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Definitions

Amount Financed:  the bottom line on your purchase order, which includes vehicle price, trade-in credit, negative equity, fees, taxes and licensing charges.  This figure is what your monthly payment will be based upon.

APR:  Annual Percentage Rate, or APR, (commonly known as the Interest Rate):  the cost of credit expressed as a percentage.  It is calculated yearly, it includes all the fees and charges associated with a loan. It is always tied in with a loan term.

Base Price:  the cost of a car without options. This price includes standard equipment and the manufacturer’s warranty and is printed on the Monroney (large window) sticker.

Blue Book:  formally, it refers to the Kelley Blue Book, an industry guide dealers use to estimate wholesale and retail vehicle pricing. In common parlance, “the blue book price” can actually refer to a price looked up in one of the many guides to pricing. The books now come in a variety of hues, are issued by many organizations, and are commonly available online or in the reference sections of public libraries.  This is used as a guide for financial institutions to determine lending values on vehicles.  It does not determine actual market values. 

Dealer Financing:  car dealers realized they were missing an opportunity by simply selling consumers vehicles, rather than selling them vehicles and the money to purchase them. Thus dealer financing was born. Consumers considering financing their cars this way should proceed with caution. Sometimes a favorable interest rate/APR goes hand-in-hand with a bulked-up sticker price. Also, watch out for long loan terms and very low monthly payments. The longer the loan, the more interest you will pay.  Check with your credit union first before falling for dealer financing options.

Dealer Holdback:  an allowance, usually between 2 percent and 3 percent of manufacturer’s suggested retail price, that manufacturers provide to dealers. A holdback allowance may allow the dealer to pay the manufacturer less than the invoice price. A buyer could obtain a car below invoice price and the dealer would still make a profit.

Dealer Invoice Price:  the price that the car dealer pays the manufacturer for the automobile. The difference between the dealer invoice price and the MSRP is the dealer’s profit. One thing to remember: the MSRP can often be padded as well, sometimes by $200 to $500. The size of the gap depends on the make of the car. The dealer invoice price is determined by the manufacturer and is prone to adjustments over the course of a model year, as the manufacturer tries to manage its profits and the demand for the vehicle fluctuates.

Dealer Preparation charges:  an additional charge that dealers try to impose on buyers. It represents pure profit for the dealers, who have already been paid by the manufacturer for the cost of preparing the car for sale.

Destination Charge:  the fee charged for transporting the vehicle to the dealer from the manufacturer or port of entry. This charge is to be passed on to the buyer without any markup.

Dealer Sticker Price:  this is the public price of an automobile. Plastered to a car’s windshield, this number is the manufacturer’s suggested retail price (MSRP). It is meant to be the jumping-off point for the negotiations that lead to an eventual selling price.  Also known as the Monroney Sticker.

DMV/DOL Fees:  when buying a vehicle, you have to register it with the State and pay for license plates before you can drive it away. These various fees are referred to as Department of Motor Vehicle fees. These costs might also be called title and license fees.

Down Payment:  the amount of cash or trade equity applied to your vehicle purchase.

Equity:  the difference between your trade payoff balance and its value. It may be positive or negative.  Negative equity will be added into the transaction, while positive equity will be subtracted from the transaction.

Extended Warranty or Service Contract:  a contract that covers certain car repairs or problems after the manufacturer’s or dealer’s warranty expires. Extended warranties are sold by car manufacturers, dealers and independent companies. With a new car, the extended warranty usually must be purchased by the end of the first year of ownership.  Check with your credit union on coverage offered.

Finance Charge:  the total dollar amount you pay to use credit over the life of the loan.

Four-Square Worksheet:  a standard form, used at many dealerships, to help the salesperson keep track of the four elements of a deal as he negotiates with the customer. The squares allow him to jot down offers and counter offers for the trade-in, the price of the car, the down payment and monthly payments. 

Lease:  if you lease something, such as a car, you don’t actually own it. You pay a monthly fee to use the car. At the end of the lease, you return the car and owe nothing more (assuming it is returned in good condition and with the agreed-upon mileage).  Beware:  once a lease is signed, it is difficult to get out of it prior to the end-date, without taking a financial loss.  Lease payments can vary, depending on down payment, mileage per year and lease term.  Beware that there is typically a stiff financial penalty if you go over the contact’s mileage allotment.

Prepayment Penalty:  a lender’s charge to the borrower for paying off the loan before the end of the term. 

Rebate:  a rebate is a gift to buyers, extended by the manufacturer (or, sometimes, the dealer) to encourage  them to purchase a particular make and model. Typically, rebates are stated as a reduction in the selling price  of the car, but they may also be expressed as an offer for a better rate of financing. These are called either-or offers. Rebates are most often attached to the slowest-selling vehicles.

Retail Installment Contract/Purchase Order:  the finance agreement allowing for payment over time at a fixed monthly payment amount and rate.

Sales Tax (applicable to Washington residents):   when someone buys an item, they are charged a percentage of the purchase as state sales tax. The actual percentage varies widely from one state to the next and, often, within the state. The sales tax is often made up of a state tax and a local tax. These two are combined for one grand total. On small items, the sales tax doesn’t seem significant. But when purchasing a car, it can be a large factor that affects the total cost of ownership.

Simple Interest:  finance charge calculation based on the unpaid principal balance, number of days between payments and the APR.

Stipulation:  additional documentation/action required to complete the transaction, like proof of income, proof of insurance and proof of residence.

Term:   the number of monthly payments provided for in the retail installment contract.  Common terms are 24, 36, 48, 60, 72 and 84 month terms.

Title:  a title is a legal document providing specific information about the vehicle and stating who owns it. If you borrow money from a bank to get a car, the title will be held by the credit union or bank until you make all the agreed-upon payments.

Total of Payments:  the amount you will have paid after you have made all payments as scheduled in the retail installment contract.  This will include interest rate charges.

Total Sales Price:  the total cost of your purchase on credit including finance charge, down payment and amount financed.

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Portland, OR 97206
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