Glossary - Auto Buying and Lending

Advertising fee
A fee that an auto dealer charges an auto buyer to pay for advertising costs.

 Annual percentage rate (APR)
The yearly cost of a mortgage or the effective interest rate paid on a loan, expressed as an annual rate. APR includes interest, mortgage insurance and the origination fee (points), expressed as a percentage. As an example, if a borrower pays $1000 in closing costs to obtain a $20,000 loan, the APR is higher than the simple interest rate because the borrower is repaying a $20,000 loan but only receiving net proceeds of $19,000.

 Appraisal
A professional opinion of an asset's market value as of a specific date.  Average cost per year
The net cost of owning a car divided by the number of years the car is owned. Net cost equals non-operating costs of owning a car less the car’s expected trade-in value, any amortized loan principal and rebates. Non-operating costs include interest paid on a loan for the car, depreciation expense or wear-and tear and the trade in value of the car used to help pay for the replacement vehicle.

Base price
The cost of a car without options, but including standard equipment, factory warranty and freight.

Capitalized cost
Amount financed under a lease agreement.

Capitalized cost reduction
A term used in leasing that means cash down payment or some other consideration made at the beginning of the lease term, such as a trade
in.

Closed-end lease
A lease agreement that establishes a non-negotiable residual value for the leased auto and fee amounts due at the end of the lease term.

Collateral
Assets pledged by a borrower to secure a loan or other credit, and subject to seizure in the event of default.

Collision insurance
Insurance that pays to repair damage sustained in a collision with another auto.

Compound interest
Interest which is calculated not only on the initial principal but also the accumulated interest of prior periods.

Comprehensive insurance
Insurance that pays for damage sustained in a non-collision event such as theft, vandalism or bad weather.

Cost analysis
A technique in evaluating multiple choices and identifying the low-cost alternative using financial principles.

Credit risk
The possibility that a bond issuer will default, i.e. fail to repay principal and interest in a timely manner.

Dealer charges
Amounts charged for features sold separately by auto dealers, such as rustproofing, undercoating or services offered in extended warranties.

Dealer holdback
Allowance auto manufacturers give dealers that are worth about two to three percent of an automobile’s Manufacturer's Suggested Retail Price (MSRP). This holdback allows a dealer to pay the automaker an amount less than the invoice and allows the dealer to record a profit by suggesting he paid invoice price for the auto when, in reality, he/she paid less.

Dealer incentives
Programs offered by automakers to boost sales of less popular models and reduce inventories. It is up to the dealer whether or not they pass the savings onto the customer.

Dealer invoice
Amount that auto manufacturers charge dealers for vehicles, including options.

Dealer sticker price
The Monroney sticker price plus a suggested markup for dealer
installed options.

Depreciation
The decline in the value of an asset due to normal wear and tear. In an automobile, depreciation is based primarily on the number of miles driven—the more miles driven, the greater the depreciation—but may also be influenced by vehicle model, maintenance, general consumer demand for the model and the maker's reputation for quality.

Destination charge
A fee not marked-up by the dealer that is paid by the consumer for shipping and dealer
delivery costs of an auto.

Down payment 
The part of the purchase price paid in cash or trade-in value by the buyer upfront, in order to obtain a loan. The down payment reduces the amount of the loan.

Effective annual interest rate
The actual annual interest rate that accrues, after taking into consideration the effects of compounding (when compounding occurs more than once per year).

Escrow
Money, documents, real estate or securities deposited with a neutral third party (the escrow agent) and then disbursed upon fulfillment of certain established conditions. The escrow agent's role is to protect either side of a transaction from the other side's unauthorized use of funds and to ensure an arms
length transaction between buyer and seller.

Gap protection
Insurance that covers the amount owed due to early termination of a lease agreement. This may occur when a car is stolen or seriously damaged in an accident. Be aware, though, that the auto insurer's payment may not be enough to pay off the lease balance and/or any early-termination penalties.

Gross income
Total income before taxes or deductions. Gross income is one of the factors lenders weigh when they review loan requests.

Inflation rate
The percentage increase in the price of goods and services, usually annually.

Interest rate
The fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal; the rate is dependent upon the time value of money, the credit risk of the borrower and the inflation rate. Interest rates can be calculated as simple, compounded or effective.

Invoice price
The auto manufacturer’s base charge to a dealer, which includes a freight charge (often called a destination or delivery charge).Lien
A legal claim against an asset, like a home or auto, which is used to secure a loan.

Loan
An arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time.

Loan application
The first step in obtaining a loan. The loan application tells the lender how much the applicant wishes to borrow and how the loan proceeds will be used. An application typically lists personal income and assets, provides a work history and authorizes the lender to obtain a credit report.

Loan-to-value ratio
Also known as LTV. It is the amount borrowed (loan) divided by the appraised value of the collateral. It is expressed as a percentage. The collateral value is determined by either an appraisal or recent arms-length transaction. For example, a $20,000 loan on a car that was recently appraised at $25,000 has an LTV of 80 percent. Lock-in
Also called a rate lock, A lock-in is commitment by a lender to make a loan at a guaranteed interest rate for a specific period of time. Also known as rate lock. A lock
in protects the borrower against interest rate increases and shifts the risk of changes in market interest rates to the lender.

Manufacturer's rebate
A money-back program that auto manufacturers offer consumers directly to boost sales of less popular models and to reduce inventories.

Money factor
Used in the leasing industry to mean interest rate.

Monroney sticker price
The label attached to the window of an auto that discloses the automobile’s base price, installed options, MSRP, freight charge and fuel economy (mileage). Federal law mandates these minimum-labeling requirements and prohibits the sticker's removal by anyone other than the buyer.

MSRP
Acronym for Manufacturer's Suggested Retail Price. It is an automobile’s recommended selling price. Most options are not included in the MSRP.

Open-end lease
A lease term that requires the lessee to pay the difference between residual value and fair market value at the end of the lease term if the fair market value is lower.

Preparation charges
Charges imposed by a dealer for preparing a newly purchased auto for delivery to the buyer. These include fueling and servicing the auto and any cosmetic changes made just prior to sale.

Principal
The amount borrowed, or the part of the amount borrowed which remains unpaid (excluding interest). Also known as the part of a monthly payment that reduces the outstanding balance of a mortgage.

Reconditioning reserve
An auto leasing term identical with security deposit. The lessee gives the lessor a reconditioning reserve in the event a leased auto's condition deteriorates to a point where reconditioning is necessary.

Residual value
The remaining dollar value of a leased auto at the end of the lease term. Also known as book value.

Savings rate
The percentage of gross income that is saved or invested.

Simple interest
The interest calculated on a principal sum, not compounded on earned interest.

Tax rates  
The level of income tax of a given individual, as indicated by the amount of taxes he/she pays on his/her final dollar of taxable income.

Tax savings
A strategy of reducing of income tax liabilities by taking allowable deductions from taxable income, such as payments for mortgage interest, medical expenses and charitable contributions. Also known as a tax shield.

Term
The period of time of a loan. Auto loans are generally two to fours years in duration, while home mortgage loans generally have 15
or 30-year terms.

Title
A legally binding document that establishes evidence of ownership of an asset and any liens or other claims filed against the asset. A title should be examined for any recorded liens, which "encumber" a title and make its transfer more difficult than that of an unencumbered title. An unencumbered title is also referred to as a "clean" title.

Trade-in value
The amount a dealership will offer as consideration for an auto used as a down payment to purchase another auto.

Underwriting
A loan review process that begins with the acceptance of a loan application and ends with a decision to either approve or deny the loan request.

Upfront costs
These include any fees and charges collected in advance, before a loan is funded.

Upside-down 
A situation in which the fair value of an auto is less than the principal balance of the auto loan. This can be caused by the large depreciation in the auto from excessive wear-and-tear during the early years of the auto loan term.