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Amortize:
To pay off in regular installments (monthly) over a loan term. The payments
(installments) are generally the same amount. (Amortized loans differ from term
loans in this way.)
Appreciation:
The value that an asset gains over a period of time.
APR, Annual Percentage Rate, Interest Rate, or Loan Rate:
The rate being charged to a consumer for the ability to use the finance
company’s money. It is usually expressed in a percentage, so you can think of a
8.5% loan rate as meaning that you pay $85 per $1,000 loaned over a one-year
period. Truth in lending laws dictate how this figure is expressed, and prevent
the quoting of a figure which is secretly bloated by added costs such as loan
origination fees. A bank may charge you 8% for a loan, but the APR may be higher
because they have also charged you $25 per $1,000 to get a loan at 8%. Thus you
really are borrowing $975. The listed APR is to help the consumer better
understand how much the loan is actually costing.
Assets:
The items you own. You don’t have to own something “free and clear” for it
to be considered an asset. Say you have a house, on which you owe money to a
bank or mortgage company. The amount you owe is considered a liability; the
amount you’ve already paid off is an asset.
Collateral:
Assets that can be used to back up a loan which you obtain with a finance
company. If you fail to pay on the loan as agreed, the finance company can take
these assets. Most finance companies will not loan full cost on a vehicle
because it is already depreciated in value below the loan amount, because if you
fail to pay, and they take the vehicle in collateral, they end up losing money.
Credit Line:
A loan approved by a financial institution and available for the lender to
draw on that is unused, or not used to the maximum allowable amount. Many buyers
today are using what is known as a “Home Equity Line” as a means of purchasing
vehicles, instead of obtaining separate vehicle loans. The good news is that
interest paid on such loans is normally tax deductible. The bad news is that a
portion of the home is being used as collateral.
Depreciation:
The value that an asset loses over a period of time.
Equity, or Vehicle Equity:
Think of this as your current vehicle’s net worth: the value of the vehicle
at the wholesale level (asset) minus any loan amount (liability).
Interest:
The amount the finance company charges for the use of the capital or
principal in a loan.
Liabilities:
Your debts. The amounts you owe on your mortgage, car payments, and even
taxes are all liabilities.
Lien:
A legal claim on ownership stemming from a debt. A lien will often be held
on the vehicle’s title until the debt is paid off, at which point the title is
transferred and the lien is cleared. Liens can also be recorded in writing, in
state or county documents.
Loan Term:
The length of time a loan is given, usually measured in months.
Monthly Payment:
The combined principal and interest owed on a loan, paid on a monthly basis
over the loan term.
Negative Equity:
This exists when the liability portion (what you owe on a vehicle) of the
equity equation is larger than the asset portion (what the vehicle is worth
wholesale). (See also buried, upside down.)
Net Worth:
The sum of all your assets minus the sum of all your liabilities. Net Worth
= (Total Assets) – (Total Liabilities)
Principal:
The amount borrowed. If you borrow $10,000 for a new car, you must pay back
the $10,000, which is the principal, as well as interest.
Term Loan:
A loan which is paid back as a lump sum (principal and interest) at the end
of a loan term.
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