Before you buy a car, you need to do your homework. This involves learning the meaning of certain car loan terms you may encounter that can affect your financing. Understanding them will help you know what goes into the dealer’s pricing of a car and enable you to better negotiate how much you will pay, as well as the terms of your car loan.
Amount financed: This is determined by multiplying the purchase price by the interest rate. Next, subtract that amount from the purchase price. Then add state taxes to that amount and subtract the down payment. AF = purchase price – (purchase price x interest rate) + tax – down payment.
Annual Percentage Rate (APR): The yearly cost of a loan to the borrower. It’s similar to the interest rate. However, it also includes other charges and fees so as to reflect the total cost of the loan.
Captive Finance Company: A finance company that is separate from a dealership but is owned by the same parent company in order to provide financing for the dealer’s customers. There may be incentives offered to use this company for your car loan.
Dealer charges: What the dealership charges for extras such as an extended warranty.
Dealer holdback: An allowance that the manufacturer gives to the dealer. It is usually between 2 and 3 percent of the manufacturer’s suggested retail price (MSRP) and allows the dealer to sell the vehicle at cost but still receive a small profit from the manufacturer.
Dealer invoice: The amount that a dealer is billed from the manufacturer for the car.
Destination charge: The fee charged for shipping, freight, or delivery of a vehicle to the dealer from the manufacturer or port of entry. This charge is passed on to the buyer without any markup.
Factory-to-dealer incentive: A discount or rebate offered by a manufacturer to move slow-selling cars or excessive inventories.
Manufacturer Suggested Retail Price (MSRP): A manufacturer’s recommended selling price for a vehicle and its options.
Mark-up: The amount of profit that a dealer makes on a car. It is the selling price subtracted from the dealer invoice.
Monroney Sticker Price: The sticker on the car’s window listing its base price, manufacturer’s installed options, manufacturer’s suggested retail price, destination charge and fuel economy.
Sticker price: The same as the MSRP.