10 Must Know Automotive Financing Terms
Once you’ve found a vehicle you want to buy or lease, unless you have cash in hand, it’s time to look at financing that vehicle. And that’s when the tricky part comes in. Many dealerships use “finance-speak” with customers, phrases that may not be readily comprehensible to most consumers. Here are some basic terms that will make you feel more comfortable with – and more informed about – the financing process.
1. Annual Percentage Rate (APR): While a somewhat basic term, and one that is used frequently these days in regard to credit cards and even home loans, it’s wise to know exactly what this term means. Also referred to as the finance rate, this figure refers to the interest rate on a loan. In short, it’s the percentage of the amount you borrow which the lender charges annually for your use of its money. With this information in hand, it’s much easier for consumers to decide if they want to go with a conventional dealership-loan, or come in already qualified with a credit union or bank loan.
2. Acquisition Fee: When leasing a car, this fee may seem negotiable, but it isn’t. This refers to the dealership’s costs in lease processing, such as obtaining credit reports and verifying insurance. However, in reality this is dealership profit, and as such, is nothing that can be negotiated away. It’s a money-maker for the dealership.
3. Buyout Price: This is what it will cost a consumer interested in buying a car at the end of the lease term. Should this be an option you’re considering, you’ll want to take the time to compare the costs of outright purchase versus that of purchasing a vehicle after you’ve leased it. While the lease payment may be exceedingly attractive with a very small down-payment requirement, purchasing the vehicle at the end of the leasing period is often not as good a deal: buyers at lease end may find costs prohibitively high.
4. Closed-End Lease: Although this type of lease is what is most commonly given to consumers, it’s a good idea to make sure this is what you’re getting. This type of lease means a consumer can either buy the vehicle when the lease term ends or walk away from it without liability for any depreciation on the car’s value.
5. Dealer Prep Fees: A negotiable charge that’s added to the purchase price of a vehicle. It covers the cost of preparing the car for sale after it is transported to the dealership.
6. Disposition Fee: While not exactly a negotiable item, the disposition fee is also called a termination fee, and it’s the amount charged by finance companies at the end of a lease. Designed to cover the cost of bringing the car back into the fleet and preparing it for sale, the fee is often waived if a consumer purchases a vehicle from the same brand when the lease ends.
7. Documentation Fee: Here’s a truly negotiable fee. This refers to charges covering the cost of processing the vehicle paperwork. If it’s more than $100, negotiate the amount.
8. Early Termination Fees: These fees refer to penalties a consumer is liable to pay if they wish to withdraw from a lease or loan before its scheduled end date. These penalties are often ample, and may apply if a vehicle is stolen or totaled and the consumer has no gap insurance coverage. Pay attention to these amounts, and consider gap insurance. Note any pre-payment fees as well, should you elect to pay off a vehicle loan prior to the end of the loan term.
9. Excess-Wear Charge: These charges are the penalties paid at the close of a lease if a vehicle is returned in poor condition. That includes modifications like different wheels or window tints. Many dealerships offer as a bargaining chip the ability to cover excessive wear charges. Note this possibility when looking at finance.
10. Gap Insurance: This insurance covers the difference in cost between a vehicle’s depreciated value in a loan or a lease and the amount which is owed if stolen or totaled. Buying this insurance may be prudent as the cost difference falls on the lessor should a serious accident or a theft occur.