5 Important Auto Financing Terms You Should Know

If you are in the market for a car, there are important auto financing terms you should know before making your purchase. The negotiation process can be stressful when you do not fully understand what your car salesperson is saying. If you learn some of the basic terminology that is used in the car industry, you can avoid overpaying for your new vehicle.

1. Dealer Sticker Price 

Every new vehicle has a sticker on one of the windows. This sticker shows the manufacturer's suggested retail price, or MSRP. This is the price of the vehicle before adding costs, such as a destination charge, or options that were installed at the dealership. The car dealer will try to get you to pay full sticker price for the car because that is the price that gives them the highest amount of profit. 

2. Dealer Invoice Price 

Dealer invoice is the amount the dealer paid the manufacturer for the vehicle. They may add to this cost by putting different features and accessories on the vehicle before moving it to the car lot. The dealer does not want to sell you a vehicle at the invoice price because the amount of profit they will make is very low. 

3. Annual Percentage Rate 

The annual percentage rate, or APR, is the yearly cost of a loan. The APR includes the interest rate, points, and any fees paid. You can use this to calculate what the monthly payment will be on your vehicle loan. 

4. Rebate 

Many car manufacturers offer a factory-to-dealer incentive, or rebate, on the sale of a new car. The rebate usually depends on the time of year and vehicle type. If you are not particular about the make and model of the car you buy, search online for vehicles that have a rebate. When you go to the car dealership, tell your salesperson you are interested only in a vehicle that has the rebate. This will save time, since the salesperson will know which car you want and will not try to get you to buy a model that has the best commission. 

5. Dealer Financing 

When you take out a loan at the car dealership for the purchase of a vehicle, this is called dealer financing. The dealer has agreements in place with a variety of lenders. These can include the financing arm of their manufacturer, banks and finance companies. The dealer's finance manager will shop your application to all available sources.

The finance manager will either receive an outright approval on your loan or a modified approval that contains conditions you must meet in order to secure financing. These conditions will usually be a larger down payment, shorter loan term or further documentation on your application.

Since the finance manager uses multiple sources, you will often be able to choose which lender you want to use for your loan. Even though there may be higher fees charged by one of the lenders, if their loan has the lowest payment, they are the one to choose.