Sometimes taking out a car or truck loan or refinancing a loan can be confusing due to the terminology. Understanding loan terminology helps you be sure that you are getting the best financing deal. Let’s look at some important loan concepts and their meanings.
Term length is the time agreed upon for you to pay off your loan. Your loan is said to have matured at the completion of the term. The loan term is generally expressed in months, usually ranging from 24 to 84 months. The longer the loan, the smaller your monthly payment, but the greater the interest you’ll pay over the life of the loan.
Principal And Interest
If the car you want to buy costs $20,000, you can borrow $20,000 for the purchase. This amount is the principal. When you pay the loan back over time, your lender will charge you interest which is expressed as the annual percentage rate (APR). Interest is also sometimes referred to as finance charges.
This is a lump sum of money you put towards paying for your car. It is not part of your loan, but the down payment does reduce the loan’s principal.
Annual Percentage Rate
The annual percentage rate (APR) is the interest you pay on the loan per year. The APR is usually set based on the U.S. Prime Rate which is the interest rate set by the federal government and the nation’s largest banks. On top of the prime rate, the lending institution adds a margin. The sum of the prime and the margin equals the APR.
Early Termination Fee
You might decide to go with a long term loan to keep your monthly payments low but with the intention paying off the loan early when you have more cash. This is permissible, but you should check the details of your loan to find out it there is an early termination fee for paying off a balance before the loan matures.
If you have an already existing vehicle loan, you might choose to refinance. The simplest refinance involves taking out a new loan with better terms, such as a lower interest rate, in order to pay off the full amount of the original loan.
If you are upside-down on your loan, it means that the amount you owe on your car loan is more than the market value of the vehicle. This often happens at the start of a loan term because the loan includes the value of the car plus finance charges. One way to avoid or shorten the time period for being upside-down is to make a large down payment. Another option is to go with a short loan term with larger monthly payments.
Sub-prime refers to a loan offered to someone with a low credit score. The rates and terms of sub-prime loans can vary significantly, and sometimes the interest rate will be higher than the prime.
Amortization basically means paying off a loan through installments. Part of the amount you pay each month goes toward interest and the rest goes toward reducing the principal. Amortization tables show exactly how your payment is distributed each month.
Being familiar with auto loan terminology makes borrowing or refinancing easier, and so does ready access to multiple lenders. With access to nearly 100 lenders all competing for your business, the CARCHEX Auto Refinance Resource Center is a great resource for your auto refinancing needs.
About The Author
Joe Campanella is the EVP of Business Development for CARCHEX and oversees partner relationships. Joe possesses 12+ years of experience building sales/customer service teams and securing strategic partnerships. He is a sports enthusiast who enjoys mountain biking, surfing and snowboarding in his spare time.