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Vocab For The First Time Buyer


Although the title of this posts address vocabulary for the first time buyer, it is wise to assume even second or repeat buyers may not be knowledgeable of the basic terms used when purchasing or leasing a vehicle. Ensure that you are thorough and clear when going over agreements with first time buyers are sometimes anxious or overwhelmed, and always make deals with integrity.

Annual Percentage Rate (APR): Also called a finance rate, this is the interest rate on a loan; a percentage of the amount borrowed that a lender charges annually for the use of its money.

Acquisition Fee: A fee charged by the dealer for initiating a lease.

Balloon Payment/Balloon Loan: A loan that pays off only a portion of a vehicle during its term and demands a large sum—the “balloon”—to be paid at the end of the loan.

Buyout Price: The price of buying a car at the end of the lease term.

(Net) Capitalized Cost: A leasing term that means the sum total being financed through the lease (vehicle price plus any extras and minus the capitalized cost reduction). Also known as “Adjusted Cap Cost.”

Default: Failure to make payments or otherwise abide by the terms of a financing contract.

Down Payment: Cash paid up-front by a borrower to reduce the amount financed in a lease or loan.

Early Termination Fees: Penalties paid for withdrawing from a lease or loan ahead of the scheduled end date. Which are typically very large and may apply if a vehicle is stolen or totaled and you don’t have gap insurance.

Excess-Mileage Charges: Penalties paid at the close of a lease if the lessee drives the vehicle a greater distance than the limit stipulated in the contract.

Extended Warranty: An agreement to cover certain specific service and repairs beyond the life of the factory warranty.

Financing Cost: An APR, a money factor, or a rent charge, this is the charge for using the bank’s (another lender’s) money to acquire the car.

Finance Rate: Also called an “annual percentage rate”; the interest rate on a loan. A percentage of the amount borrowed that a lender charges annually for the use of its money.

Gap Insurance: Insurance that covers the difference between a vehicle’s depreciated value in a loan or a lease and the amount owed on it in case it is stolen or totaled, a difference the owner or lessee would otherwise have to pay the lessor.

Lease: Essentially a long-term rental in which the dealer (or a third-party buyer working with the dealer) buys a car and allows the lessee to use it for a specific period of time or agreed mileage while making monthly payments. At the end of the lease period, the lessee can either buy the car or return it to the dealer, depending on the type of lease.

Lease Extension: An agreement between the lessee and the lessor to continue the lease beyond the initial term, generally without altering the monthly payment.

Lease Payment: The amount you must pay every month during the term of a lease. This is the sum of the Rent Charge and the depreciation charge plus applicable taxes.

Mileage Limit/Allowance: The maximum distance a vehicle may be driven during a lease. Any additional mileage will garner an additional fee, usually a per-mile charge.

Rebate: A partial refund on a new-car purchase offered by the manufacturer or dealership. Rebates can either be deducted from the purchase price or refunded by mail after the sale has been completed.

Trade-In Value: The price a dealer will pay for a current car when selling you a new one.

Up-Front Costs: The total of all costs that must be paid at the signing of the contract, so the down payment plus any fees.

Upside Down: When you owe more on a loan than your vehicle is worth. Explain to the first time buyer that if they want to trade the vehicle in before their loan balance catches up to the car’s depreciation, they will still owe money to their previous lender in addition to whomever they buy a new car from. Also, if the car is totaled in an accident, the insurance company will only pay them the worth of the vehicle, leaving an outstanding balance with the lender—unless they purchase have gap coverage, which is nearly always worth buying with a new car lease or loan. To minimize the risk of becoming upside down, encourage buyers to keep their loan term as short as possible.

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