Common Finance Terms Explained | Mobile AL
Finance Terms Explained in Mobile, AL
There’s a lot to comprehend when reading over an automotive finance agreement. Whether you’re new to financing a car or just need a refresher, we’re here to help. We want you to feel confident when you sign your name on a contract, so we’ve compiled a list of common automotive financing terms and their explanations. To learn more about common finance terms and what they mean, keep reading.
Most Common Finance Terms
When you finance a vehicle, you’re borrowing money from one of our lenders or a bank of your choice so you can purchase your desired vehicle. Essentially, the lender purchases the vehicle for you, and you repay the loan over an agreed term and interest rate.
Leasing, essentially, is like extended renting. It’s a great way to try out new cars that are still under warranty, but you’ll return the vehicle at the end of the agreed term. Customers pay a down payment, generally 20% of the vehicle’s value, followed by monthly payments until the end of the lease term. The typical term runs anywhere from 24 to 36 months, but it can go up to 60 months or 5 years. Once your term is up, you can return the car or have the option to purchase it.
The term is simply the set amount of time for a loan or lease. For example, the term on a 36-month loan is 36 months, or three years. Shorter terms usually mean higher payments but lower interest rates. When agreeing to a loan, make sure the loan term matches your budget.
The initial size of the loan is your principal, which is that big number you want to chip away at. If you finance a car that costs $18,000 but put down $2,000 for your down payment, your principal would be $16,000.
The more you can provide as a down payment, or money down, the better. Money down is how much money you place up front on a loan. If you can put more down up front, your monthly payments will be lower. Money down isn’t charged interest, and dealerships usually require a large down payment in order to secure a good interest rate.
You’re typically charged interest when you take out a loan. It’s the fee added onto your monthly payments, as it protects lenders from risky customers who may not repay the loan. It’s also referred to as the APR, or annual percentage rate, and it’s determined by various factors, including your credit score, the length of the term and the age of the vehicle being financed.
Cash is an incentive from manufacturers to encourage you to purchase a vehicle. It can shave off thousands of dollars on your vehicle purchase price, or the dealer can write a check for the amount advertised. You can usually use the cash back as the down payment and reduce the selling price, or you can walk away with a check in hand.
This is probably a term you’ve heard before. A rebate is an incentive that is usually applied to the selling price of a vehicle, but only after purchase. Once all the paperwork has been completed, the dealer will write a check for the rebate amount or give you cash on hand. Cash back is instant, but you may have to wait on a rebate to arrive.
When trading in, you’re offering your old vehicle to the dealership for credit towards the new vehicle that you want to purchase. By doing so, you can take thousands of dollars off the asking price.
Depreciation is when a car loses value. It happens year after year until the value is zero. You should happen to remember that depreciation affects every car, regardless of its condition. A brand new car loses around 10-20% of its value just by driving off the lot. In five years, that brand new vehicle will shed 60% of its original value, no matter how pristine you’ve kept it.
Equity is the difference between what the car is worth and how much you still owe on it. If the value of your car is $15,000, but you still owe $6,000 to the lender, you have $9,000 in equity. It’s important to keep this ratio balanced and not gain negative equity; this means you owe more on the loan than what the car is worth.
This is what we refer to as negative equity, as previously mentioned. Owing more on the vehicle than what it’s worth makes it difficult to sell, and negative equity can follow you into a new loan. If you finance with us here at Lexus of Mobile, we’ll try to help keep you from making this error.
If you have further questions or would like to know more, give us a call or visit us at 3024 Government Blvd, Mobile, AL 36606. We look forward to serving our customers from Gulf Coast, Daphne and Spanish Fort.