You've walked the walk--done your research into car brands, different body styles and types, compared models and features, and you're ready to take the next step.
But, if you're a student, a first-time buyer, or you've got no credit or bad credit, you'll want to talk the talk; be able to communicate clearly and effectively with whoever you choose to finance with. Whether that's a bank or credit union, or your local used-car dealer near St. Louis, you need to be able to understand the common terms of auto financing before you go in to make a deal.
At AutoCenters St. Charles, we believe that knowledge and education are an important part of a happy car ownership.
We've detailed a few of the most common car loan terms that you'll need to know. We'll be adding to this list as time goes on, to make sure our local drivers can be confident going in to their next transaction.
APR
Your Annual Percentage Rate is the total amount of interest that you'll pay in a year (includes the interest rate plus any applicable fees) shown as a percent of the total loan amount that you took out. APR will depend largely on the applicant: higher credit scores will see lower APR, lower scores will see higher APR. Read our blog to learn how you could raise your score!
Cosigner
A cosigner, or co-buyer, can be an invaluable resource to first-time or young buyers who may not be able to qualify for financing on their own. The cosigner signs the financing agreement along with the main applicant, and agrees to be legally responsible for the remainder of the loan if the applicant is unable to or won't make payments.
Credit/Line of Credit
"Credit" refers to the general ability to be able to borrow money from a lender, while "line of credit" refers specifically to the amount of money that is extended to a borrower. Usually it's used for companies that are taking out a loan, but it can apply to an individual customer, as well.
Creditor
The creditor is the institution that's lending the money: a bank, credit union, or dealership though an OEM program.
Down Payment
The down payment is the amount of money that you're able to pay at signing--for most people it's between $1000 and $5000 but there's no limit to what you can put down. The more money you put down, the less you have to finance in total.
Good Credit
There is no hard definition of "good credit", because it varies by credit bureau, or even by how the lender defines it. Some bureaus consider a score in excess of 700 as "good", while others start around 650, or even lower. If you keep balances low on open accounts and pay your bills on time, you likely have good credit.
Bad Credit
There is no hard definition of "bad credit", because it varies by credit bureau, or even by how the lender defines it. Some bureaus consider a below 550 as "bad", but other bureaus or lenders may still consider the 580-590 range as bad.
No Credit
Having "no credit" means just that--you have nothing on your credit report; you've opened no accounts or borrowed any money within the period of time that your history records (about 7 years). No credit doesn't mean bad credit, but it doesn't mean good credit either.
Debt-to-Income Ratio
Your debt-to-income ratio (DTI) is the ratio of your monthly debt payments to your gross (pre-tax) monthly income--how much you pay to car loans, home loans, credit cards, etc. divided by how much money you bring in per month. An ideal DTI is 35% or below, but lenders will often give credit to those who are below 50%.
Depreciation
Depreciation is another word for devaluation that's usually used in reference to cars; as assets, automobiles depreciate faster than any other types. All cars naturally lose value over time as they suffer from normal wear and tear--excess W & T can speed up the process.
Equity
Equity is the value of as asset after outstanding loan balances have been subtracted. For a brand-new car that has left the lot, but only had one or two payments applied to the loan, you would have negative equity because the value of the car would be less than the total amount of the loan. After making payments for a while, you have positive equity--the value of the car is greater than the total amount of the loan. When the loan is completely paid off, your equity is the entire value of the vehicle.
Blue Book Value
The Blue Book Value of a car is the estimated value of a used or new car as compiled by Kelley Blue Book, a vehicle valuation and automotive research company that was founded in 1926 and uses industry data to determine car values.
Black Book Value
The Black Book Value of a car is the estimated value of a used car by Black Book, a vehicle valuation company that was founded in 2002 and that uses pricing data from auctions and wholesale buying to determine car values.
Trade-In
The trade-in is the vehicle (or vehicles) of value that buyers can use as a form of downpayment on their purchase to help lower the amount of money they need to borrow. Car dealers determine the trade-in value of a vehicle based on Blue Book or Black Book values, as well as on local supply and demand and the condition of the vehicle.
Pre-Qualification
Pre-qualifying for a loan is a step toward securing financing for a car--but it's not the last step. Pre-qualification is an estimate of the amount of money you may be able to borrow from a lender. The estimate is created from information provided by the shopper, and it doesn't include a credit check. Because of this, it may not accurately reflect the amount of money that you will actually be approved to borrow.
Pre-Approval
Pre-approval is a step above pre-qualification. While the latter could help you determine whether you could be given credit, the former ensures that you will be. Pre-approval looks at your full credit history, as well as your debts, assets, and income, to determine how much money you are able to borrow from the lender and at what interest rate.
Principal
Your principal is the original amount of money that you borrowed. This does not include interest that has accrued or will accrue. When you make a payment, the principal always receives the last portion of that payment--everything else goes toward fees (if there are any) and toward interest that's been accrued.
Balance
The balance on a car loan is the sum of the principal, accrued interest, and any outstanding fees left after you've made a payment.
Loan Term
The loan term is the total number of months (or years) that you're allowed to make payments on your loan. You can pay off the remaining balance before the term is up, but don't go over your loan term or it'll hurt your credit for the future.
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