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Twenty Auto Financing Terms You Should Understand Before You Walk Into a Dealership

Published April 24, 2018

Purchasing a new or used car, truck, or SUV is one of the most complicated financial processes the majority of people will ever encounter, just short of purchasing a home. While you’re at the dealership you’ll have terms thrown at you that you might never have heard before. We’ve assembled a list of 20 terms that unless you’ve purchased a car in the recent past you might not have come across. So before you head to a dealership to talk financing, it’s our advice that you familiarize yourself with these terms.
Auto Auction is where dealers send vehicles that for one reason or another they don’t feel are the right type of car, truck, or SUV for their used car lot. These vehicles are sometimes purchased by other new car dealers, or by independent dealers, for resale. Sometimes condition and mileage are a factor in the decision to send a car to auction. It may also be that its unlikely someone who would purchase that model would come to that dealership (i.e. a BMW M3 at a Kia dealership is an extreme example).

Bad Credit “Bad” or “Poor” credit generally is considered a FICO score around 600 and below. The Congressional Budget Office identifies a FICO score of 620 as the “cutoff” for prime loans. While important, FICO scores are not the sole factor in lending decisions.

Balloon Payment can make monthly payments lower on an auto loan but require a large payment to be made at the end of the car loan. The buyer often anticipates that they can sell or trade the vehicle just prior to the balloon payment coming due. This risk is that the value of the vehicle is less than the payment.

Bill of Sale is the legal document prepared by the seller or dealership to record the details of a vehicle sale.

Black Book similar to Kelley Blue Book, Black Book is a collection of information about the value of a car, truck or van. Black Book bases the value of the car on data collected from wholesale car auctions, rather than trade-in values collected by KBB. The Black Book value is typically lower than the KBB value, as the dealers seek to protect themselves when accepting an unknown vehicle as a trade-in. Black Book data used to be a closely-held secret but is now available online.

Buydown is when the buyer may be offered an option to lower the interest rate on their car loan by making a payment to the loan originator. This is different than a trade-in or a down payment toward the purchase cost of the vehicle.
Cash Back Refi is a type of refinance loan that allows you the vehicle owner to tap into any equity that exists in the vehicle in order to get cash back while refinancing your car (see LTV). The most likely opportunity is when someone with poor credit has improved their credit rating and is eligible for a lower interest loan.

Certificate of Title is the document provided by each state’s Department of Motor Vehicles that serves as proof of ownership of the vehicle. It may also list any lienholders, typically the bank or company that financed the loan.

Cosigner is an additional person who agrees to assume equal responsibility for an auto loan, typically in situations where the buyer has no or poor credit.

Credit (as in Good Credit, etc.) is the term often used to refer to your credit history, which is used as an indicator as to whether you have the ability to repay an auto loan or not. It is not the only factor taken into consideration by many banks and financial companies.

Credit Bureau is a company that keeps a record of your credit history. The three major credit bureaus are Equifax, Experian, and TransUnion. Each is required by law to provide you a copy of your report so you can check it for accuracy, something you should do at least 60 days before applying for financing.

Credit History is a record of your financial transactions that allows lenders to determine your ability to repay loans. It includes timeliness, balance versus credit limit, and any reports of accounts going to collection.

Credit Scoring System is the system used to determine a customer’s creditworthiness based on previous use of credit on a scale of 300 to 850. Scores of 750 and above are considered Excellent. Each company weighs scores differently so you’ll most likely see a variation from one to another.

Creditor is the bank, credit union, a financial arm of the automaker or any other lender that finances a car loan.

F&I Office, short finance, and insurance, is where auto loan customers fill out their contract and paperwork at a dealership before taking delivery of their new or used vehicle.

Invoice Price is the amount a dealerships pays for a vehicle when purchasing from the manufacturer. There may be incentive discounts that further lower the cost to the dealer, but those are typically offered on slower-moving vehicles.

Loan-to-Value Ratio Also known as LTV, this ratio expresses the percentage difference between a loan amount and a vehicle value. When you have a low LTV and are looking to refinance to a lower interest rate, you can withdraw some of that equity with a Cash Back Refi.

Payment-to-Income Ratio, also known as PTI, is the ratio of the percentage of an individual’s income that an auto loan payment will require. Most lenders have a maximum PTI they will allow to avoid offering consumers loans they cannot repay. When the PTI is low (meaning that the buyer has more than enough income), but the buyer has a less-than-perfect credit history, some lenders will approve a loan based on a solid PTI.

Stips which is short for stipulations are documents required by a lender to approve a loan. Stips may include proof of income, proof of residence, proof of insurance, and any additional information the lender requires to grant approval.

Term is the length of the auto loan and is often referred to in months. For example, a two-year term is 24 months, a four-year term is 48 months, and so forth.

Understanding these 20 terms will help put you in a position where you’ll feel more comfortable discussing the finances of purchasing your new or used vehicle. We want you to be an informed consumer that way we can work together more closely in order to assemble the financial package that best fits your own situation, and results in your long-term satisfaction with your purchase.
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