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Auto Loan Glossary

On this page is s group of some terms connected to auto loans and the financing system. If you have any uncertainties about our funding process, contact us. We invite you to read the auto purchasing tips page in addition to the FAQ page to develop a knowledge about auto financing and how our car buying program works.

If you are looking to buy a car from a dealership, it is a very good idea to check out section that covers terms you will hear in a dealership.

The reduction and retirement of a debt through periodic payments of interest and principal.

Accrued Interest
Interest which accumulates on the unpaid balance of loan principal.

The transfer of your loan from one lender to another. Or from the automobile dealership to the lender.

Buyers Order
This form is the legal contract between the Buyer and the Seller.

Buyers Guide
The Federal Trade Commission's (FTC) Used Car Rule requires dealers to post a Buyers Guide in every used car they offer for sale.
The Buyers Guide must tell you:

  • Whether the vehicle is being sold "as is" or with a warranty.

  • What percentage of the repair costs a dealer will pay under the warranty.

  • That spoken promises are difficult to enforce.

  • To get all promises in writing.

  • To keep the Buyers Guide for reference after the sale;

  • The major mechanical and electrical systems on the car, including some of the major problems you should look out for.

  • To ask to have the car inspected by an independent mechanic before you buy.

Unlike a Co-Signer a Co-Buyer's income is combined with the Buyer's.  This option is normally limited to a spouse or a person closely related residing at the same residence.

Someone who assumes legal responsibility for repayment of a loan in the event the borrower does not pay.
A Cosigner may be considered for a Buyer who does not comply with all the credit requirements.  The income of the Buyer, however, must meet all the income and budget guidelines without reliance upon the income of the cosigner.

Credit Bureau
An agency that compiles, maintains and provides credit and other personal information to creditors. There are three major credit reporting agencies:

  • Equifax®
    P.O. Box 740241
    Atlanta, GA 30374-0241
    Phone: (800)-685-1111
  • Trans Union®
    P.O. Box 1000
    Chester, PA 19022
    Phone: (800) 916-8800
  • Experian® (formerly TRW)
    P.O. Box 2002
    Allen, TX 75013
    Phone: (888) 397-3742

Credit Report
A historical document that may include payment habits, number of credit or loan accounts, balance of those accounts, place and length of employment, and records of financial transactions. The following items normally appear within the credit report.

  • Credit Score - A statistical formula that assigns a numerical value to your credit worthiness.  There are many different score models.  When you apply for an auto loan the lender is most likely viewing your "Car Enhanced Score".  This score may be higher or lower than your regular credit score.  Scores can vary widely among all three credit bureaus.
  • Applied for Credit - Items on your credit report that you actually initiated the request for credit.
    • Installment Credit - Loans that have a fixed monthly payment for a fixed period of time.  These items are the most important items on your credit report when you apply for an auto loan.  Examples include car loans and mortgages.
    • Revolving Credit - Loans that do not have a fixed monthly payment nor a fixed period of time. Examples include credit cards and home equity lines of credit.
    • Open Credit - Loans that must be paid in full each month.
  • Unapplied for Credit - Items that you did not initiate a request for credit.  These items only show up on your credit report if you don't pay them.  Example include utility and medical bills, bad checks, and collection agency accounts.
  • Charge Off / Write Off - Items that the original creditor has given up on trying to collect.  Often these Charge Offs will show up twice on a credit report, once from the original creditor as Applied for Credit, and once from a collection agency as Unapplied for Credit.
  • Judgments - A court order to repay a debt.  A creditor with a judgment in their favor may request a wage garnishment to repay the debt.

**It is always a good idea to get a copy of your credit report before applying for good and bad credit auto loans. You want to make sure that all of your information is up to date. Having erroneous information on your credit report can negatively affect the interest rate you obtain with your automobiles financing. You can receive a FREE copy of your credit report from ID Lookout by clicking here.   

Credit Scoring
A system used by banks and other lending institutions to determine whether or not you are creditworthy.  Each lender uses their own score card to determine if they will approve an auto loan.  The following items are normally contained in a lender score card:

  • Credit Report Score
  • Time in Credit File
  • Time on Job
  • Monthly Income
  • Debt to Income Ratio
  • Payment to Income Ratio
  • Loan to Value

Debt Ratio
How much you earn compared with how much you owe. The lower your debt ratio, the more disposable income you have.

  • You calculate it like this: Take the amount needed to repay debts each month, including rent or mortgage, and divide this by your gross pay (your pay before deduction of tax).

Failure to make one or more installment payments by the due date(s).

Disclosure Statement
A statement of the total amount and cost of a loan, including the principal loan amount, interest rate and any additional finance charges or loan fees.  The disclosure statement is contained within a bold box on the retail installment (finance) contract.

Finance Charges
A set percentage charged to the borrower by a lender.  To calculate this subtract the total of payments from the amount borrowed.

Fixed Interest Rate
A fee charged for the use of borrowed money, based upon a set percentage rate.

Fuel Efficiency
A car that is designed to be resourceful in its use for gasoline.

Insurance Products
When you're borrowing money to buy a car it's likely that you'll be offered insurance products.

  • GAP Insurance - If your vehicle is totaled for any reason the amount your insurance company pays may be a whole lot less than the actual amount you still owe on your loan.  GAP Insurance pays the difference. This product is highly recommended if you are adding negative equity to your new loan.
  • Credit Life - Credit life insurance pays off the balance of your loan upon your death.
  • Disability - This insurance pays your monthly payment if you are unable to work due to illness or injury.  There is normally a waiting period:
    • 14 Day Retro -If you are disabled for 14 days before a claim is made. With a doctor's certificate the first payment is retroactive to the day the disability took place. Payments cease when you return to work.
    • 30 Day Retro - If you are disabled for 30 days before a claim is made. With a doctor's certificate the first payment is retroactive to the day the disability took place. Payments cease when you return to work.
    • 30 Day Elimination - If you are disabled for 30 days before a claim is made. With a doctor's certificate the payments begin after the waiting period. Payments cease when you return to work
  • Employment Insurance - Not available in every state.  This insurance pays your monthly car loan payment if you involuntarily loose you job.
  • Extended Service Contract - Covers the cost of unexpected auto repairs.  Service contracts normally have a per visit deductible and most do not cover normal wear items such as break pads.

Loan to Value (LTV)
The amount financed relative to the published book value of the vehicle.  Lower LTV's have a better chance of approval.  Lenders usually use Trade of Wholesale Value Book Value when calculating LTV.

  • Book Value - The published valuation of a vehicle.  There are three nationally recognized vehicle valuation services.
    • NADA®
    • Kelly Blue Book®.
    • Black Book.

Minimum Down Payment
Few lenders will approve an auto loan for people with bad credit without a down payment. Lenders vary on acceptable forms of down payment; a summary follows:

  • Cash - Cash is always acceptable.
  • Trade Equity - The difference between the value of your trade and the lien payoff.  Trade equity is always acceptable as a down payment.
  • Negative Trade Equity  (Upside-Down) - The difference between the lien payoff and the value of your trade.  Since this is a Negative Number it cannot be used as a down payment.
  • Manufacture's Rebate - Some lenders do not allow rebates to meet their minimum required down payment. The rebate, however, is still used to reduce the finance amount.
  • Dealer Rebate - Lenders do not allow dealer rebates to meet their minimum required down payment. The rebate, however, is still used to reduce the finance amount.

Payments received are first applied to (collection) fees, then to accrued interest, and finally to the outstanding principal balance. To calculate a payment use our auto loan calculator.

The amount borrowed, or the amount on which you pay interest and must pay back, which may increase as a result of capitalization of interest.

Principal Balance
The portion of the original loan, plus capitalized interest, which the borrower has not yet satisfied through payment or cancellation.

Payment to Income Ratio
Your monthly car payment compared to your gross monthly income.  Most lenders prefer this ratio to be less than 15%.

When a creditor takes possession of your vehicle after you default on your loan or lease. For credit rating purposes it does not matter if the repossession was voluntary or involuntary.

  • Deficiency Balance - A deficiency is any amount you still owe on your contract after your creditor sells the vehicle and applies the amount received to your unpaid obligation. This also applies to lease turn-ins with over mileage charges.

Simple Interest
A flat rate of interest that is not compounded, generally expressed as an annual rate. One day of simple interest is calculated by: loan balance x interest rate = daily amount of interest 365 (days in a year).

Stipulations (STIPS)
Documentation may be required to prove items on your initial credit application.

  • Proof of Income (POI) - Income is the SINGLE BIGGEST FACTOR in determining how much or what type of vehicle you can purchase.  See our car loan calculator for more details.
    • W2 Income - This type of income is most important to a lender because it is attachable (it can be garnished).  Acceptable POI includes
      • Computerized pay stub with year to date calculations.
      • Four consecutive handwritten pay stubs and previous years W-2.  Often, cancelled checks from the employer are required.
    • Self Employment or 1099 - This type of income must be verified with tax returns prepared by a professional tax service. Lenders require two years tax returns. It is rare for a lender to approve a person with bad credit that has been self employed for less than two years.
      • Lenders use a customers adjusted gross income. That is income net of all expenses. This can be found on Schedule C of a tax return or line 31 of the 1040.
    • Child Support - A copy of the court order and a recent check or check stub.  Lenders may not count this type of income if will not last for the length of the car loan.
    • Social Security - Form SSA 1099 and a bank statement showing deposits.
    • Unreported Income - Income from cash jobs is not counted when calculating income.
  • Proof of Address (POR) - Acceptable forms of POR include utility bills, credit card statements or anything received through the mail which contain the following:
    • Customer's name.
    • Customer's address.
    • Dated within the last thirty (30) days.
  • Telephone Bill - Some lenders require proof of home phone service.  Many lenders are now accepting cell phone service as well. 
  • Mortgage Statement - The most recent mortgage statement is used to verify your monthly mortgage obligation. This document also serves as POR.
  • Lease Agreement - Used to verify your monthly obligation.  Often the landlords phone number is required for verbal verification.

Auto Warranty
Offers protection for you and against certain types of defects and mechanical issues.

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