Know the Five Important Loan Terms
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Five Important Car Financing Terms

When you're shopping for car loan rates, you will run across the same key terms again and again. Here are the most important five terms to understand when shopping for auto financing.

Car Loan Terminology

  1. Sticker price - you will find this price, also called the MSRP, on the windshield of your new car. This is the public, or advertised, price of the vehicle. The MSRP is intended as a starting point for negotiations to settle on a selling price. Occasionally, car buyers will pay full sticker price. For example, on some 0% APR car loan rates, dealers are inflexible on the price of the car, which means you end up paying full sticker price. Rarely, if a car is in high demand, you might end up paying more than sticker price. In general, though, if you paid sticker price for the vehicle, you likely paid too much.

  2. Invoice price - this is what the dealer actually paid the manufacturer for the car. The difference between the MSRP and the dealer invoice price represents the dealer's profit, which is the amount you will negotiate.

  3. APR (annual percentage rate) - this is an especially common term you will see when shopping for car loan rates. This number calculates all interest expenses, charges, and fees per year to represent the total cost of the loan to the buyer annually. Remember that the best way to compare car loan rates is the APR because each lender/dealership can calculate fees, charges, and interest rates different ways. The way an APR is calculated, though, is regulated by the government.

  4. Rebates - manufacturers use rebates as a "gift" to buyers to give them an added incentive to buy particular makes and models. The dealer will also sometimes offer rebates. Rebates usually take two forms: a reduction in the price of the vehicle or a better offer on car loan rates (or financing). Rebates usually come with slow-selling vehicles to help dealers get rid of surpluses.

  5. Dealer financing - as soon as dealers realized they were missing out on potentially huge profits by just selling cars and not financing, the dealer financing business was born. Dealership financing rarely offers the lowest car loan rates, so be cautious if you're considering it. Dealerships usually take advantage of you by jacking up the sticker price of the car when they offer more competitive financing deals. Additionally, they sometimes will rope you into a bad deal with the promise of low payments over a ridiculously long term.

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