A Glossary of Car Buying Terms

Car buying can be a daunting and overwhelming activity, especially if you are a first timer. We here at Instamotor believe in taking the mystery out of the entire process. To that end we’ve created a glossary-style list of words you need to know when venturing into the world of buying a car. Whether the car is brand new off the lot or simply new-to-you, these terms will help you know what you are getting into and help you get a great deal.

Acquisition Fee or Doc Fees

These terms are sometimes interchangeable. An acquisition fee is a fee that is charged by a dealer to start a lease or buying process, typically in new car leasing or in some cases used car leasing. This is a “processing fee” that allows the dealer/lender to pull credit reports, insurance verification, and other things needed to ensure that you are worthy of the lease terms. Know that these fees are often complete profit for the dealer and that they can be negotiated but can’t be avoided. Doc fees are the charges that the dealer has to pay to process your paperwork.

Annual Percentage Rate (APR)

The annual interest rate that a lender charges you to borrow money. Usually this is based on the Federal rate, plus some additional amount. It can also go up or down based on your credit worthiness. This rate is also known as a finance rate.

As-Is

When you see this on a car, know that the car is sold exactly as it is, usually (according to Autobytel) without a warranty. Any issues that come up with an ‘as-is’ car are the buyer’s responsibility.

Balloon Payment/Balloon Loan

A loan that usually only pays off a portion of the total cost of a car through monthly payments. At the end of the loan, the remaining balance comes due in one large chunk—the “balloon.”

Blue Book or Blue Book Value

The value of your trade in based on Kelley Blue Book’s used car guide. There are other guides that dealers and private sellers use to determine value as well, such as NADA, Edmunds, TrueCar, as well as the Black Book for wholesale.

Bump, Bump Rate, or Bumping

This is a bit inside baseball, but this is the difference between the rate the dealer pays for financing on a lease or loan and the rate that they sell it to you at. These rates are generally around 1% which is why it makes sense to shop for a loan outside of the dealer. You can generally get a better interest rate at a credit union or big bank with just a bit more paperwork and legwork. Want to find out why it’s worth it? Check out our article on the difference between financing your car at a big bank or a credit union. The term bumping is also used to mean raising the customer’s offer for a car, according to Edmunds.com.

Buy Rate

The rate that a car dealer gets financing. This rate is usually beefed up for the consumer by as much as 1% (the Sell Rate). The dealer keeps the difference between the Buy Rate and the Sell Rate. This is known as a Spread. See also Bump or Bump Rate.

Buyout Price

The cost of buying a car at the end of the lease term. As Car & Driver notes, you need to look closely at the costs of buying the car outright versus the cost of purchasing after the lease is up. Dealers can offer a low residual/low money factor lease but it’s rare.

Capitalized Cost or Net Capitalized Cost

This is the total amount (including car cost and any options) that you will be financing. The rule of thumb is that the lower this number is, the less your monthly payment will be.

Cap Cost Reduction

In leasing or buying this is a specific amount of money you put down on a car to reduce the payments over the life of the loan. It is usually put down up front as cash but can be put down as the value of a trade in or rebate amount. Sometimes cap cost reductions are required to get a specific lease term or interest rate. This term can apply to either new or used cars.

Closed-Ended Lease or Walk-Away Lease

At the end of a lease you have the option to buy the car at a set and agreed upon price or walk away without any kind of obligation or liability. It’s always a good idea to verify that your lease is closed-ended.

Cost of Funds or Financing Costs

The APR, money factor, or rent charge. This is the cost for using a bank’s money to get the car. This is a term that is occasionally used—but not often.

Commission

This is money that the salesperson at a dealership receives for making a sale. At many dealerships it forms the bulk of their income though some do not use commission and use salary instead. Salespeople can earn additional commission by meeting sales quotas.

Dealer Charges

Any extra charges for additional services or products sold at the dealer. These are usually negotiable but be sure to ask about them up front.

Dealer Installed Option

Optional equipment installed by the dealer, not the manufacturer or an aftermarket shop. Dealer installed options could include things like undercoating, fabric protection, some appearance accessories, performance accessories. Many of these things are added on once the negotiation of base price has taken place. Be careful of these because some are unnecessary, and many can be negotiated.

Dealer Incentives

These are offers from the manufacturers, passed through to dealers to get sales going and encourage specific makes and models to sell. These are usually passed through to the customer. Be sure to ask if there are any dealer incentives available on cars you are interested in purchasing.

Dealer Invoice

The amount a manufacturer charges the dealer for a car. Be aware, this doesn’t necessarily reflect the actual dollar amount paid by the dealer.

Dealer Prep or Dealer Preparation

Dealer Prep fees are fees that dealers charge to “get your car ready” for sale. This includes removing plastic covers, cleaning the car and adding fluids etc. These are definitely negotiable.

Default

Not making your payments or abiding by the terms of the lease or buying agreement. If you default on your loan your credit will take a major hit. You want to avoid going into default on any financial obligation you make. There are also Default Fees that can be charged to your account if you don’t make your payments as the lease or loan stipulate.

Destination and Delivery Charge

This is the fee charged by the manufacturer to the dealership to deliver the vehicle from the factory to the dealer. This is a fixed fee and can be found on the window sticker (also known as a Monroney) on new cars.

Deposit

Money that a dealer or seller holds until the paperwork is complete. Read the fine print if you are putting a deposit down because if you decide to walk away from the deal you could lose your deposit. A deposit is different from a down payment.

Depreciation

The decrease of a vehicle’s market value over time.

Disposition Fee or Disposal Fee

This is a fee charged at the close of a lease by any financing company. This is the cost that the dealer incurs to bring the car back into the fleet and prep it for sale again.

Direct Financing

Financing a loan through a credit union or bank, rather than going through the dealer.

Documentation Fees, Document Handling Charge or Document Preparation Fee

See also Acquisition fees, above. These are totally negotiable and should not be exorbitant. This is the fee that is charged in order to take care of the paperwork needed to complete the sale. When buying from a private party these fees are usually handled at the DMV and not negotiable. When handled at a dealership they are negotiable.

Down Payment

The money you put down up-front to reduce the amount you are financing. This can reduce your monthly payments. Usually a typical down payment is roughly 20% of the sale price of the car.

Early Termination Fee

This is a fee paid for pulling out of a lease or financial agreement early. These are generally very large payments and could apply if a vehicle that you lease is stolen or totaled and you don’t have gap insurance.

Equity

The value left in a used vehicle after subtracting the remaining loan balance from its market value.

Equity Lease or Open End Lease

A lease where you must buy the vehicle at the end of the lease. It’s not a common type of lease but they do exist. In an open-ended lease there sometimes is an amount that the lessee will pay at the end of the lease that covers the difference between the vehicle’s residual value and the actual market value. This is known as an End of Lease Payment.

Excess Mileage Charge

This applies if you're leasing a vehicle. If you go over the mileage agreed to on your lease (typically 10,000/year, 12,000/yr, or 15,000/yr) you’ll have to pay a per-mile fee for the number of miles you go over. To avoid this, be realistic about how many miles you’ll put on a leased car per year.

Excess Wear Charge

A fee paid at the close of a lease if the car is returned with lots of damage or modifications. Things you could be charged for include tinted windows, different wheels, dings and dents, bad smells in the interior, etc.

Extended Warranty

A warranty that gives a customer added coverage when the factory warranty expires. Dealers try to sell extended warranties at the time of sale but they are largely a waste of money. Opt out of them if you are buying a new car. If you are buying used from a dealer, it may make sense to get the extended warranty depending on the car, age, mileage, and the general state of the vehicle. Always look at extended warranties with an eye of suspicion. These are also negotiable and can be bought up to a year after you’ve purchased a new car.

F&I aka Finance and Insurance

This is the office you’ll go to, to finalize your purchase or lease at a dealership. Usually they’ll try to sell you last minute additions. Know what you are agreeing to and always negotiate.

Fair Market Value

The value of a vehicle on the market in its current condition. Use things like TrueCar, Edmunds, and Kelley Blue Book to determine the Fair Market Value of a new or used car.

Financing Costs

See also, APR, money factor, or rent charge. This is the cost of borrowing money from a lender. It is also known as a cost of funds.

Finance Rate

Also known as the interest rate or APR. This is the interest rate that the lender charges you to borrow money.

Fixed (Guaranteed) Residual

A set price that is agreed to at the start of a lease. This is a price you can purchase the car for, at the end of the lease. Be careful of deals like this as it’s not often that it works out in a buyer’s favor.

Gap Insurance or Protection

See also as it relates to a disposition fee. Gap insurance covers the difference between a vehicle’s depreciated value and the amount you owe to a lender if the car is stolen or totaled. Without gap insurance you will end up paying the difference to the lender out of your own pocket. Let’s say you owe $15,000 on your car and it’s totaled. The insurance company claims it’s worth $10,000 leaving a $5,000 gap between what you owe and what it is worth. If you don’t have gap insurance, you will have to pay the lender the $5,000 out of your pocket. Generally gap insurance is a good idea.

Gray Market Vehicle

Any car that is imported but not through an authorized dealer. A gray market vehicle may not meet U.S. standards for emissions, crash safety, or other requirements.

Holdback or Dealer Holdback

This is an amount that is paid to a dealer by the manufacturer for each new or used vehicle sold. It is an incentive for dealers that they get after the sale of a vehicle. A typical holdback is 2% of total vehicle invoice. It’s an additional profit center for the dealership. If there are holdbacks, it may allow the dealer to sell the car below invoice—which means it’s a good deal for the customer. You can find out about dealer holdback by visiting a site like TrueCar and looking up the make and model.

Incentive Rate

A special interest rate offered by manufacturers to people with great credit. Also, one of the many reasons that it pays to have great credit and shop around for a loan.

Incentive

A cash refund or attractive rate offered by a manufacturer. See also Incentive Rate.

Joint Tenancy

When ownership is shared by two or more people.

Lease

This is a lot like a long-term rental. It’s a fixed, long-term contract which allows you to use the car without owning it. You can use the vehicle for a set period of time, or agreed number of miles, and are required to make payments to the lender for the use of the car. At the culmination of the lease you can either buy the car or return it to the dealer depending on the terms of the agreement. You pay for the portion of the vehicle’s life that you use, which usually means that leases are more affordable than buying a car.

Lease Extension

An agreement between the buyer and seller to continue the lease beyond the original terms without changing the monthly payment.

Lease Payment

The amount you are required, by contract, to pay to the lender monthly for the use of the vehicle. Usually this number is the sum of the rent charge, depreciation of the vehicle plus applicable taxes. To calculate the lease payment you’ll need the MSRP (sticker price or agreed upon price), the money factor (or interest rate), lease term, and the residual value of the car. If you’d like a great and easy to use calculator, check out the one on Edmunds.com.

Lien

A legally documented claim against the vehicle by another party. If there is a lien against a title on a car, it may be very difficult to sell unless you clear the lien before selling.

Lienholder

The person or entity holding a lien against a car.

Lessee

The person leasing the car.

Lessor

The financing company or bank that loans out the money for the lease. This is the company or entity that actually owns the car even when you are leasing it.
Line of Credit: The amount of approved credit you have that has not been used.

Lock or Lock in

Getting a commitment from the lender to hold specific terms of a loan or lease for a set amount of time, before committing to a sale or lease. Usually a lock lasts from the time that you apply for the loan until you sign the paperwork and get the money you borrowed.

Loss Leader

A vehicle or good (aftermarket or otherwise) sold at a loss to the company in order to get buyers in the door. Usually the dealer or seller will make up the loss somewhere else (like in fees etc.)

MSRP or Manufacturer’s Suggested Retail Price

The suggested selling price of the vehicle found on the Monroney or window sticker. This does not usually include destination charges, optional equipment or taxes.

Market Value

The price at which something would sell, right now.

Mileage Limit/Allowance

The max distance you can drive your leased vehicle before incurring additional charges. Those charges are usually calculated as a price per mile.

Money Factor

See also Lease Payment and APR. This is essentially an annual percentage rate for a lease. It usually makes an appearance in the form of a small decimal number. To figure out what the interest rate is, multiply the decimal number by 24. For example if you see a money factor of 0.0025 multiply it by 24 to get 6%. Watch out because sometimes dealers write money factors as a larger decimal figure. Say you see a money factor of 2.5—that is in fact a money factor of 0.0025 or 6%. Dealers do this to disguise them as low interest rates.

Monroney or Monroney Sticker or Window Sticker

Named after a senator from Oklahoma who sponsored the Automobile Information Disclosure Act in 1958, this is the window sticker that gives you all the information (MPG, included packages and features, price, and expected cost of gas over a year). Know that invoice price is never listed on a Monroney.

MSRP

This is an acronym for manufacturers suggested retail price. Find this on the window sticker or Monroney. The MSRP does include options and packages but does not include things like taxes or financing charges.

Maintenance or Service Contract

A contract that you usually buy up front that can cover everything from routine maintenance to mechanical coverage. Examine any maintenance or service contract closely as they are often littered with things you won’t need, and they’ll cost you a pretty penny. See also, extended warranty.

Negative Equity

When the amount owed on a vehicle is more than its market value.

Open End Lease

Usually only offered to fleets or companies that are buying or leasing a large number of vehicles, this kind of lease makes you responsible for the difference between the residual and the fair market value of the vehicle at the end of the lease.

Optional Equipment

Add-ons at the dealer or manufacturer that can be included in a particular car model, which can be ordered individually or as part of a larger package.
Papers of Origin: Documents provided by the manufacturer used to obtain vehicle titles.

Positive Equity

When a vehicle’s market value is more than the amount the borrower or owner owes on it.

Prepayment Penalties

A charge you’re required to pay if you pay off your loan or lease early. If you have good credit there should be no prepayment penalties.

Pre-Qualify

When you go out and get a lender to confirm that you are eligible for a loan without having to sign on the dotted line.

Principal

The amount of money you borrow to finance a new or new-to-you car.

Purchase Option

The right to purchase a car at the end of a lease or loan for a set cost. This can be negotiated.

Rebate or Factory Incentive

A manufacturer to customer bonus to help the carmaker sell off older (end of model year) or slow-selling models. Customers can get their hands on them in the form of rebates, cash back or a lower interest rate. These can also be called commercial incentives.

Refundable Security Deposit

Money held by the lessor until the end of the lease. This money is returned to the lessee when the lease is up.

Rent Charge

The money that goes towards the financing rather than the principal in a loan.

Residual Value

The estimated remaining value of a car when it comes back to a dealer or to the market. This number is used to calculate the monthly payment and the price you can buy the car at, at the end of the lease.

Security Deposit

A deposit that may be required by some lease contracts to help cover missed payments.

Sell Rate

The financing rate that a dealer offers to a consumer. Dealers make money on the spread between the Buy Rate and Sell Rate.

Spread

The difference between the Buy and Sell rate.

Sticker/Asking Price

The MSRP or dealer price of a car.

Subprime Loan

Loans that risky borrowers with bad credit get. They typically include higher interest rates, higher down payments and higher penalties for failure to pay.

Term

The length of a loan or lease.

Termination Fee

A fee sometimes charged at the end of a lease or loan.

Title

The legal, government-issued document that shows ownership of a specific vehicle.

Trade-in Value

The amount of money that a dealership will pay for your used vehicle that you bring in as a down payment or cap-cost reduction on a new car. This value is usually below the vehicle’s wholesale market value. So think twice before trading-in your car.

Truth in Leasing

The Consumer Leasing Act of 1976 which was designed to protect consumes from inadequate or misleading lease information.

Up-front costs

The total costs that must be paid at the signing of the contract. Usually this consists of the down payment plus any fees.

Upside Down

Owing more money on a loan than your vehicle is worth. See also Negative Equity.

Vehicle Identification Number or VIN

A 17 digit identification number that is unique to each vehicle which includes codes for year, make, body style and engine for each car. VINs are found under the windshield or along the door jambs of a vehicle.

For more about understanding what your VIN is, read our article here.

Walk-Away Lease

A lease that gives the lessee the option to buy or walk away without liability at the end of the lease term. Though it’s the most common kind of lease, always verify that your lease is a walk-away lease.

Wholesale Value

The amount of money that a dealer would pay to a manufacturer for a vehicle. Also the amount of money that a dealer would pay to purchase the vehicle from another dealer at auction. Things like condition, age and mileage all affect the wholesale value of a used car.