A Glossary of Car Loan Terms and Definitions

Buying a car? Applying for a car loan? Got all the jargon? Know all the terms? If you answered yes to even one of these questions, we’ve got the definitive glossary of car loan terms and definitions for you. This glossary will sort out the unknown, the misunderstood and the unclear. We’ve listed, in simple terms, the language of car loans. Study it, and you’ll have no trouble getting around the financing process. Read on.

Acceleration Clause
If you default on a loan, an acceleration clause allows the lender to speed up the rate in which the loan is paid off. This can include an entire balance to be paid off immediately.

If you default on a loan, an acceleration clause allows the lender to speed up the rate in which the loan is paid off. This can include an entire balance to be paid off immediately.
Agreement of Sale
An agreement of sale, otherwise known as a sales or purchase agreement, states that the seller is selling and the buyer is buying under a specified set of terms. It’s signed by both parties.

An agreement of sale, otherwise known as a sales or purchase agreement, states that the seller is selling and the buyer is buying under a specified set of terms. It’s signed by both parties.
Amortization
Amortization is the process that calculates the loan payment, including interest, on the outstanding balance to be paid off at the end of a fixed period.

Amortization is the process that calculates the loan payment, including interest, on the outstanding balance to be paid off at the end of a fixed period.
Annual Percentage Rate (APR)
Not to be confused with interest rate, an APR refers to the cost of credit over the course of a year. It’s represented as a percentage, and is calculated using the amount financed, any charges, and the term of the car loan.

Not to be confused with interest rate, an APR refers to the cost of credit over the course of a year. It’s represented as a percentage, and is calculated using the amount financed, any charges, and the term of the car loan.
Business days
Business days are the period of time during a given work week that a company considers itself open. Weekends and national holidays are not business days.

Business days are the period of time during a given work week that a company considers itself open. Weekends and national holidays are not business days.
Car loan
A car loan, or auto loan , is a loan used to purchase a new or used car. The car itself is used to secure the loan. New car loans typically range from 3 to 7 years in length, while used car loans are usually shorter. The interest rate for auto loans depends on the length of the car loan, and the credit rating of the buyer .

A car loan, or auto loan , is a loan used to purchase a new or used car. The car itself is used to secure the loan. New car loans typically range from 3 to 7 years in length, while used car loans are usually shorter. The interest rate for auto loans depends on the length of the car loan, and the credit rating of the buyer .
Collateral
Collateral is property offered to support a loan. It can be seized if you default on your payments.

Collateral is property offered to support a loan. It can be seized if you default on your payments.
Commitment
A commitment is an agreement, often in writing, between a lender and borrower, to lend money at a future date, subject to the stated conditions.

A commitment is an agreement, often in writing, between a lender and borrower, to lend money at a future date, subject to the stated conditions.
Cosigner
A cosigner is another person who signs your loan and assumes equal responsibility for it.

A cosigner is another person who signs your loan and assumes equal responsibility for it.
Credit
Credit is your reputation for solvency and integrity that entitles you to be trusted in buying goods or borrowing money.

Credit is your reputation for solvency and integrity that entitles you to be trusted in buying goods or borrowing money.
Credit bureau
A credit reporting bureau is an agency that keeps your credit record.

A credit reporting bureau is an agency that keeps your credit record.
Credit scoring system
A credit scoring system is used to rate credit applicants according to various characteristics relevant to creditworthiness.

A credit scoring system is used to rate credit applicants according to various characteristics relevant to creditworthiness.
Creditworthiness
Your creditworthiness is your past and future ability to repay debts.

Your creditworthiness is your past and future ability to repay debts.
Default
Default refers to your failure to repay a loan, or otherwise meet the terms of your credit agreement.

Default refers to your failure to repay a loan, or otherwise meet the terms of your credit agreement.
Delinquency
Delinquency refers to your failure to make payments on time.

Delinquency refers to your failure to make payments on time.
Disclosures
Disclosures are important – they’re the information about a vehicle’s history, such as accidents or repairs that have been done to the car. Make sure you get them when you buy a car.

Disclosures are important – they’re the information about a vehicle’s history, such as accidents or repairs that have been done to the car. Make sure you get them when you buy a car.
Down payment
Your down payment is the amount of money you initially deposit to lower the amount financed.

Your down payment is the amount of money you initially deposit to lower the amount financed.
Earnest money
Earnest money is given by a buyer to a seller as part of the purchase price, to bind a transaction or assure payment.

Earnest money is given by a buyer to a seller as part of the purchase price, to bind a transaction or assure payment.
Finance charge
The finance charge is the total dollar amount it’ll cost you to borrow money.

The finance charge is the total dollar amount it’ll cost you to borrow money.
General Warranty Deed
A General Warranty Deed shows you all the lender’s interest in and title to the property, but also warrants that if the title is defective or has a “cloud” in it (claims, tax liens, judgments, mechanic’s liens against it), you may hold the lender liable.

A General Warranty Deed shows you all the lender’s interest in and title to the property, but also warrants that if the title is defective or has a “cloud” in it (claims, tax liens, judgments, mechanic’s liens against it), you may hold the lender liable.
Interest
Interest is charged to the borrower by the lender, as payment for the loan; it’s expressed as a percentage of the total amount loaned.

Interest is charged to the borrower by the lender, as payment for the loan; it’s expressed as a percentage of the total amount loaned.
Prepayment penalty
A prepayment penalty is charged by a bank if you pay off your loan early, to make up for the lost income from interest on the loan.

A prepayment penalty is charged by a bank if you pay off your loan early, to make up for the lost income from interest on the loan.
Refinance
When you refinance a loan, you get a new loan, with which you pay off the existing loan. The purpose is to get a lower rate, or have a longer term than the previous loan.

When you refinance a loan, you get a new loan, with which you pay off the existing loan. The purpose is to get a lower rate, or have a longer term than the previous loan.
Service charge
When buying a car, a service charge is usually charged by the dealer to cover his cost of preparation of the vehicle for delivery.

When buying a car, a service charge is usually charged by the dealer to cover his cost of preparation of the vehicle for delivery.
Term
The term of a loan is the period of time between the beginning of the loan and the end date, at which time the balance of the loan would be due.

The term of a loan is the period of time between the beginning of the loan and the end date, at which time the balance of the loan would be due.
Title
A title is a legal document that proves an individual’s ownership of property.

A title is a legal document that proves an individual’s ownership of property.

Those are the basics. Those are the things you’ll need to know when you’re applying for a car loan. You’ll need to have a good understanding of credit, credit bureaus and credit reports. All these things will affect your loan process. You can also refer to "How Car Loans Work" for more such information.

So now you’re equipped to go and negotiate. Go see your dealer. Or get on the Internet and join the growing number of consumers who’ve enjoyed the benefits of applying online. Now that you understand the terms, it’ll be simple!

A Glossary of Car Loan Terms and Definitions – Put your Knowledge on Auto