, 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

payment

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

interest

, while a long term will have you paying extra in interest.

Principal

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%

interest

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

loan

term short ensures that more of your payment goes toward the principal, saving you money in the long term.

APR

Your annual percentage rate, or

APR

, 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

APR

can save you money on your auto loan.

Cosigner

If you’ve got below-average

credit

, 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

payments

if you’re not able to.

Prequalified finance

Prequalifying for an auto

loan

can give you a sense of how much you can afford when you head to the

dealership

. 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

vehicle

and signed a loan agreement.

Refinancing

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

bank

, a refinance broker, or an affiliate lender.

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

dealership

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

loan

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.

ACV

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

Amortization refers to reducing a debt through regular

payments

. 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.

interest

. 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

rate

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

loan

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

APR

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

price

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

dealership

. 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

risk

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

risk

MORE:

How to determine the retail value of your used car

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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.

FAQs

Still have some questions?

Let Jerry help you find the answers

How can I get an auto loan from my bank?

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!

Is it better to get an auto loan from your bank or the dealership?

An auto loan from the

dealership

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.

How much should you put down on a car?

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

price

, it’s best to wait and save your

money

What is a good APR for a car loan?

Interest

is the biggest factor in your APR, and your interest rate depends on your credit score. If your

credit

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%.

What company is best for auto loans?

PenFed Credit Union, Bank of America, LightStream, and Consumers Credit Union are a few of the best-rated companies for auto loans. The

Jerry

app can compare loan offers from top lenders to find you the best deal based on your credit score and budget!