Auto financing documents contain a lot of formal legal language that the average consumer is not familiar with. A basic understanding of the common auto financing terms will help you navigate car loan negotiations and keep you from signing a contract you do not fully comprehend.
Shortened to “APR,” the annual percentage rate of auto financing is a percentage rate that represents the real expense of a car loan’s credit. The APR of auto financing is not the loan’s interest rate, which is calculated differently.
The interest rate for an auto financing loan is a percentage of compound interest that the loan accrues each year. The interest rate is derived from and applied to the principal plus interest, which usually results in you spending more than the APR for the car.
A down payment is the amount of money you pay up front toward the purchase of a used car. The loan amount is how much is left over after your down payment that needs to be financed.
This relationship means you should save as much for a down payment as possible, so you can use as little auto financing as possible.
An auto financing cosigner is someone who agrees to be financially and legally responsible for the car loan along with you, the principal borrower. Loan cosigners are often used to supplement a lacking credit history or income below the lender’s required minimum level. The cosigner will not retain any equity in the financed car, but their credit will be either positively or negatively affected by the repayment of the loan.
The disclosure statement for your auto financing agreement is the most important and detailed document you need to review. This statement includes how much the car is actually going to cost after the interest and other fees are considered. Be sure that the final amount, and each charge included in it, is what was agreed to during financing negotiations.
Very few average consumers know what amortization means. This term refers to how your monthly auto financing payments have been calculated. Financing agreements will include an explanation of the loan’s amortization, if you are curious how your monthly loan payments are determined.
An understanding of the terms used in your auto financing contract is vital to reviewing the long term financial commitment before signing. The basic terms are easy to understand, and you should always ask for clarification on any terms or phrases that don’t immediately make sense.
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