Financing Terms: How Much Do You Know?

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We cover a lot of financing topics here on the AutoCenters Herculaneum blog--but today, we want to go a little more high-level.

Our financing team works with a lot of first-time buyers, people with no credit, and students--some are in all of the categories. If you've never had to work with financing before, there's a chance that you don't know a lot about the terms used.

Brush up on common auto finance terms and phrases, so that you can be confident when you go to buy your next car.

Or, just choose an AutoCenters used-car location near St. Louis, and let our helpful car loan experts walk you through the process.


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This stands for Annual Percentage Rate, and represents the interest rate that you qualify for when you get approved for a loan, plus fees. A higher APR means more total money paid at the end of the auto loan. Better scores mean lower APR, so be sure to check out our credit tips to get your credit score up.



A co-signer is someone who legally puts their name on the auto loan alongside you; if the main applicant ever can't or won't make the payments, the co-signer is responsible for paying. This is like a failsafe for lenders, and can help someone get financing who otherwise wouldn't.


Credit/Line of Credit

"Credit" can mean a lot of things, but typically it refers to the line of credit you apply for/get approved for when you're ready to buy a car. "Credit" also refers to a person's ability to be able to borrow that money in a line of credit--as you know if you read our blog.



The creditor is the lender (bank, credit union, or financial institution) that provides the necessary money for the loan.


Down Payment

Your down payment is the amount of money, in cash, that you put down on a vehicle to decrease the amount of money needed to finance the rest of the vehicle's cost. The more money you can put down, the cheaper your loan payments will be and the less interest you'll pay over time.


Good Credit

In general, "good" credit is around 700 or above, but some bureaus consider 650 or above a good score, and others are even more flexible. In general, if you pay your bills and try to keep your debts low, you'll likely have good credit.


Bad Credit

In general, "bad" credit is a score that's below 550 or so--it varies based on the credit bureau, but the lower you get on the three-digit credit score slide, the worse your credit is, and the less likely that most small banks and dealers will give you a loan. (Except for AutoCenters Herculaneum, of course--we believe that everyone deserves a second chance.)


No Credit

This one is tricky--because while no credit does not equal bad credit, it can still be difficult to qualify for a loan if you have zero credit history, because you've never been able to prove that you can be trusted to make payments. But how can you build history if you can't get a loan? (Contact us, of course.)


Debt-to-Income Ratio

Your DTI is the ratio of the total amount of debt that you have in your name to your total listed income. Staying below 50% for that ratio is an acceptable option--but it's recommended that you stay at or below 35% for your debt-to-income ratio.



Depreciation is the decrease in value that a car suffers due simply to time. All new cars suffer from depreciation, although high mileage, excessive wear and tear, and poor maintenance can speed up the process significantly. Reliable, well-cared for cars with low mileage depreciate the slowest.



When you make payments on an auto loan, you're building equity. In the beginning, since cars initially depreciate faster that most people can make payments, you will likely have negative equity in the vehicle--you owe more than it's worth. But, in time, you'll have positive equity--the car is worth more than you owe.



Loan pre-qualification is a process where a lender looks at your financial situation as supplied by you--your debt, your income, your assets, etc. You can pre-qualify for financing when a lender gives you an idea of about how much you could be approved for. It doesn't require a credit check, but it also only gives an estimate of what you may be able to borrow. This is a better option for drivers with bad or no credit who have just started shopping



Loan pre-approval is a must if you're trying to buy a car through financing. This process is more intensive and does require a hard credit check. However, getting pre-approved for a car loan gives you a clear picture of exactly how much money you can borrow in order to make your purchase. This is a better option for drivers, regardless of credit, who are ready to buy.


Loan Term

The number of months over which payments on the initial loan and accrued interest will be paid; auto loans are typically 60 months, but could be as short as 12 months or as long as 84 months.



The principal is the original sum of money lent by a financial institution that you agree to pay back. The principal does not include any of the interest that will accrue. Payments on auto loans will usually go toward any outstanding fees; then toward the interest that's due; then toward the principal balance.



The balance--or balance due--is whatever amount of money is left to pay off on your loan. The balance includes the principal, accrued interest, and fees, minus whatever payments have been made. The balance does not include future interest that will accrue, so paying down your balance as soon as possible is recommended.



Your trade-in is the value of a vehicle offered to offset the amount that you want to borrow--usually, it's whatever car, truck, or SUV that you're driving now offered as a trade-in on the vehicle that you want to buy. Values are set by individual car dealers.


Blue Book Value

The estimated value of a new or used car as determined by Kelley Blue Book, a vehicle valuation and automotive research company founded in 1926.


Black Book Value

The estimated value of a used car, based on wholesale or auction prices drawn from regions all over the country. Black Book was founded in 2002.


Categories: Finance