key terms in auto loans

Key Terms in Auto Loans

Key terms in an auto loan can be complicated, but some of the most important terms to you and your loan. Whether you’re buying a car for the very first time or it’s been some time since your last vehicle purchase, familiarizing yourself with these key terms could help you better understand the process of an auto loan and make you feel more confident, knowledgeable, and secure in your purchase.


  • Actual Cash Value: The current value of a vehicle according to independent sources, such as Kelley Blue Book.
  • Amount Financed: The total amount you are borrowing from a lender
  • Amortization: The process of paying off your loan, gradually. In an amortized loan, a portion of your monthly payment applies to the amount of your loan, or principal, and a portion applies to the interest.
  • Annual Percentage Rate (APR): The realistic yearly cost of your loan, which includes interest and any fees applicable to the loan, expressed as a percentage. The higher the APR, the more you’ll pay as compensation for your loan.
  • Base Price: The purchase price of a vehicle, as is, without any add-ons or extended warranties. The actual purchase price may increase if you opt for additional upgrades, extended warranties, or maintenance contracts.
  • Co-signer: A person who assumes equal responsibility with you for your loan and pledges to repay the loan should you default. A co-signer on the loan gives the lender added confidence the loan will be repaid.
  • Credit Report: A detailed report on a borrowers credit history that lenders will review when determining your interest rate and APR.
  • Credit Score: The score on a credit report, which represents the risk level of a borrower.
  • Down Payment: An upfront payment made towards the cost of the vehicle. The down payment lowers the amount needed to finance the vehicle.
  • Extended Warranty: Covers the costs of basic maintenance or repairs, in addition to, or after the manufacturers warranty ends.
  • Fixed Rate Financing: An interest rate that remains the same throughout your entire loan term.
  • Flexible Rate Financing: An interest rate that alters based on the current market.
  • Guaranteed Auto Protection (GAP): Optional protection in the event the vehicle has been destroyed or stolen before the loan is paid in full. GAP covers the difference between what an insurance company will pay for the car and the remainder still owed on the loan.
  • Interest Rate: The cost of borrowing money from a lender, per year, shown as a percentage. Interest rates do not include any additional fees or charges.
  • Loan Term: The period a borrower will be making payments on their loan.
  • Loan-To-Value Ratio: The total dollar value of the loan divided by the Actual Cash Value of the vehicle.
  • Negative Equity: When the amount owed on a vehicle is higher than it’s current market value, mainly due to interest. Also known as being “upside down”.
  • Principal: The amount owed on the vehicle, not including any interest, fees, or additional charges.
  • Total Cost: The total cost of purchasing your vehicle over the entire loan term, including principal, interest, additional fees or finance charges, down payments or trade-ins.

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