If you’re taking out a car loan, you might be confused by some of the terms you run into.  It’s not unusual to find something in a loan agreement that seems nefarious, but which is actually beneficial for you or just benign.  Likewise, some innocuous-looking clause might not be harmless.  Here’s what you need to know.

 

APR

The APR is the annual percentage rate.  This is something you definitely want to know about.  It’s the interest rate you pay for the loan.  So, for example, an APR of 8 percent means that you pay 8 percent, per year, on the vehicle loan.  In other words, if you borrow $10,000, that 8 percent translates into $800 per year.  Of course, most banks arrange the loan so that most of the interest is paid in the early years of the loan.

Poor credit loans always carry a higher APR than other loan types, so always ask about your APR before you sign.  Even one percentage point can make a huge difference in the amount of interest you pay.

 

Amortization

This is the payment schedule for your loan.  All car loans are amortized.  Some loans are amortized over 4 years, while others are amortized over 5 years.

Vehicle Financing 101: Understanding Your Auto Loan from A to Z

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YFM Group deal with Tygan by Matthew Anderson, on Flickr.  This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 Generic License.

 

Acceleration Clause

This is a clause that allows the lender to call the loan due prior to the final payment date in the loan contract.  These clauses aren’t common, but it’s something to look out for.

 

Balloon Payment

A balloon payment is unusual for a car loan.  Usually, this happens as a result of a lease.  A balloon payment is an abnormal payment made usually at the end of a loan or lease contract.  It signifies the end of the loan or a final amortization that will cause the loan to be fully satisfied (paid off).

 

Base Price

Base price refers to the cost of the vehicle you’re buying, stripped of all options or extras.  It’s also called the “sticker price” or the “MSRP” (Manufacturer’s Suggested Retail Price).  This is the price you pay for the vehicle, but it’s also the price your lender uses to determine the loan amount, interest he will charge you, and the amortization schedule.

 

Clear Title

A clear title means that no other person or financial institution can lay a legal claim to the vehicle.  This is particularly important if you want to sell the vehicle or if you need a title loan.  All vehicles sold by dealers in the U.S. must have a clear title.  While you should be able to safely assume that your vehicle is free and clear, if you’re buying from a used car dealer, or from an individual, you may want to run a background check on the vehicle using Carfax or a similar service.

 

Collateral

Every car loan is backed by the vehicle you’re purchasing.  This is just standard practice, and it protects the bank from missed payments.  If the borrower (you) miss a payment, the bank has the legal right to lay claim to the vehicle.  It can repossess it, and then sell it at auction.

 

Cathrine Howe has taken out a few car loans in her lifetime.  An avid writer, she likes to share what she has learned with those who need solid advice.  Look for her informative and helpful posts on a variety of websites today.

Tom
 

Arnel Ariate is the webmaster of Money Soldiers.

Click Here to Leave a Comment Below 2 comments
Amos - October 27, 2014

Very informative. I went for a used card as my first car, just to avoid some unnecessary costs, but I have realized that with some knowledge about a car loan could financed the car as well.

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Nick | Millionaires Giving Money - November 20, 2014

Great guide, this is really useful for people who are opting between cash and finance. Personally I would always buy a car with cash to avoid paying nasty payments at the end of the month. However there are times when financing makes sense for other people. Considering both options I think is key to keep the motoring budget intact. Great post, thanks for sharing..

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