

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U

Underwriting
The process of verifying data and approving a loan or insurance policy.

Usury Law
A law that sets the maximum interest rate that can be charged on a loan.

Usury Limit
The maximum interest rate allowed by law in a given state.

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V

Vehicle Identification Number (VIN)
An individual serial number assigned by the manufacturer to a motor vehicle. The alphanumeric number consists of seventeen (17) digits is located on the auto's dashboard and visible through the windshield.

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W

Warranty
A guarantee from the dealer or manufacturer that an auto (item) will perform as expected or specified. Warranties usually cover specific mechanical problems for a specific number of miles or amount of time.

Wholesale Book Value
The amount the dealership usually pays for a used auto in markets other than retail, typically auctions and broker transactions.

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X

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Y

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Z

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