Car Loan Background

28 Sep

15 Car Loan Terms You Need to Know

15 Car Loan Terms You Need to Know

Deciding to take out your first auto loan can be overwhelming and confusing. Jump start your journey by first understanding these 15 car loan terms you need to know.

We’ve curated and explained 15 major car loan terms below so you can walk into your lending process with confidence and knowledge.

15 Car Loan Terms You Need to Know

  1. Amortization. This is where the principal of the loan, or the amount you borrow, is paid down over the term of the entire loan.
  2. Certificate of Title. This is the legal document that names you as the owner of the vehicle you’re purchasing.
  3. Collateral. To secure a loan, your lender might require you to offer property or an asset you own as collateral. If you stop making payments, the lender has the right to seize that property in return. Their right to your collateral is called a lien (see below: Lien).
  4. Co-Signer. A co-signer is a person who will sign a loan alongside the borrower to help the individual secure the loan. Those who have poor credit or low income, who might not be approved for a loan on their own, may partner with a co-signer (usually a trusted family member) who promises to make payments if the borrower defaults.
  5. Creditor. This is the institution from which you are borrowing the money.
  6. Debtor. If you are borrowing money, you are the debtor.
  7. Direct Financing. When you go directly through a financial institution to secure your loan rather than open a loan through your car dealer, you are using direct financing. For example, any Signet Federal Credit Union member can opt for direct financing through us rather than allow their dealer to mediate their loan.
  8. Interest. Interest is the amount you pay at a determined rate each month for the use of your borrowed money. It is a percentage of the principal (see below: Principal).
  9. Interest Rate. This is a determined portion of the borrowed money that is charged as a payment in interest. It’s the money you pay for using the borrowed money and is usually shown as an annual percentage of what is left on your loan.
  10. Lien. The institution providing the borrowed money may require you to offer collateral (see above: Collateral). Their right to that property if you default on payments is called a lien.
  11. Monthly Payment. This is the amount of money you pay each month through the term of the loan.
  12. MSRP. This is often called the “sticker price.” It’s the manufacturer’s recommended selling price for the vehicle.
  13. Principal. This is the original amount of money you borrowed in the loan, not including interest.
  14. Term. This is the length of your loan, the pre-determined amount of time it will take you to pay it off.
  15. Trade-In Value. If you are trading in a car you currently own as a payment for the car you are purchasing, the amount the dealer will credit your purchase is called the trade-in value. For example, if you are purchasing a $10,000 car and you are trading in an older car with a trade-in value of $3,000, you will then owe $7,000 on your new car.

Have any questions about auto loans? Give us a call today or swing by a branch! To learn more financial terms, read Understand Retirement: Basic Terms You Need to Know.