Basic Financing Terms

Basic financing terms used in car loans. Loan lingo can be confusing, especially for a first-time buyer, so we’ve provided a few basic financing terms:

Financing

Financing in the simplest terms, is borrowing money to purchase a vehicle. In most cases, a down payment is required, and the borrower signs a contract agreeing to pay back the loan at set payment amounts and intervals. The interest rate will also be specified in the contract.

Leasing

Leasing is the use of a vehicle for a set amount of time for set monthly payments. Basically it’s renting a car. Some financing providers offer leasing as an alternative option to outright purchasing a vehicle.

Annual Percentage Rate

The Annual Percentage Rate (APR) is the yearly interest rate, including fees and costs associated with the loan. The rate is calculated using the average compound interest rate and the term of the loan. APR is how borrowers can compare loans. The lower the APR, the better the loan is.

Nominal APR

The nominal APR is the simple interest rate for a year.

Effective APR

The effective APR is the compound interest, calculated over a year, plus associated fees.

Amount Financed

The amount financed is the total value of the credit used. This includes the principal amount of the loan, as well as any additional charges which aren’t part of the finance charge that aren’t paid upfront before, or at, the close of the loan.

Finance Charge

The finance charge is the total cost of the loan, including all fees and interest charged on a loan.

Total Payments

The total payments amount is the sum of the amount financed and the finance charge.

Total Sales Price

The total sales price is the sum of the scheduled payments and any down payment made.