Automotive Loans: Understanding Typical Loan Language

(1/8/2013) When getting a car loan, the process can seem intimidating. Amongst the excessive paperwork, documentation, and other needs, the language used can seem like a foreign one.

To better understand your options with car loans and to speak the language of the lender, here are a few key words to know.

TERM. Generally, the “term” of a loan refers to its length. Typical options for car loan length range from 1 to 6 years, with the most common being 3 to 4 years. Buyers should be advised that while a longer-term loan can reduce monthly payments, they also increase the total amount paid in interest and therefore the actual price of the car.

RATE. The interest rate at which the car loan is extended. Depending on your credit history and score, your finances, and the price of the car, you may qualify for a specific annual percentage rate (APR). This rate will then determine how much interest you pay each month, and over the life of the loan. Savvy borrowers shop around before purchasing a car to view all the rate options, and thereby achieve the most favorable loan for their situation.

DEPRECIATION. The loss in a car’s value over time. Cars depreciate quickly, losing a good portion of their total value in their first couple years.

DOWN PAYMENT. The initial deposit you pay at the time of purchase. The amount of your down payment is reduced from the total price of the car, meaning the bigger the down payment the smaller the loan. Down payments can be made with cash, or a combination of cash, trade-in vehicle, and any cash rebates or other dealer offers. Generally, experts recommend paying as much as you can in a down payment to reduce your loan and increase your savings. A good rule of thumb is to aim for a 20 percent down payment.

TRADE-IN. Your current car, sold to the dealer for credit against a new loan. The value of the trade-in can be applied to your down payment.

WARRANTY. An agreement that may either be included in the car purchase or available for additional funds that specifies repairs and issues that will be covered by the dealer. Typically warranties apply for a certain amount of time, and are limited in their coverage. Depending on your driving habits and vehicle, the warranty be a good investment or unnecessary.

UPSIDE DOWN. A dangerous situation when borrowers owe more than the car is worth. This can happen easily when purchasing a new car, as depreciation causes a significant drop in value in the first months and years. Putting down a larger down payment helps offset this loss in value.

For Additional Reading:

Should You Take a 7-Year Loan?

Other related articles:

Automotive Loans: Types of Financing

Automotive Loans: Buying Vs Leasing

Automotive Loans: Applying for a Car Loan

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High MPGs and low auto loan rates can save you thousands of dollars

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Amy Lillard A frequent contributor to ERATE® since 2006, Amy Lillard is a freelance writer specializing in turning complex information into useful tips and tricks for readers. For questions or topic suggestions, contact Amy at [email protected].

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