Car Buying & Financing Glossary

Buying and financing a vehicle will introduce you to a plethora of new terms. Get the definitions of the most common car-buying and auto finance terms here.

• Base price - the price of the vehicle without adding any options. The base price usually covers a factory warranty and standard vehicle equipment.
• Dealer profit margin - the difference between the MSRP of a car and the invoice price. Usually, the dealer's profit margin ranges between 10%-20%. After you compare auto loans, you can negotiate the price of the vehicle with the dealer to minimize their profit margin.
• Dealer sticker price - the MSRP of the vehicle in addition to the retail value of the upgrades the dealer has installed.
• Down payment - the amount of money you will pay out-of-pocket toward the price of your new vehicle. If you make your down payment as large as possible when you compare auto loans, your interest rates and payments will be lower.
• Monroney Sticker Price (MSRP) - this reflects the base price of the car, the options installed by the manufacturer plus the manufacturer's suggested retail price, the fuel economy of the vehicle, and the transportation charge assessed by the manufacturer. The MSRP sticker must be placed on the car's window according to federal law, and only the car's owner may remove it.
• Monthly payment - the amount of principal and interest you will pay on your car loan each month. Some lenders will quote you estimated monthly payments when you compare auto loans.
• Negative equity - when you owe more on your vehicle than it is worth. Also known as being upside-down in the loan.
• Prepayment penalty - the fee borrowers must pay on some loans if they repay the loan before the term expires. When you compare auto loans, look for loans with no prepayment penalties.
• Term - the length of the loan. Auto loans typically have terms of 36-60 months. The shorter the term of the loan, the less you will pay in interest expense.
• Third-party financing - if you compare auto loans from a source other than the dealership, you are using third-party financing. Banks, credit unions, and online lenders all issue third-party financing.

After you know and understand these terms, you can also benefit from reading the frequently asked questions.