Complicated Auto Loan Terms, Defined

Auto loans come with their own language and if you’re not prepared it can take all of the enjoyment out of buying a new car. What should be a fun experience can quickly become overwhelming. It’s easy to lose composure when you’re not so sure what you are agreeing to.

Auto loan terms don’t have to be intimidating and they are not as complicated as they appear. Learning a few basics can help you make sense of what a lender is offering and what they expect from you in return. Here are some common auto loan terms you might come across.

Annual Percentage Rate

The APR is a true reflection of the annual cost to borrow money. It includes the interest rate along with the fees that the lender charges and expenses associated with obtaining the loan. On something like the purchase of a car, the APR is usually a substantial amount of money so it’s smart to pay close attention to this number.

The disclosure of the APR and what it needs to contain is governed by the Truth in Lending Act to protect consumers. Having these standards in place makes it easier for borrowers to accurately compare different lenders and what they offer. A standardized APR allows for better financial decision making.

Amortization

Loan amortization is the scheduled fixed payments required to pay back the loan over a set amount of time. While each payment installment is for the same amount of money, they may not be applied to the principal amount and the interest in the same way. Lenders generally require that a larger portion of the initial payments go towards the interest saving the larger part of the principal to be paid in later installments.

Creditor

A creditor is a person or institution that lends money to the borrower. It is this entity to which the balance of the loan is owed. In the case of auto loans, the creditor is usually a financial institution such as a bank or credit union. They are the lender giving credit to another party.

Cosigner

If you don’t have good credit or you don’t meet the lender’s minimum requirements for items such as income, then your only option for getting a loan may be a cosigner. This person agrees to assume financial responsibility for your loan if you fail to pay back what you owe. A cosigner is just as obligated as the borrower to meet all stipulated requirements on the loan.

Balloon Payment

A balloon payment is a larger payment that is due at the end of the loan. Generally this larger payment is more than two regular monthly payments. The benefit of having a balloon payment is that your monthly installments are lower. If you are offered this option it’s only worth considering if you are sure that you will be able to make the inflated balloon payment at the end.

Buydown

A buydown is sometimes offered as an option to lower the interest rate that a borrower is qualified for. It is a fee that is paid upfront at the time of purchase. In exchange, the borrower is able to secure a lower interest rate for the life of the loan which results in lower monthly payments.

Credit

Credit represents trust. It is the amount of trust which a lender has in a borrower’s willingness and ability to repay a loan. Credit is normally based on past behavior, credit history, and overall financial health.

Loan Term

The loan term is the amount of time it will take for the loan to be repaid. This is generally represented in months. A longer term means smaller monthly payments but often at the cost of a higher APR.

Adverse Action

If an individual wants to borrow money they need to submit a credit application. The lender will assess the applicant’s candidacy for a loan and either accept or refuse the application. An adverse action happens when the lender refuses an applicant the loan.

Credit Bureau

A common misconception is that a credit bureau has the power to approve or deny a loan but this is not the case. A credit bureau is a company which collects the financial information and credit history that determines your credit score. The credit report that they compile is what a creditor will use to determine how much they are willing to lend a specific individual.

Credit bureaus collect information from the creditors that you have accounts with such as banks and other financial institutions. They also gather information from collection agencies, courthouse records, and other sources pertaining to credit history. The three main credit bureaus are Equifax, Experian, and TransUnion.

Indirect Financing

Indirect financing occurs when a borrower secures an auto loan from a dealership instead of directly from a financial institution. In this case the dealership is not the lender. Instead they are an agent acting on behalf of the lender and forwarding the loan to the financial institution.

Fixed Rate

In a fixed rate loan the APR stays the same for the life of the loan. It is established at the start of the agreement and is not influenced by any other factors. This means that your monthly payments will not change.

Variable Rate

With a variable rate loan the APR is linked to a benchmark. Most often the benchmark which is used is the prime rate. Your APR may change if the market fluctuates affecting your monthly payments.

Credit Life Insurance

In the event of death, any outstanding debts become the liability of the borrower’s estate. In order to protect the estate from creditors, a borrower may purchase credit life insurance. The insurance company will then pay the outstanding balance on your debt if you pass away before paying off the loan.

Don’t be intimidated by complicated auto loan terms. Just a little preparation can improve your confidence and help you make the best financial decision. Not happy with what your lender is offering? myAutoloan can help you compare quotes in a matter of minutes.