Auto Finance Key Terms

Make the right choices by learning auto finance vocabulary

Many people feel nervous when they try to finance a new or used vehicle. Car dealers have a reputation for taking advantage of customers who don't know the basics of auto finance. Fortunately, by understanding a few of the words that people use when talking about financing a car, you can feel more confident when negotiating a loan. For example, you may want to learn the difference between dealer and bank financing or whether there may be any pre-payment penalties incurred for early payment.

Dealer financing and bank financing

Dealer and bank financing simply refer to where your car loan originates from. With bank financing, sometimes called direct financing, you apply for a loan directly through the bank. Car dealers also offer financing options at attractive rates, typically for those with good credit. It's important for a consumer to consider all options before making a decision.

Pre-payment penalties

Some lenders include a pre-payment penalty in their car loan. This means that if the consumer were to pay the loan early, they will also have to pay additional fees. This happens more with longer or high-interest loans. If you plan to try to repay your loan early, make sure that there is no pre-payment penalty.

Pre-approval

Some people apply for pre-approval for a car loan before they shop for a car. The bank will tell you how much you can afford, which helps you to decide which car is right for you.

Repossession

When you get an auto loan, the bank uses the car as collateral against the loan. If you default on the loan, the bank may repossess, or take away, the car in order to recover its costs. To avoid repossession, talk to your lender if you encounter financial difficulties.
Federal Trade Commission explains repossession and what a consumer can do to avoid it.

Leasing or buying

Those that are interested in financing an automobile should decide whether they want to lease or purchase the car. When you purchase a car, you own the car when you finish making payments. When you lease a car, you make smaller payments, but you do not ultimately own the car.

FICO score

Your credit, or FICO, score is a measure of your credit-worthiness, which lenders use to determine whether they will offer you a loan and what your interest rate will be. The higher the credit score, the lower the interest rate.

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