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One of the hardest parts of finding an auto loan is wading through all the confusing terminology that most brokers use to sell you loans. 
, we do things a little differently. We don’t think you should need a degree in finance to get the best car loan available. We created this guide to clear up confusion around auto loan terminology so you can know exactly what kind
Down payment
Lenders typically won’t loan you the entire cost of the car you’re buying. Instead, you’ll have to pay part of the total cost (usually around 20%) as a down payment. The higher your
down payment
, the less you’ll pay in interest—and you may even qualify for a lower APR.
Repayment term
Your monthly loan
won’t just depend on the amount you borrowed and the interest rate your lender offered—it’s also a matter of how long you’re paying the loan off. A short repayment term means high payments and lower total
, while a long term will have you paying extra in interest.
Your loan principal is the original amount you borrowed from your lender. If you took out a $35,000 auto loan at a 3.64%
rate, you could pay $38,334 over a 60-month term—but $3,334 of that would be interest alone. The original $35,000 is the loan principal. 
Keeping your
term short ensures that more of your payment goes toward the principal, saving you money in the long term.
Your annual percentage rate, or
, refers to the total cost of your loan on top of the loan principal. It includes interest and fees and is expressed as a percentage. 
Remember our $35,000 loan? Factoring in $1,500 in fees alongside the original 3.64% interest rate results in an APR of 5.4% and a total of $4,834.47 owed on top of the principal. Aiming for a lower
can save you money on your auto loan.
If you’ve got below-average
, getting a cosigner for your loan can help you qualify for a loan that won’t bankrupt you. Your cosigner should be a trusted friend or family member with a good credit rating and a steady income who can guarantee that they’ll cover your loan
if you’re not able to.
Prequalified finance
Prequalifying for an auto
can give you a sense of how much you can afford when you head to the
. You’ll get a sense of the APR and loan term you may have—but you won’t be tied into a specific offer until you’ve settled on a
and signed a loan agreement.
If you’re not able to keep up with your
car loan
payments, you can refinance your loan by negotiating a new loan agreement with your current lender or a new one. You can refinance your loan through a
, a refinance broker, or an affiliate lender.
The financial institution that issues your auto loan is your lender. Banks and
credit unions
are the most common types of lenders—even if your
sets up the financing, your actual lender will likely be a bank or a credit union. 
Every lender will tailor your offer to both your needs and their own, so it’s a good idea to compare offers from a few lenders to find the right fit.
New car/used car
You can get an auto
for a new or used car. The difference is that you’ll likely have a higher
interest rate
if you’re financing a
used car
, and you may not get approval from some lenders for a low loan amount.
Credit score
Your credit score determines your approval odds, as well as the
interest rate
and APR you qualify for. Anything over 660 is considered a good credit score for a car loan, while anything below 629 is bad credit. If your credit is under 540, you may have trouble qualifying for any loan.
stands for your car’s actual cash value at any given time, including depreciation. Because cars depreciate quickly in their first few years, your loan balance might be greater than your car’s ACV.
Amortization refers to reducing a debt through regular
. In the context of car loans, an amortization schedule can show you how much you’ve paid off, how much is still due, and how much of your monthly payment goes to the principal vs.
. In general, the principal will decrease slowly at first and more quickly towards the end of your loan term.
Extended warranty
Your lender may offer an optional extended warranty—also known as a vehicle service contract—to protect your car after the manufacturer’s warranty expires. These warranties typically cost between $350 and $1,000 and will increase your monthly payment. It’s a good idea to check what’s covered before agreeing to an extended warranty.
Fixed-rate vs. variable-rate financing
A fixed-rate auto loan is one in which your
interest rate
stays the same for the entire life of the loan. With a variable rate loan, on the other hand, your interest
can change based on a benchmark called the index rate. This means you could potentially see your interest rate drop over the life of your loan—but you could also end up paying a higher rate! 
In general, variable-rate financing is the riskier option—especially if you’ve got a long loan term.
Loan-to-value ratio
Your loan-to-value (LTV) ratio is the total amount of your auto
divided by your car’s actual cash value (ACV), multiplied by 100. You’ll usually see it listed as a percentage. For instance, if you take out a $30,000 loan to buy a $45,000 car, your LTV ratio is 66.67%. 
The lower your LTV ratio is, the better your approval odds and
can be—and making a large down payment can help to keep it low.
Manufacturer’s suggested retail price (MSRP)
The manufacturer’s suggested retail price (MSRP) is just what it says on the tin—the
a car’s manufacturer suggests that dealers charge. It’s not quite the same as the car’s actual cash value, and it’s not necessarily what you’ll actually pay at the
. Negotiating a purchase price below MSRP can set you up for a more affordable auto loan.
Negative equity
Negative equity on a
car loan
means that you owe more than the car is worth. You’ll also see people refer to this as being “
upside down
” on your loan. It’s not a great position to be in, but it can happen easily when your car’s value depreciates quickly in the first few years. 
To get out of negative equity, it’s best to make a lump sum payment to avoid damaging your loan odds in the future.
No credit check/ “buy here pay here”
Some car dealerships, often known as “
buy here, pay here (BHPH)
” dealers, will loudly advertise that they don’t do credit checks. They use proof of income instead of credit scores to set up your loan—but they typically charge
high-interest rates
and fees. Proceed with extreme caution when it comes to the promises of a BHPH dealer.   
Risk-based pricing
Lenders use risk-based pricing to make car loan offers based on their estimate of your likelihood of paying off the loan—i.e., the
that you’ll default on the loan. There’s no single system for risk-based pricing, but most lenders will use a combination of credit checks, income verification, and a review of your financial history to determine your level of
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through a podcast and decided to try it out. My 2008 Range Rover Sport was costing me $168/month before Jerry found me the exact same coverage for $84/month under Plymouth Rock. I’ll definitely keep shopping for insurance with Jerry.” —Eileen P.
Arm yourself with an understanding of loan terminology before you start comparing rates and negotiating your auto loan. From down payments and lenders to variable-rate financing and amortization, knowing the key terms of car loans puts you in the driver’s seat.


Still have some questions?

Let Jerry help you find the answers
To get an auto loan from your bank, start by checking your credit and getting prequalified. Once you’ve chosen your car, you can sign off on the loan from your bank—but be sure to compare rates from other lenders first!
An auto loan from the
where you bought your car may be the more convenient option, but it tends to be more expensive than a loan from a bank. If you qualify for 0% APR financing through the dealership, it may be worth it.
Try to put down at least 20% of the purchase price for a new car and 10% for a used car. If you’re not able to put down at least 10% of the purchase
, it’s best to wait and save your
is the biggest factor in your APR, and your interest rate depends on your credit score. If your
is good (661-780), the average interest rate for a new car loan is 3.64%. For fair credit (601-660), the average interest rate is 6.61%.
PenFed Credit Union, Bank of America, LightStream, and Consumers Credit Union are a few of the best-rated companies for auto loans. The
app can compare loan offers from top lenders to find you the best deal based on your credit score and budget!

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