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Car Buying Glossary of Terms and Financial Planning Guide

Buying a car can be stressful, in part due to the unfamiliar terms used during the process. Having detailed explanations of the terms commonly encountered when buying or leasing a vehicle can help you navigate the process with greater confidence and clarity.

  • Annual Percentage Rate (APR): This is the annual cost of borrowing, expressed as a percentage, which includes both interest and fees.
  • Acquisition Fee: This fee is charged by dealers when starting a lease and is intended to cover administrative costs, though it often contributes to dealer profit.
  • Balloon Payment/Balloon Loan: A balloon loan has smaller payments during the term followed by a large final payment at the end, known as a balloon.
  • Bump: A bump is the difference between the dealer's financing rate and the higher rate offered to consumers, with the dealer keeping the difference.
  • Buy Rate: The buy rate is the interest rate a dealer receives when securing financing, which is often marked up when offered to consumers.
  • Buyout Price: This is the price to purchase a leased vehicle at the end of the lease term.
  • Capitalized Cost: The capitalized cost in a lease is the total amount financed, including the vehicle price and any extras, minus any applicable reductions.
  • Capitalized Cost Reduction: Payments such as a down payment or trade-in that reduce the total amount financed in a lease are considered capitalized cost reductions.
  • Closed-End Lease: A closed-end lease allows the lessee to either purchase the vehicle at a set price or return it at the end of the lease without further obligation.
  • Cost of Funds: The cost of funds is the money that a borrower must pay in order to use the lender's money to buy a car. It's represented as an APR, money factor, financing cost, or rent charge.
  • Dealer Holdback: A dealer holdback is a percentage of the vehicle's price that the manufacturer refunds to the dealer after the sale, allowing for profit even if the vehicle is sold at or below the invoice price.
  • Dealer Incentives: Dealer incentives are discounts or special offers from manufacturers to dealers, often passed on to customers to encourage vehicle sales.
  • Dealer Invoice: The dealer invoice is the amount a dealer pays the manufacturer for a vehicle.
  • Dealer Prep Fees: Dealer prep fees cover the cost of preparing a vehicle for sale, though these fees are often negotiable.
  • Default: Default occurs when a borrower fails to meet the payment terms or conditions of a loan or lease agreement.
  • Destination Charge: The destination charge is the fee for transporting a vehicle from the manufacturer to the dealership and is non-negotiable.
  • Disposition Fee: This fee is charged at the end of a lease to cover the costs of preparing a returned vehicle for resale.
  • Documentation Fee: A documentation fee is charged for processing paperwork during a vehicle sale and is negotiable if it exceeds $100.
  • Down Payment: A down payment is an initial payment made to reduce the total amount financed in a loan or lease.
  • Early Termination Fees: These are penalties charged for ending a lease or loan before the agreed-upon term ends.
  • Equity Lease: An equity lease requires the lessee to purchase the vehicle at the end of the lease term.
  • Excess-Mileage Charges: These fees are charged for exceeding the mileage limit specified in a lease agreement.
  • Excess-Wear Charge: An excess-wear charge is a penalty for returning a leased vehicle in poor condition or with unauthorized modifications.
  • Extended Warranty: An extended warranty is a service contract that covers repairs beyond the manufacturer's warranty, though it is often limited or of questionable value.
  • Fair Market Value: Fair market value is the estimated worth of a leased vehicle at the end of the lease term.
  • Financing Costs: Financing costs represent the expense of borrowing. This is also referred to as the cost of funds or APR.
  • Fixed (Guaranteed) Residual: This is the agreed-upon price for purchasing a leased vehicle at the end of the lease, determined at the start of the agreement.
  • Gap Insurance: Gap insurance covers the difference between what a vehicle is worth and what is still owed on it if the car is totaled or stolen.
  • Lease: A lease is a long-term rental agreement in which the lessee pays monthly to use a vehicle for a set period or mileage, with the option to buy or return it at the end.
  • Lease Extension: A lease extension allows the lessee to extend the lease beyond the original term, typically without altering the monthly payment.
  • Lease Payment: The lease payment is the monthly amount due, calculated by combining depreciation and a rent charge.
  • Lessee: The lessee is the person leasing the vehicle.
  • Lessor: The lessor is the company or party providing the lease and financing.
  • Mileage Limit/Allowance: The mileage limit or allowance is the maximum number of miles a vehicle can be driven under a lease agreement, with additional fees charged for exceeding the limit.
  • Money Factor: The money factor is the interest rate for a lease, expressed as a decimal and used to calculate financing costs.
  • Monroney Sticker: The Monroney sticker is the window sticker on a new vehicle that shows the manufacturer's suggested retail price (MSRP), options, and other relevant details.
  • MSRP (Manufacturer's Suggested Retail Price): The MSRP is the base price of a vehicle as recommended by the manufacturer, listed on the Monroney sticker.
  • Open-End Lease: An open-end lease requires the lessee to pay the difference if the vehicle's value at the end of the lease is lower than its estimated residual value. This type of lease is commonly used by businesses and fleets.
  • Pre-Computed Interest: A loan with pre-computed interest has the total interest calculated up front and added into the monthly payments.
  • Prepayment Penalties: Prepayment penalties are fees charged for paying off a loan before the end of its term.
  • Pre-Qualify: Pre-qualification is an initial assessment by a lender to determine whether a borrower is eligible for a loan, without committing to the loan terms.
  • Principal: The principal is the amount borrowed on a loan, excluding interest.
  • Rebate: A rebate is a refund or discount offered by the manufacturer or dealer to encourage a vehicle purchase.
  • Rent Charge: The rent charge is the portion of a lease payment that covers financing costs, rather than paying down the vehicle's value.
  • Residual Value: Residual value is the estimated worth of a leased vehicle at the end of the lease term and helps determine monthly payments.
  • Sell Rate: The sell rate is the interest rate a dealer offers to a consumer, which is often higher than the buy rate the dealer receives.
  • Spread: The spread, also called a bump, is the difference between the buy rate and the sell rate that a dealer charges.
  • Sticker/Asking Price: The sticker or asking price is the amount listed on a vehicle's window sticker, generally higher than the negotiated sale price.
  • Subprime Loans: Subprime loans are loans with higher interest rates and down payments, typically offered to individuals with poor credit.
  • Term: The term is the length of time for a loan or lease agreement.
  • Termination Fee: A termination fee may be charged for ending a lease or loan early or for returning a leased vehicle at the end of the lease term.
  • Trade-In Value: The trade-in value is the amount a dealer offers for your current vehicle when you are purchasing a new one.
  • Up-Front Costs: Up-front costs are the total amount due at the start of a lease or loan, including the down payment and fees.
  • Upside Down: A borrower is upside down on a loan when they owe more on the vehicle than it is worth due to depreciation.
  • Walk-Away Lease: A walk-away lease, also known as a closed-end lease, allows the lessee to return the vehicle at the end without further obligation, provided that mileage and wear conditions are met.

Financial Planning for Car Buying and Other Large Purchases