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Common Finance Terms


Knowledge is power in most situations, and this saying is just as true when you’re buying a car. Simply knowing the definition of a few common finance terms can go a long way and could save you from a bad deal. Some finance terms pop up in almost every purchase finalization. Here’s a list of terms you should know before you make a final decision.

A term that comes up in almost any loan, the Annual Percentage Rate is the interest rate charged for taking out a loan. That number, expressed as a percentage, is the yearly cost of taking out a loan. Usually, this includes fees or additional costs, like paying off a loan early or refinancing, as well.

If you purchase a vehicle with the assistance of a second person, then that person is known as a cosigner, and they assume equal responsibility for the vehicle and its payments.

Simply put, depreciation is the loss of value in a vehicle due to use. It is an important concept to keep in mind if you plan on selling your vehicle down the line.

Direct Lending
With direct lending, a loan is taken directly from a bank, credit union, or other lender. You agree to pay the amount borrowed over a period of time set by a contract. Once you have the contract with a dealership, the loan from the direct lender pays for the vehicle.

Down Payment
A down payment is the amount of money you pay upfront for a vehicle. While most transactions will include negotiating a car loan, many places require you to at least partially pay for your car right at the beginning. This is helpful to you as well, as it lowers the amount of money you owe on your loan on a monthly basis.

Grace Period
Speaking of payments, the grace period is the period of time that customers have to make a late payment before they are penalized financially for it.

A lien simply says that a bank or other financial institution assisting you with car loans has the right to that vehicle until the loans are paid off. The rights to the title of the vehicle won’t be in your name until you repay your debt to the lienholder.

A common term associated with the automotive market, the Manufacturer’s Suggested Retail Price is how much a company recommends a product be sold for. It should be noted the suggested price doesn’t necessarily mean that’s the price dealerships sell the car for. Dealerships may also include fees, extra costs, or special discounts in the price of the vehicle.

Residual Value
As a car ages, it loses value. The “residual value” typically refers to how much a vehicle is worth after a specific amount of time. This often refers to leased cars that are worth less at the end of a lease than they were at the time of negotiations.

Once the purchase of the vehicle is finished, drivers will carry the title for the vehicle, which is the official proof of ownership for that vehicle.


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