Reference
Glossary of car-loan and auto-finance terms.
The vocabulary that turns up in dealer F&I rooms, AFCPE auto-finance materials, and lender disclosures. Each entry is short and links to longer treatment where one exists.
- Add-ons
- Optional dealer-added products and services (paint protection, VIN etching, nitrogen tires, etc.). Refuse unless meaningful and priced fairly.
- Amount financed
- Vehicle price plus tax and fees, minus down payment and trade-in equity. The principal of the loan.
- APR
- Annual Percentage Rate. The annualised cost of borrowing as defined by US Truth in Lending Act regulations.
- Buy rate
- The APR at which a lender will fund a loan; the rate before any dealer markup. Not typically disclosed to the buyer.
- Cap cost
- Capitalised cost. The lease equivalent of vehicle price. Negotiable.
- Captive lender
- An auto-loan financing arm owned by a vehicle manufacturer (Ford Credit, GM Financial, Toyota Financial Services). Typically the source of promotional 0 % financing offers.
- CARD Act
- Credit Card Accountability Responsibility and Disclosure Act of 2009. Applies to credit cards, not auto loans, but the broader Truth in Lending Act framework governs both.
- Dealer reserve
- The markup a dealer adds to the lender’s buy rate, retained as profit. See the APR page.
- Doc fee
- Documentation fee charged by the dealer for preparing paperwork. Capped by statute in some states; uncapped in others. Range $80–$700.
- Down payment
- Cash paid at the close of the transaction, reducing the amount financed. Typically expressed as a percentage of OTD price.
- Extended warranty
- Optional service contract covering mechanical breakdowns beyond the manufacturer’s warranty. Sold by F&I offices and third-party providers. See the F&I page.
- F&I
- Finance & Insurance office. The dealership department handling loan paperwork and selling optional add-on products.
- FICO score
- The proprietary credit-scoring model from Fair Isaac Corporation used by most US auto lenders. Range 300–850; auto-loan APR is heavily stratified by FICO band.
- Gap insurance
- Guaranteed Asset Protection. Coverage for the gap between auto-insurance payout and outstanding loan balance after a total loss. See the F&I page.
- KBB
- Kelley Blue Book. The most-cited US used-vehicle valuation publisher. Provides separate trade-in, private-party, and dealer-retail values.
- LTV
- Loan-to-Value ratio. Loan amount as a percentage of vehicle value. Auto-loan LTVs over 100 % (financing more than the vehicle is worth) produce immediate negative equity.
- Money factor
- The lease equivalent of an APR. Multiply by 2400 to approximate APR. The financing cost component of a lease payment.
- MSRP
- Manufacturer’s Suggested Retail Price. A starting point for negotiation, not the price the buyer pays.
- Negative equity
- Outstanding loan balance exceeds vehicle market value. Common in long-term financing and after rapid early depreciation. See the trade-in equity page.
- OTD
- Out-the-Door price. Vehicle price plus all taxes, fees, and add-ons. The total amount the buyer owes at close.
- Pre-approval
- A conditional commitment from a lender (typically a credit union) to fund a loan up to a stated amount at a stated APR, valid 30–60 days. Strengthens the buyer’s negotiation position in the F&I office.
- Residual
- The lessor’s estimate of a leased vehicle’s value at lease end. Determines the depreciation portion of the lease payment.
- Rule of 78s
- A front-loaded interest-allocation method used in some legacy and sub-prime auto loans. Penalises early payoff. Increasingly restricted by state and federal regulators.
- Sales tax
- State and local tax on motor-vehicle purchase. Range 0–9 % of (vehicle price − trade-in) in most US states; varies materially by jurisdiction.
- Subprime
- Borrowers with FICO scores below 600 (or other lender-defined threshold). Auto-loan APRs in this band typically run 12–25 %.
- Subvented rate
- A below-market promotional APR offered by a captive lender, typically funded by the manufacturer as a sales incentive. Common in 0 % / 2.9 % / 4.9 % promotional offers.
- Trade-in
- The process of giving an existing vehicle to the dealer in exchange for a credit toward the new vehicle’s price. See the trade-in equity page.
- TILA
- Truth in Lending Act. The US federal law governing consumer-credit disclosure, including the standardised APR calculation and finance-charge presentation.
- Underwater
- Synonym for negative equity. The vehicle is worth less than the outstanding loan balance.