Car Buying Terms Glossary

Index

Annual Percentage Rate (APR)

APR is the rate that a bank or lender charges you to borrow money from them for a car. It is also known as the Finance Rate or Cost of Funds. The amount you pay the bank is typically calculated monthly even though it is an annual rate. For example: In January you owe $20,000 x 2.2% APR = $440 / 12 months = $36.67 Financing Charge or interest. Your monthly payment will include payment towards the car amount and the interest. In the next month, your finance charge will be recalculated using the remaining amount owed on the car.

Acquisition/Bank Fee
A fee charged by financing institutions to car dealers in order to get you financing on a lease. The fee is typically passed to you (the car Lessee) and is non-negotiable. The fee should range in amount from $300 to $1,000 depending on the value of the car.

Adjusted Cap Cost
The final amount of your lease that, in conjunction with the Residual Value and Money Factor, will be used to determine your payments. Adjusted Cap Cost is calculated by subtracting the Capitalized Cost Reduction from the Gross Capitalized Cost.

Balloon Payment
An unusually high payment due at the end of the financing term which holds back most of the actual payments towards the Principal until the end of the loan. The majority of the payments go towards the interest keeping the monthly payments low. However the car isn’t fully paid off at the end of the term, requiring a large lump sum payment to close out the loan. Not typical in most car buying situations.

Base Model
Usually the least expensive version of the car you are shopping. The Base Model includes all the standard equipment but no additional options.

Bump
A term used by dealers to increase the price you pay. The sales manager may tell the salesperson to “go bump this guy $20 and we can make the deal.” If it happens with the finance guy it’s usually to sell you additional products.

Buy Rate
The lowest rate (APR) that a dealer can get you for financing your car purchase. Dealers can then mark up this rate in order to make

Buyout Price (leasing)
This is the price you would pay at the end of a lease to purchase the car. It is similar to the Residual Value but also includes any end of lease payments. Pay particular attention to this amount if there is any chance that you will want to buy the car after the lease expires. You will want to make sure the Buyout Price is close to the actual value of the car at the end of the lease. Check the prices of similar makes that are a few years old to see if the Buyout Price is in range.

Capitalized Cost (Net) (leasing)
Also known as Adjusted Cap Cost, a term used in leasing which designates the total amount of money being financed by the lease. This will include a portion of the value of the car (the purchase price minus the Residual Value) plus any extras (Acquisition Fee, etc) minus any discounts or Down Payments (see Capitalized Cost Reduction).

Capitalized Cost Reduction (Leasing)
A leasing term referring to anything that reduces the overall Net Capitalized Cost (the total amount to be financed). This could include a Down Payment, manufacturer’s rebate, or a trade-in that lowers the total amount required to be financed, all of which will lower your monthly payments.

Closed-End Lease (leasing)
Also known as a walk-away lease, this type of lease allows you to either buy the car or walk away without any expected further payment requirements – other than potential mileage overages, vehicle damage, or stated Disposition Charge. This type of financing is typical of almost all cars leased in the U.S

Cost of Funds
See APR.

Dealer Cost
Dealer cost is what a dealer actually pays the manufacturer for a car after all Dealer Holdbacks, Dealer Incentives, and end of month or quarter manufacturer to dealer Volume Bonuses. Any profit that a dealer makes on the purchase price of a car would be on top of the Dealer Cost.

Dealer Holdback
Refers to the amount of money that the manufacturer will pay to a dealership after the sale of a new car. Dealers pay an invoice amount (Dealer Invoice) to the manufacturer for every car in their inventory. The Dealer Holdback is typically expressed as a percentage of MSRP. A Dealer Holdback program from the manufacturer gives the dealer an added profit on every car sold and is the primary reason why some dealers are able to sell cars for less than invoice. Holdback also makes the Dealer Invoice less relevant to you because it’s not the actual cost of the car for the dealer.

Dealer Incentives
Discounts and other bonuses that a manufacturer gives to dealerships to drive demand and increase sales during slow sales times of the year. Typically these incentives are passed directly to you in the form of discounts and cashback offers – see rebates.

Dealer Installed Options
Options that the dealer installs at the dealership as opposed to Factory or Port Installed Options. Prices for these options are not listed on the official Window Sticker; rather they may be itemized on a second window sticker that the dealer applies. These options do not require approval by the manufacturer and therefore are often not covered by the factory warranty.

Dealer Invoice
Also known as the Invoice Price, this is the amount that the manufacturer represents as the price that the dealer pays for the car. However, it’s well known that this amount may not tell the whole story because the dealer has access to other incentives like Dealer Holdback.. The term Dealer Cost has become more popular; which is the amount they actually pay after all the manufacturer incentives.

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Dealer Prep Fees
Fees associated with the preparation of the car after the dealer takes delivery from the manufacturer. These charges are usually negotiable. Dealer prep typically involves removing plastic covers from the exterior and interior, checking and installing fuses, checking fluid levels, installing plate frames, and a quick 3 or 4 mile test drive. This fee is typically stated to be covered in the MSRP but on rare occasions, some dealers will charge this fee on top of the agreed purchase price.

Depreciation
The reduction in market value of a vehicle over time. In Leasing, the projected Depreciation of the vehicle is used to determine the vehicles projected Residual Value and the monthly lease payments.

Destination Charge
This is the amount charged to ship the car from the manufacturer to the dealership, which is passed directly to you. This is a very common and non-negotiable amount. Make sure that there are no additional delivery fees above and beyond the Destination Charge which will be publicly displayed on the Window Sticker.

Documentation Fee
A fee associated with preparation and administration of all the documents required to purchase a car. The fee varies by state and is non-negotiable. Check with your state DMV about acceptable doc fees and potential caps (i.e. in California it’s capped at $55).

Down Payment
The amount of money you pay up-front when purchasing a car that goes directly to lowering the amount required to be financed. For example, when purchasing a $20,000 car, you decide to make a $2,000 Down Payment leaving you $18,000 that requires financing. Larger Down Payments lower your monthly payment amount but require you to pay a lot of cash up front. If you have poor credit, a big Down Payment can help shield you from the high interest loan you will inevitably get. If your credit is good, try to find a Down Payment amount that will keep you from being Upside Down in your loan – owing more on the loan than the car is worth. Most cars depreciate about 20% when they drive off the lot, so 20% down could be a good place to start if you have the spare cash.

Drive Off
The total amount a buyer must pay to finalize a lease contract and drive the car off the lot. Also called the “Total Due at Signing” for both purchases and leases. For leasing, it usually includes the first month’s lease payment, the down payment, documentation fees charged by the dealer, an acquisition fee charged by the leasing company, sales tax and various state registration fees. In purchasing, it usually includes the down payment, sales tax, any documentation fees charged by the dealer, and state registration fees.

Early Termination Fees
A penalty for getting out of a lease or loan before the contracted end date. This typically only applies to leases as you can usually pay off the total value of a loan whenever you want. Early termination fees and guidelines are required to be documented in your lease or loan documentation. Also, don’t assume that you can end a lease whenever you want. It’s common for the lender to require you to pay off the total amount outstanding on the lease and the Early Termination Fee to end your financial obligation on the car.

Excess Mileage Charge (leasing)
Also known as overage. When you lease a car, the contract allows you to drive a certain number of miles every year (see Mileage Allowance). If you go over that limit you will have to pay this per mile charge. Sometimes the finance company gives you the option of buying extra miles at a discounted rate upfront, so be honest with yourself about the number of miles you drive. For example: A 3-year lease with a 36,000 mile allowance equals a modest 12,000 miles per year. If you drive 42,000 miles, you will get charged $0.15 per mile of overage and will owe $900 in Excess Mileage Charges when you return your car.

Excess Wear Charge (leasing)
This charge refers to a penalty associated with returning your leased vehicle in poor condition. Who determines a condition as unusually “poor?” Often, it is someone associated with the manufacturer or lender who will inspect the car soon after you return it to the dealership. You can also get hit with this penalty if you make changes to the vehicle, such as window tinting or paint alterations. Don’t do these things to your car if you lease it.

Extended Service Contract
These are service plans provided by the dealership that cover certain specified services for a determined period of time and miles. Most manufacturers provide reasonable warranties for new cars that are included in the purchase price and some also cover basic service & maintenance as well. Be wary of any additional service plans and warranties offered by the dealership or other third parties; you may not need them, but if you are interested, in most cases the price of the service contract is negotiable.

Factory (and Port) Installed Options
Factory and Port Installed options are equipment that manufacturers add to a vehicle either at the factory or the port of entry for imported cars. They will be, by law, listed on the Window Sticker. Pricing for these options will be the same from dealer to dealer. These options are also always covered under the manufacturer’s new-car warranty.

Financing Charge
(Also known as Cost of Funds) This is the amount you pay over and above the cost of the car in order to borrow money. It’s covered a little more in-depth under Annual Percentage Rate (APR).

Finance Rate
See Annual Percentage Rate (APR)

Gap Insurance
Gap insurance is offered by the dealership and covers your car if you get in an accident and the insurance company pays you less than what you owe on the car. For example, let’s say you total your new car and the insurance company determines that the car is worth $17,000 but you owe $18,000 on your loan. Gap insurance would pay the extra $1,000.

Gross capitalized cost
All of the costs that are part of the lease, after negotiation. This includes taxes and additional items you roll into the lease and don’t pay up front, including service contracts, aftermarket add-ons, and insurance.

Incentives
See Rebates.

Invoice Price
See Dealer Invoice

Lease
A car Lease is a method of obtaining a new car that involves only paying for a portion of the vehicle’s actual cost instead of paying for it in its entirety. In return, you agree to make a monthly payment and adhere to mileage restrictions (see Mileage Allowance). Leasing is an attractive option if you want a new car with all the latest in-car tech every few years, don’t plan on making changes or upgrades to the car, drive less than 15,000 miles a year and you want a lower monthly payment.

Lease Acquisition Fee
Non-negotiable fee for processing a lease.

Lease Disposition Fee
A standard, non-negotiable fee communicated at lease inception and collected when the vehicle is returned. The fee, which can range from $200 to $500 depending on the manufacturer, is used to cover expenses associated with reselling the vehicle, including reconditioning and auction fees. If you purchase the vehicle at lease end, you will typically not be charged the fee although you may be charged a comparable purchase option fee. Most manufacturers will waive the lease disposition fee if the lessee leases or purchases another new vehicle from the same manufacturer/brand at the end of the lease term.

Lease Extension
An agreement you can make with the leasing provider to extend your lease beyond the end date originally designated in your contract. Usually the monthly payment goes up reflecting an adjusted residual value.

Lease Payment
The most sought after detail when leasing a car. Your monthly lease payment consists of 1) your monthly rent (interest) charge; 2) your monthly depreciation charge and; 3) applicable taxes all rolled up into a single payment. You can also think of it this way: Your cost of financing + your principal reduction + taxes = your total monthly lease payment.

Lessee
The person leasing the car..

Lessor
The company providing financing in a Lease, usually a finance company owned by the manufacturer (i.e. Toyota Financial). This company becomes the owner of the car and you rent it from them.

Lien
A Lien on your car is another way of saying that you borrowed or financed money to make the purchase. The lien holder is the company you borrowed money from and they financially own the car until you pay off the lien amount. Once you pay in full, the Lien is removed and you receive the title to the car as it’s rightful owner.

Mileage Allowance (or Limit)
The maximum number of miles the leasing company will allow you to drive the car without incurring a penalty (see Excess Mileage Charge). Keep in mind that it may be cheaper to purchase excess miles upfront if you think you may go over this amount.

Money Factor
A leasing term for the cost of borrowing money; basically an APR for leasing. You can estimate what your interest rate (see Annual Percentage Rate) is with a lease by multiplying the Money Factor by 2,400. (0.0025 x 2,400 = 6% APR). The Money Factor then determines what your monthly Rent Charge will be. Ask what your Money Factor will be and compare it to what you could get as an APR on a new car loan; it should be somewhat similar. Keep in mind you may have a higher Money Factor if your credit is less than stellar.

Monroney Sticker
Also known as the Window Sticker, it’s that page of useful information that is required to be on the window of every new car sold in the U.S. and can only be removed by the buyer. Information that is required to be on this sticker include: MSRP, Destination Charge, standard features, optional features and pricing for those features, warranty information, city and highway fuel economy figures provided by the EPA and crash test data. Some things that will not be found on this sticker include: Dealer Invoice or any kind of dealer and finance fees. The name “Monroney Sticker” came from deceased Oklahoma Senator Almer Stillwell “Mike” Monroney, who sponsored the Automobile Information Act of 1958.

MSRP
Stands for Manufacturer’s Suggested Retail Price. Sometimes gets confused with Sticker Price and Invoice Price but MSRP is something completely different. The MSRP is required to be posted on the Monroney Sticker and is the price that the manufacturer has determined should be the recommended asking price for the car. MSRP typically includes Destination Charge but none of the dealer fees.

Options
Also known as optional equipment or additional options, these are paid upgrades that are installed by the manufacturer.

Out the Door Price
This is the actual price you pay to purchase your car. It includes the negotiated vehicle purchase price, Destination Charge, Dealer Prep Fees, Document Fees, tax and title.

Principal
The amount that you are actually borrowing from a financial institution (i.e. does not include finance charges, taxes, etc). Paying down principal means that you are paying back the money you owe (i.e. principal reduction).

Purchase Option Fee
At the end of a lease term, the lessee has the option to purchase the vehicle at the pre-determined residual value of the vehicle plus, typically, an additional $300 to $600 fee called the Purchase Option Fee.

Rebate
Discounts on the price of a car provided by either the manufacturer (see Dealer Incentives) or dealership. Similar to sale prices only instead of a percentage off they are expressed in dollar amounts off the top. Sometimes they are taken as direct discounts on the price of the car or they may be offered as money back after the purchase is made.

Registration Fee
Also known as tags fee. One of three standard fees: tax, title and registration. This is the amount that the state charges you to register your car with the DMV. It usually goes to ordering the license plates and a whole litany of other taxes that are determined by your state. Check out your local DMV’s website for details on the total amount as it varies greatly by state. This money goes directly to the state but the dealership takes care of it for you so don’t be surprised when you see it on your bill.

Rent Charge
A leasing term referring to the cost of financing the lease. This is the amount that the leasing company is charging you to borrow their money. You pay the Rent Charge monthly, and it is determined by the Money Factor when leasing a car.

Residual Percent
See Residual Value below

Residual Value The predicted wholesale value of your car at the end of the lease. Residual Value is often expressed as a percentage of the vehicle’s MSRP (never on the negotiated price), in which case it is called Residual Percent. It is typically provided for vehicles at 24, 36, or 48 months old, depending on the lease term length. This value is used to calculate your monthly lease payments. It’s also similar to the Buyout Price however it doesn’t include any fees or taxes due. The Residual Value is usually calculated by the bank or leasing provider but is just as instrumental in negotiating your monthly payment as the price you pay for the car. See Lease Payment for information on how Residual Value is used to calculate your monthly bill.

Sales Tax
Your tax rate is determined by your state and local municipality and is calculated on the agreed purchase price of the car. On a Lease, the tax is calculated on the base monthly payment.

Sell Rate
The rate at which a dealer offers you financing. In some cases, the dealer can acquire your financing at a lower rate (see Buy Rate) and then they markup that rate to make money on the difference. This difference is known as the spread.

Spiff(s)
A bonus that is paid directly to a salesperson for selling a specific product or hitting a specific sales goal (i.e. Bob got the $500 spiff for selling the most trucks last month).

Spread
The difference between the Buy Rate that a dealership can get your financing and the Sell Rate that they offer you to finance a new car purchase.

Standard Equipment
The features of a car that are not paid upgrades.

Sticker Price
Also known as the asking price. This is the price that the dealer is listing as their price for the car. It usually includes Destination Charge, Dealer Prep Fees, and any Dealer Installed Options. This is the starting price that a dealer will negotiate from, so it is usually artificially inflated. Remember, this is different from MSRP, which won’t include any Dealer Installed Options. Sticker price does not include tax, title or registration fees.

Subprime Loan
If you have poor credit or are attempting to purchase a car that is slightly outside of your income bracket, you may only qualify for a Subprime Loan. It basically means that the bank thinks that loaning you money is risky. They make up for that by charging you high interest rates and requiring a larger Down Payment. Bigger risk for them means you have to pay them more money to give you a loan.

Term
The length of the contract, loan, or Lease. Typically measured in months.

Title Fee
One of three standard fees: tax, title and registration. A fee charged by the state that goes to assigning the title of your new car (that piece of paper that says who owns the car). If you are financing your car, the title will say that the bank owns the car, but you still have to pay the title fee. The dealer pays the state on your behalf. Check out your local DMV’s website as title fees vary greatly. Some states don’t have them at all.

Trade In Value
The price a car dealer or wholesaler is willing to pay you for your current car. This money usually goes straight to the down payment on your new car loan or lease. At Roadster, we typically can get you a much better price than you would get from the dealer where you are buying the new car (we get them to bid on your trade-in too). At the time of your new car delivery, we will do a short inspection of your existing car (e.g. confirm mileage, no major damage or mechanical issues) and pay you for the trade-in.

Up-Front Costs
All of the costs that you have to pay before driving your new car off of the lot. This includes the Down Payment and any fees. It’s not the price of the car (see Out The Door Price) but just what you need to pay immediately before walking out the door of the dealership with your keys.

Upside Down
A term that describes when you owe more on your loan or Lease than the actual car is worth if you were to sell it. For example: let’s say you could sell your 2007 Toyota Highlander for $8,000 but you still owe the bank $10,000 on your loan. You are Upside Down in your loan.

VIN Number
The VIN (vehicle identification number) is a long string of letters and numbers that uniquely identify every car sold in the U.S., much like a fingerprint for a car. VIN numbers were first used in 1958 but everyone made up their own sequences. It wasn’t until 1981 that the US Gov standardized the formatting of the number. It’s printed on your car somewhere; usually on a plate in the windshield or inside one of the doors.

Volume Bonus (Monthly and/or Quarterly)
A manufacturer-supplied bonus to a dealership for selling a specific number of cars in a given month and/or quarter. These payments effectively lower Dealer Costs and allow dealers to sometimes sell vehicles below invoice and still make a profit..

Wholesale Market / Wholesale Price
Wholesale refers to cars that are sold between dealers. The wholesale price that dealers pay is usually much less than the retail price that you will pay when buying the car from the lot. Wholesale cars can come from auctions, other dealerships or dedicated wholesale dealers who help remarket cars to other dealerships.

Window Sticker
See Monroney Sticker.

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