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Car Loan Terms Used By Dealerships

If you are planning on purchasing a new or used car from a dealership, you need to familiarize yourself with some of the 'dealership' jargon that is going to be used. Not knowing what these terms mean will show that you are not an educate consumer, likely resulting in you paying more than you should for your car purchase.

In addition to the terms below, we offer a more comprehensive car loan glossary.

Add-on interest - This interest is added on to the principal of the car loan in the beginning. So, if you pay your loan off early, this interest is still going to be have to paid back.

Base price - This is the price of a car that is build with only standard equipment and does not have any options. The base price includes a manufacturer's warranty.

Blue Book - An industry guide for consumers and dealers as to what the wholesale and retail values are for new and used cars.

Dealer holdback - Allows the dealer to still make profit, while selling a car below retail price. Manufacturer's usually allow a holdback between 2 - 3%.

Dealer incentives - Motivations offered by manufacturers, through the dealers. These enticements are supposed to tempt consumers into buying slow-selling makes and models of cars. 

Dealer preparation charges - This type of charge is bogus. You are not obligated to pay any preparation fees for your new or used car purchase. This a way that dealers make extra money from unsuspecting buyers.

Destination charge - This is a obligatory fee and is passed on to the buyer by the dealer without any markup. Meaning, the dealers are not supposed to make any money from the destination fee. The fee covers the cost to transport the car from the manufacturer to the dealership.

Service contract or Extended warranty - A warranty that will cover any necessary repairs that occur within a certain time frame from purchase. Most likely, the dealer will offer you a warranty when purchasing your new car. It is a good idea to buy a warranty. You never know if you the car you are buying will wind up being a lemon.

Invoice price - This is the price that car manufacturer's charge dealers for the cars that they produce. This is not the final cost that the dealers pay because they receive dealer rebates and incentives. The destination charge, otherwise known as the freight charge, is always included in the invoice price.

Dealer sticker price - Exhibits the base price of the car as well as the manufacture's suggested retail price. This sticker also shows all of the installed options of the car as well as car's fuel economy and what the destination charge is.

Manufacturer's Warranty - Offers protection for certain parts, for a pre-specified amount of mileage and time.

Rebate - A discount offered to buyers to help increase sales.

Rule of 78 - A formula used in calculating what you owe when you pay-off your pre-computed car loan early. Any loan that utilizes this type of formula should be avoided. You can learn more about the Rule of 78.

Trade-in value - The amount the dealership will offer you for your old car. The sum they offer you can be used as a credit towards the price of your new car purchase. You should check out the Kelley Blue Book value of your car before you go to the dealership to trade-in your car.

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