Financing Your Car
What does "balloon payment" mean?
With regards to financing your car, a balloon payment is a way that finance companies have helped get a lower monthly payment. Quite often people buy a vehicle and they're mostly concerned with keeping it under $40 or $50 a month. If they're financing it and their approved interest and term of the loan won't allow for that, they'll sometime slide some of the amount you owe into a balloon payment at the very end of the term. So, if you're paying $40 a month for 35 months and then month 36 comes, you have to pay $20. While that can seem like a good financial advantage as you're able to keep more money in your own bank account, potentially making interest on it, it's often dangerous because people will often live right to that line and not have that additional money set aside for that balloon payment. While the balloon payment structure does allow for a lower monthly payment, most people are not savvy enough or not smart enough to make sure that they're also budgeting for the big balloon payment at the end. Therefore this balloon payment at the end can cause a problem and potentially put you in a deeper debt situation.
What does "base value" mean"?
The base value of a vehicle is the actual base price of a car before you add any special options, upgrades, stereos, additional features, taxes, licences; just the real core cost of that vehicle.
What does "buy here, pay here" financing mean?
With regards to financing your car, a "buy here, pay here" dealer is one that has arranged to do all the financing there in-house. Quite often this is much more on the used car side than in the new car side. So, while this is an advantage in that you can do one-stop shopping if you will, the disadvantage is that there is usually a much higher interest rate than with a large finance company or a bank would be able to provide. So, while you will be approved finance for that loan, you'll probably be paying a much higher interest rate than you would at another dealership, bank or credit union.
What does "capitalized cost" mean?
With regards to financing your car, the capitalized cost, or “cap cost” is the all-in-one price. This is the price that after you add in the financing cost, the licensing, all of the fees, and all the things that go into building out the final price of the car. This cost is then split out over the months of the term, whether it's a lease or a financing and identify then what your monthly finance payment's are going to be.
What does "capitalized cost reduction" mean?
Capitalized cost reduction can really come from two different places. Firstly, if you're doing a trade in or writing a down payment against the vehicle, that can reduce the overall price of the vehicle. That is probably the cleanest, easiest way. Capitalized cost reduction can also come from the manufacture itself providing additional funding, such as rebate or incentive program to take down the price. Capitalized cost reduction is either going to come from additional down payment, from additional money on the hood or the rebate from the manufacture. However, it is important to keep in mind that trading in a vehicle is going to get you the least amount of money for your used car. You may be better served to take it out to the market and sell it privately, and then take that profit from the sale and apply that directly to your new loan on your new car to reduce the capitalized cost.
What does "collateral" mean?
Collateral is just another word for the assets that are used to secure a new loan.
What does "cost of funds" mean?
With regards to financing your car, cost of funds is in essence the interest rate. How much the person who is lending you the money is going to be making in exchange for providing you with that lump sum of money in the first place. So, the cost of funds is going to be that APR or that interest rate that's above and beyond the lump sum that you're borrowing.
What does "default on a loan" mean?
If you're defaulting on your loan, you're putting your credit rating in peril, and potentially really hindering the possibility of getting new loans and new credit in the future. What this means is that you're not paying attention to your payment schedule, you're allowing yourself to go two or three months before you make the payment and paying just before the due date. These are all things that are very dangerous. Payments may not be recognized, and therefore your credit rating is going to be very negatively impacted.
What does "earnings to debt ratios" mean?
Earnings to debt ratio is the balance between the amount of money the person's bringing in versus how much they owe.
What is an "implicit lease rate"?
With regards to financing your car, an implicit lease rate is in essence what your actual payment is going to be built on when you're doing a lease. Quite often that lease rate can be adjusted in a positive way by the manufacturer who's doing incentives or programs to provide more incentives for taking on that lease. So, they will provide additional funding to bring that percentage down to something that allows that monthly payment to come down, and therefore make the lease more attractive.
What does "financing costs" mean?
With regards to financing your car, “financing costs” are very simply the amount of money that you owe above and beyond the actual value of the property that you're taking on. So, financing costs would be any additional interest rates, additional fees, and additional points. These are all the things that add up to the cost of taking on that money, since you didn't have it in your savings account to pay for the product up-front.
What does "grace period" mean?
With regards to financing your car, a grace period is in essence an extension onto your payment schedule. The grace period allows you to take more time to collect the funds you need for your payment without any additional cost or penalty.
What is a "home equity loan"?
A home equity loan is a loan that takes into account the collateral that you've built as an equity on your home. So the value that the home has appreciated over time, is the difference that can then be borrowed against.
What do "points" mean in a loan?
Points are additional charges that are incurred when you take on the loan in the first place, and in this case one point equals one percent of the purchase price of the loan.
What is a "lifetime rate cap"?
With regards to financing your car, a lifetime rate cap is adjustable financing. For example you may take on the loan at 5%; however, over the term of the loan, it can increase up to 7%. The lifetime rate cap just makes sure that it can't go anything past that pre-agreed 7%.
What are "pre-payment penalties"?
With regards to financing your car, ‘pre-payment penalties' reflect additional fees or charges that will come if you go to pay off the loan earlier than the actual term. It's in the interest of the lender to keep you in that financing term through the full extent. So, if you want to pay off the finance early for whatever reason, he'll often charge additional fees being ‘pre-payment penalties' to allow you that benefit.
How do I get "pre qualified" for an auto loan?
To pre-qualify for a loan is to provide your credit rating, your personal information, your finance information and to see about what you could actually afford or what would be loaned to you. It's not a pre-approval, just giving you a guideline of where you stand, how the lenders see you and what sort of risk you are to them. You would know if you were pre-qualified if you provided all the information, your social securtiy number, your credit report score, your financing information, income information. When you provided all that they are going to go away, take that into account, see what sort of risk you are and then allow you to know what you are pre-qualified to borrow. You would know by virtue of receiving some sort of notice either in an e-mail or actually verbally at dealership, the bank or credit union.
What do "principal" and "simple interest" mean in a car loan?
The principal is the actual amount that you borrowed. So, in the case of buying a vehicle, if the vehicle price is $20,000, your loan then is written for $20,000 plus any interest. Before you add that interest, that base amount is the principal. Looking at the car loan, it's quite simple. You consider how much you're borrowing up front, take the interest rate and apply it over the months before you pay the loan off.
What are "sub prime loans"?
A sub prime loan is an ability of a lender to provide financing to somebody whose credit rating is probably not the very best. The downside of this is that the person whose credit rating is not good is going to be asked to pay a higher interest rate.
What is a "rebate"?
With regards to financing your car, a rebate is an incentive that generally comes from the manufacturer, something that's passed from the manufacturer directly to the consumer. A rebate is additional funding, for example a $2,000 rebate can be used as funding i.e. if you buy the vehicle for $20,000, and we'll give you $2,000 rebate. A rebate can also and is often used though to increase the down payment on the vehicle, so it's basically funding assistance from the manufacturer to the consumer.
Will I have to pay taxes on the amount of the rebate?
With regards to financing your car, rebates are not taxable. In fact, rebates will reduce your tax burden because in most cases the rebate is not a realized fund of money but it actually just goes in to increase the down payment on the vehicle. Therefore the rebate reduces the transaction price of the vehicle, which also then reduces the sales tax burden for that vehicle.
