Key Terms to Know Before Financing a Car

negotiating a dealFinancing a new car can feel like you’re talking to someone in a foreign language. Acronyms and terms not used in everyday English are bounced around with the assumption that everyone is on the same page. If you don’t know exactly what you’re doing when it comes financing, then check out this list of essential terms to memorize before you sign on the dotted line.

Down payment – A down payment is the amount you pay the dealership for your car before you take out your loan. This amount is then subtracted from the total amount of the car, determining how much of a loan you’ll end up taking out for the car. So, if you’ve just purchased a vehicle for $17,000 and you pay the dealership $3,000 up front, your down payment is $3,000 and the loan you’ll take out will be for $14,000.

Interest Rate – When you borrow money from an institution, whether it’s a bank or a car dealership, they are almost always going to charge you a percentage above and beyond what they lent you. If someone lends you $1000 and they ask for $1100 back, they are charging you a 10% interest rate. Therefore, if you’re paying a lower interest rate, that means you’re paying less money back for your loan.

APR – This is an acronym that stands for Annual Percentage Rate, and it’s related to your interest rate. Most simply put, it is the amount of interest you have paid during the course of an entire year. So if someone is charging you a 3% interest rate over the course of 3 months, that means the annual interest rate, or APR, is 12% over 12 months.

Balance – The balance of a loan is the amount left to be paid. If you have a loan of $1000 and you pay off $100, then your balance is $900.

Lease – Leasing a car is similar to renting an apartment. You pay to use the car like you pay to use the apartment, but you don’t actually own it.

Financing – When you finance a car you are borrowing money in order to pay for the vehicle. Once you have paid off your loan, then you own the car. You can finance your car at a dealership through the Finance and Insurance Office.

February 3, 2013 by Jamie Rettig