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Base price
The cost of a car without options, but including standard equipment, factory warranty and freight. This price is printed on the Monroney sticker.
Capitalized cost
The total amount financed under a lease agreement, similar to the selling price of an automobile when purchased.
Capitalized cost reduction
A term used in leasing that means cash down payment or some other consideration made at the beginning of the lease term, such as a trade-in.
Closed-end lease
A lease agreement that establishes a non-negotiable residual value for the leased auto and fee amounts due at the end of the lease term.
Collateral
Assets (in the case of an auto loan, the car being purchased) pledged by a borrower to secure a loan, which is subject to seizure in the event of default.
Collision insurance
Insurance that pays to repair damage sustained in a collision with another auto.
Compound interest
Interest which is calculated not only on the initial principal but also the accumulated interest of prior periods.
Comprehensive insurance
Insurance that pays for damage sustained in a non-collision event such as theft, vandalism or bad weather.
Cost analysis
A technique in evaluating multiple alternatives and identifying the lowest cost using financial principles.
Credit
Reputation for solvency and integrity entitling a person to be trusted in buying or borrowing.
Credit risk
The possibility that a purchaser will fail to repay principal and interest in a timely manner.
Dealer charges
Amounts charged for features sold separately by auto dealers, such as rust proofing, undercoating or services offered in extended warranty plans.
Dealer holdback
An allowance auto manufacturers give to dealers that are worth about two to three percent of an automobile's Manufacturer's Suggested Retail Price (MSRP). This holdback allows a dealer to pay the automaker an amount less than the invoice and allows the dealer to record a profit by suggesting he paid invoice price for the auto when, in reality, the dealer paid less.
Dealer incentives
Programs offered by auto manufacturers to boost sales of less popular models and reduce dealer inventories. The dealer does not have to pass this savings onto the customer.
Dealer invoice
Amount that auto manufacturers charge dealers for vehicles, including all options.
Dealer sticker price
The auto manufacturers sticker price (known as Monroney sticker price) plus a suggested markup for dealer installed options.
Depreciation
The decline in the value of an automobile due to normal wear and tear. Based primarily on the number of miles driven (the more miles driven, the greater the depreciation) but also may be influenced by vehicle model, maintenance, general consumer demand for the model and the maker's reputation for quality.
Destination charge
A fee not marked-up by the dealer that is paid by the consumer for shipping and dealer
delivery costs of an auto.
Down payment
The upfront part of the purchase price paid in cash or trade-in value by the buyer in order to obtain a loan. The down payment reduces the amount of the loan.
Effective annual interest rate
The actual annual interest rate that accrues after taking into consideration the effects of compounding (when compounding occurs more than once per year).
Escrow
Money, documents, real estate or securities deposited with a neutral third party (the escrow agent) and then disbursed upon fulfillment of certain established conditions. The escrow agent's role is to protect either side of a transaction from the other side's unauthorized use of funds and to ensure an arms length transaction between buyer and seller.
Equity
The residual value of a business or property beyond any mortgage thereon and liability therein.
Finance company
A company specializing in the financing of installment plan sales.
Financial disclosure
Requirement to obtain a loan by providing information on assets and income in the form of tax returns when a person is self-employed.
Financing
To provide with money, monetary resources
Foreclosure
The act of foreclosing, repossessing (taking back from the borrower for nonpayment), especially a legal proceeding by which an auto or mortgage is foreclosed.
Gap protection
Insurance that covers the amount owed due to early termination of a loan. This may occur when a car is stolen or seriously damaged in an accident.
Gross income
Total income before taxes or deductions. Gross income is one of the factors lenders weigh when they review loan requests.
Inflation rate
The percentage increase in the price of goods and services, usually annually.
Insurance
Coverage by a contract binding a party to indemnify another against specified loss in return for premiums paid. Interest: A charge for a loan, usually a percentage of the amount loaned.
Interest rate
The fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal; the rate is dependent upon the time value of money, the credit risk of the borrower and the inflation rate. Interest rates can be calculated as simple, compounded or effective.
Invoice price
The auto manufacturer's base charge to a dealer, which includes a freight charge (often called a destination or delivery charge).
Lending
To provide (money) temporarily on condition that the amount borrowed be returned, usually with an interest fee.
Lien
A legal claim against an asset, like a home or auto, which is used to secure a loan.
Loan
An arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time.
Loan application
The first step in obtaining a loan. An application usually lists personal income and assets, provides a work history and authorizes the lender to obtain a credit report.
Loan-to-value ratio
The amount borrowed (also known as LTV) divided by the appraised value of the collateral, expressed as a percentage.
Lock-in
A lock-in (also called a rate lock) is commitment by a lender to make a loan at a guaranteed interest rate for a specific period of time. A lock in protects the borrower against interest rate increases and shifts the risk of changes in market interest rates to the lender. An auto lender will usually guarantee interest rate for 30 days.
Manufacturer's rebate
A money-back program that auto manufacturers offer consumers directly to boost sales of less popular models and to reduce inventories.
Money factor
Used in the leasing industry to mean interest rate.
Monroney sticker price
The label attached to the window of a new automobile that discloses the automobile's base price, installed options, manufacturer's suggested retail price (MSRP), freight or transportation charges and fuel economy (mileage). Federal law mandates these minimum-labeling requirements and prohibits the sticker's removal by anyone other than the buyer.
MSRP
Manufacturer's Suggested Retail Price. It is an automobile's recommended selling price. Most options are not included in the MSRP.
Open-end lease
A lease term that requires the lessee to pay the difference between residual value and fair market value at the end of the lease term if the fair market value is lower.
Preparation charges
Charges imposed by a dealer for preparing a newly purchased auto for delivery to the buyer. These include fueling and servicing the auto and any cosmetic changes made just prior to sale.
Principal
The amount borrowed, or the part of the amount borrowed which remains unpaid (excluding interest). Also known as the part of a monthly payment that reduces the outstanding balance of an auto loan.
Refinance
To provide new financing for, by discharging a current auto loan or mortgage with the proceeds from a new auto loan or mortgage obtained at a lower interest rate.
Repossession
To reclaim possession of collateral for failure to pay installments due.
Residual Value
The remaining dollar value agreed upon to represent the value of the car at the termination of a lease for purchase purposes. This value is usually determined by the amount of depreciation in the car's value predicted during the term of the lease.
Reconditioning reserve
An auto leasing term identical to a security deposit. The lessee gives the lessor a reconditioning reserve in the event a leased auto's condition deteriorates to a point where reconditioning is necessary.
Simple interest
The interest calculated on a principal sum, not compounded on earned interest.
Term
The time period of a loan. Auto loans are generally two to five years in duration, as compared to a home mortgage loans that generally have 15 or 30-year terms.
Title
A legally binding document that establishes evidence of ownership of an asset and any liens or other claims filed against the asset. A title should be examined for any recorded liens. An encumbered title is one that has recorded liens against it. An Unencumbered title is also known as a "clean title", being free of liens.
Trade-in value
The amount a dealership will offer as consideration for an auto used as a down payment to purchase another auto.
Underwriting
A loan review process that begins with the acceptance of a loan application and ends with a decision to either approve or deny the loan request.
Upfront costs
These include any fees and charges collected in advance, before a loan is funded.
Upside-down
A situation in which the fair value of an auto is less than the principal balance of the auto loan. This can be caused by the large depreciation in the auto from excessive wear-and-tear during the early years of the auto loan term.
Waive
To relinquish or give up a claim or right voluntarily.
Yield
The annual rate of return on an investment, expressed as a percentage.
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