11 Auto Loan Terms You Should Know Before Financing a Car
If you’re in the market for a new (or new-to-you) car, it can be fun to think about all the features you want in your new ride. Do you want a remote starter? Leather seats? How about a sunroof? While it’s nice to daydream about these bells and whistles, it’s even more important to spend some time thinking about how you are actually going to pay for your new vehicle. So before you start visiting dealerships and test-driving cars, make sure you understand the terms you need to know when it comes to auto financing.
Annual Percentage Rate (APR): This is the interest rate for the auto loan that the lender charges annually, expressed as a percentage. Sometimes referred to as the finance rate, it can vary widely depending on factors like the car’s model year, the loan term, and the borrower’s creditworthiness and down payment amount. You can use our auto loan calculators to figure out how much your monthly car payment will be depending on the loan amount and interest rate.
Blue Book Value: This refers to the Kelley Blue Book®, a used-car pricing guide that includes information for nearly all makes and models. The Kelley Blue Book is often used to determine the value of a trade-in vehicle (more on that below).
Down Payment: This refers to the cash deposit the borrower provides in order to reduce the amount financed. While a down payment isn’t always required for qualified buyers, you should aim to put down 10%–20% of the purchase price in order to keep your monthly auto loan payments affordable.
GAP Insurance: If your car is stolen or totaled in an accident, insurance companies will typically only pay the replacement cost of the vehicle, not its actual value. Guaranteed Asset Protection (GAP) insurance protects your purchase by covering the “gap” between the car’s value and your outstanding loan balance, so you don’t end up owing more than your car is worth.,
MSRP: This stands for Manufacturers Suggested Retail Price and is included on the “window sticker” placed on vehicles that are for sale. The sticker lists the car’s base price and standard features, along with any optional features and their associated costs. In general, buyers are able to negotiate the asking price below the amount quoted on the sticker.
Prepayment Penalties: Sometimes, a lender will charge a fee known as a prepayment penalty if the borrower pays off the auto loan early because that reduces the total amount of interest the lender will receive. Make sure you understand whether this applies to your loan before you sign on the dotted line. If you have decent credit, you will likely be able to obtain a loan without a penalty for early payoff.
Principal: This is the amount borrowed, and can include the purchase price plus any financed dealership fees, minus the down payment. Financing a lower amount will result in lower monthly payments.
Term: This refers to the length of the loan. Auto loans typically range from two years all the way up to seven years. A longer loan term usually results in a lower monthly payment, but higher interest costs over the life of the loan.
Trade-In Value: Often, people will trade in their car to use as the down payment for their new vehicle. The trade-in value is the price the dealer will give you for your current car when you buy a new one. Keep in mind that the amount you’ll receive by trading in your car at the dealership will usually be significantly lower than the price you could get if you tried to sell it yourself.
Upfront Costs: This is the total out-of-pocket amount that the borrower must pay when they sign the contract. The amount may include a down payment, first month’s payment, fees, sales tax, and title.
Upside Down: This is the unfortunate position that occurs when you owe more on your auto loan than the car is actually worth. Vehicles depreciate significantly during the first few years, so if you buy a brand-new car, chances are your loan balance will exceed the car’s value soon after you drive off the lot. Shorter loan terms minimize the risk of becoming upside down on your loan.
Before You Visit the Dealer, Talk to Us
At BluPeak Credit Union, we offer a variety of Auto Loans with great rates, fewer fees, and flexible terms. Whether you want to buy a new car or refinance your existing loan, we can help you find the best deal for your budget. And, we’ve partnered with Costco® to make the whole car-buying experience easier and less stressful—we’ll support you before, during, and after your purchase!
This information is provided for educational purposes only and is not intended to be vehicle buying advice. All loans subject to credit approval. Rate terms and conditions subject to change. Must meet membership and account criteria. Restrictions apply. BluPeak Credit Union is not an affiliated of with Costco or the Costco Auto Group, CARFAX® or the Affinity Development Group. Costco is a trademark of Costco Wholesale Corporation. Costco Auto Program is operated in the United States by Affinity Auto Programs, Inc. doing business as Costco Auto Program. Kelly Blue Book is a registered trademark of Kelley Blue Book Co., Inc.