Glossary of Car Loan Terms

A

• Amortization:

  The process of spreading loan payments evenly over a fixed period of time.

• Annual Percentage Rate (APR):

  The yearly interest rate charged on a loan, including fees and other costs.

• Auto Loan:

  A loan specifically used to purchase a vehicle.

B

• Balloon Payment:

  A large payment due at the end of some auto loans or leases.

• Borrower:

  The individual who obtains funds from a lender with an obligation to repay.

C

• Collateral:

  An asset (such as the vehicle itself) pledged as security for loan repayment.

• Credit History:

  A record of the borrower’s past borrowing and repayment, used to assess creditworthiness.

• Credit Score:

  A numerical value used to evaluate the likelihood a borrower will repay a loan.

D

• Dealer Financing:

  Auto loan financing offered directly through car dealerships.

• Default:

  Failure to make scheduled loan payments as agreed upon.

• Depreciation:

  Reduction in a car’s value over time.

• Down Payment:

  Initial upfront payment made when purchasing a vehicle.

E

• Equity:

  The difference between the current value of your vehicle and the amount owed on it.

• Early Payoff:

  Paying off a loan before its maturity date.

F

• Finance Charge:

  The total amount of interest and fees paid over the life of a loan.

• Fixed Interest Rate:

  A loan interest rate that stays consistent throughout the loan term.

G

• Gap Insurance:

  Insurance coverage that pays the difference between a vehicle’s value and remaining loan balance in case of loss.

I

• Interest:

  The amount charged by a lender for borrowing money.

• Interest Rate:

  The percentage charged by the lender, based on the loan amount.

L

• Late Payment:

  A loan payment not received by the due date.

• Lease:

  A contract allowing use of a vehicle for a specified period with regular payments but without ownership.

• Lender:

  The institution providing funds in exchange for repayment with interest.

• Lien:

  The lender's legal claim against the vehicle until the loan is fully repaid.

• Loan Term:

  The length of time agreed upon to repay a loan fully.

M

• Monthly Payment:

  The fixed payment amount paid to the lender every month.

N

• Negative Equity (Upside Down):

  Owing more on your vehicle than its current market value.

P

• Preapproval:

  A lender's preliminary approval for a loan, indicating likely loan terms and amount.

• Prepayment Penalty:

  A fee charged if the loan is paid off early.

• Principal:

  The initial amount borrowed before interest and fees.

R

• Refinancing:

  Replacing an existing loan with a new loan, usually to obtain better terms.

• Repossession:

  Lender reclaiming the vehicle when borrower defaults on loan payments.

S

• Secured Loan:

  A loan backed by collateral, typically the vehicle itself.

• Simple Interest:

  Interest calculated solely based on the principal amount borrowed.

T

• Term:

  See "Loan Term."

• Title:

  Official document proving ownership of a vehicle.

• Trade-in:

  Offering an existing vehicle as partial payment toward a new vehicle purchase.

U

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• Unsecured Loan:

V

• Variable Interest Rate:

  An interest rate that changes periodically, based on market interest rates.

W

• Warranty:

  A manufacturer or dealer guarantee covering certain vehicle repairs or parts for a specified time.