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Understanding Common Car Loan Terms

Shopping for a car loan is an extensive process that can tax your mental energy. We are going to break down some common car loan terms you should know.
Understanding Common Car Loan Terms

Shopping for a car loan is an extensive process that can tax your mental energy. It’s difficult enough trying to manage your own finances in relation to the car loan process before you even consider the complex vocabulary used when discussing car loans. So, in this blog, Your Credit Union is going to break down some common car loan terms you should know.

Let’s Start with the Basics

  • Lender: The lender is understood as the institution or individual who is providing you with your car loan. Most commonly, the lender is a bank or credit union that is facilitating your loan.
  • Interest Rate: Your interest rate is the amount of money added over time by your lender as a charge for giving you a loan. Interest rates are one of the most important aspects of an auto loan, as those with poor credit history are usually forced to take on higher interest rates as a form of assurance for the lender.
  • APR: This acronym stands for “Annual Percentage Rate.” Your APR is calculated as higher than your interest rate as it includes all interest you’ve accrued as well as any other fees attached to the total cost of financing. Many consumers find the APR to be a better method of comparing auto loans as it represents the actual amount you’ll pay for your loan each year.
  • Principle: The total amount of your loan.
  • Maturity Date/Loan Term: This is the total amount of time within which your loan should fully be repaid to the lender. This term is typically presented in months (for instance, a 36 month term) and the term of your loan will help determine your monthly payments, as well as interest.
  • Amortization: This term refers to the way in which early payments on the loan contribute more towards the interest than the principle. Over time, payments on the principle become higher and interest payments decrease.

Specific terms savvy shoppers should know

Now that common car loan terms are explained, let’s look at some more specific terms that are still important for savvy shoppers to know.

  • “Upside Down”: Being upside down means you owe more than the vehicle is worth. This is very common with long-term loans, as the car begins to depreciate in-value the longer you own it. Shorter-term loans can help you avoid being “upside down.”
  • Invoice Price: A vehicle’s invoice price is the manufacturer’s initial charge to the dealer. This usually is higher than the dealer’s final cost because dealers receive rebates, allowances, discounts, and incentive awards. Generally, the invoice price should include freight, also known as destination and delivery.
  • Base Price: This refers to the cost of the car without options but includes standard equipment and factory warranty.
  • “Monroney” Sticker Price: This sticker shows the base price, the manufacturer’s installed options with the manufacturer’s suggested retail price (MSRP), the manufacturer’s transportation charge and other information, such as the fuel economy (mileage). Affixed to the car window, this label is required by Federal law, and may be removed only by the purchaser.
  • Dealer Sticker Price: Usually on a supplemental sticker, and displays the MSRP plus the suggested retail price of dealer-installed options, such as undercoating, and can include additional dealer markup or additional dealer profit.

Get started

Shopping for a car loan can be equally as stressful as shopping for the car itself. It’s harder still if you don’t understand the common car loan terms. “We hope this helps you feel more empowered as a shopper.” While shopping for a car loan, don’t forget to contact Your Credit Union to learn about our fantastic loan options that can help put you in the vehicle you want.

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