Finance Glossary

Finance Terms

Acceleration Clause - The acceleration clause allows a lender to increase the rate at which the loan is paid off if the borrower defaults on the loan. This can result in the lender asking that the balance be paid in its entirety immediately.

Accrue - To accrue is when interest is building up on a loan.

Accrued Interest - Accrued interest is the interest that has built up on a loan during a certain time frame.

Acquisition Fee - An acquisition fee is charged by the leasing company and can be included in your monthly payments.

Addons - Addons are items or services that can be added on to the automobile by the dealership. These items are usually overpriced and dealers often refer to them as snake oil because it bites you.

Adjusted Capitalized Cost - The adjusted capitalized cost is the amount of the vehicle after any discounts or down payments. This is the amount that will be financed. This is also known as Net Capitalized Cost.

Adverse Action - Adverse action is when the lender decides not to grant a loan in the amount or by conditions that have been requested by the borrower.

Adverse Action Notice - An adverse action notice is the letter that is sent to the applicant advising that the loan was not approved.

Agreement of Sale - The agreement of sale is a contract signed by both the buyer and the seller that has both parties information along with the terms of the contract. This is also known as the sales or purchase agreement.

Amortization - Amortization is gradually reducing the amount owed on a loan by making regular payments on both the principal and interest.

Amortize - Amortize is making payments on a loan regularly until the loan is paid off within the set duration of the loan.

Amount Financed - The amount financed is the amount of money that is borrowed from the lender.

Ancillary Charges - Ancillary charges are charges that can be added to the amount of the loan if the buyer chooses to purchase the service or coverage offered by the dealer at the time of the purchase.

Annual Percentage Rate (APR) - The annual percentage rate or “APR” is the amount of money that is spent on credit over a years time. The duration of the loan, the finance charges, and amount financed are all used to factoring the percentage. This is different that the interest rate because it includes all of the expenses in obtaining the loan. The lender is required by law to disclose the annual percentage rate to the consumer within a .025% of .01% accuracy.

Application - An application is the form that the borrower fills
out with their information so that they can apply for a loan.

Appraisal - An appraisal is the amount that a property is deemed
to be worth by an authorized individual known as an appraiser.

Appraisal Fee - An appraisal fee is the amount charged by an appraiser to determine the worth of a certain property or item.

Appreciation - Appreciation is when a person’s assets grow in value.

Asset - An asset is something that a person owns that has monetary value. An example of an asset could be a house, stock, bond, or car.

Assignment - Assignment is when a loan is transferred from lender to lender or from dealership to lender.

Assumption - Assumption is when there is already a loan taken out for vehicle and the buyer agrees with the seller that they will take over the payments.

Automated Teller Machines (ATMs) - Automated teller machines are computers that a person can get information about their bank account or credit card account from. A person can also make monetary withdrawals or deposits with this machine.

Balance - The balance is the amount of the loan that has not been paid back or is still owed.

Balloon Payment - A balloon payment is when the last payment on
the loan is large so that the regular monthly payments can be smaller.


Base Monthly Payment - The base monthly payment is the portion
of the payment that includes only the depreciation of the vehicle for the duration of the lease. This is figured by taking the amount financed minus the residual divided by the number of months in the lease. When you add tax and the monthly interest to this number you will have your total monthly payment.

Base Price - The base price is the amount that the automobile will cost without any added features or options. The base price is also referred to as “MSRP” or the “sticker price.”

Basis Point - A basis point is equal to .01%.

Bill of Sale - The bill of sale is a detailed document used to
show information on the sale of a vehicle.


Billing Error - A billing error is any mistake on an individual’s
monthly statement as defined by the Fair Credit Billing Act.

Black Book - The black book shows how much a used automobile would
be worth for auction.

Blue Book - Blue book shows the wholesale and retail value of a
used automobile.

Borrower - The borrower is the person that is getting the loan
from the lender.

Broker - A broker acts as an intermediary by negotiating contracts
or arranging funding but does not actually loan the money themselves.

Business Days - A company’s business days are the days in which
the company intends to be open for business. By contacting a
particular company you can obtain information as to which days
are counted as business days under the Truth in Lending and Electronic
Fund Transfer Acts.

Buy down - A buy down is when you can pay for extra points at the beginning of a loan in order to permanently lower the interest rate. Another type of buy down is when you pay upfront for part of the interest in order to have a lower interest rate the first few years of the loan.

Buyer - The buyer is the person that will be making the purchase
of the vehicle.

Buyers Order - Buyers order is a legal document between the person selling the car and the person buying the car.

Buyers Guide - A buyers guide is required to be posted in every
car that a dealer wishes to sell according to the Federal Trade
Commission’s (FTC) Used Car Rule. This guide advises the buyer
whether there is a warranty with the vehicle and how much of the
repair costs are covered by the dealer under the warranty.
The guide will advise that verbal promises are hard to enforce and that all promises should be in writing. The consumer should keep the guide for reference after the purchase of the vehicle.
The guide will also list the major systems on the car and
give advice on what to look out for. It will also advise the buyer
to take the car to be inspected by an independent mechanic before it is purchased.

Caps (Interest) - Caps (interest) is when there is a limit on an
adjustable rate loan that the interest rate cannot exceed.

Caps (Payment) - Caps (payment) is when there is a limit on the
amount that the payment cannot exceed on an adjustable rate loan.


Captive Finance Company - A captive finance company is one that is owned by the automobile manufacturer that finances the vehicles that they sell.

Cash Price - The cash price is the price that the dealership will
agree to sell the vehicle for.

Certificate of Title - A certificate of title is a document showing
evident ownership of a particular vehicle that is issued by the
Department of Motor Vehicles once ownership is confirmed.

Charge Off / Write Off - A charge off or write off is where a creditor  has given up on collecting the amount due. This usually shows up under applied for credit and unapplied for credit on a credit report.

Cloud (On Title) - A cloud (On Title) is when there is a pending
claim on the title that prevents it from being transferable.

Co-Buyer - The co-buyer is a person who is purchasing a vehicle
with another person and will be equally financially responsible.

Collateral - Collateral is property owned by the borrower that
can be taken away by the lender if payments are not made on the loan.

Collision Insurance - Collision insurance is an insurance that
is purchased to cover any damage to an automobile in the event that it was to collide with another vehicle or object.

Commission - Commission is money paid to the broker for their services once they complete a sale.

Commitment - A commitment is when a lender and a borrower agree to loan money under certain conditions for a future date. This is usually in writing.

Comprehensive Insurance - Comprehensive insurance is insurance that is purchased to cover any damage to the automobile that is not caused by a collision but by a crime or natural disaster.

Compound Interest - Compound interest is interest that accumulates based on the principal and interest accumulated in the past.

Contractual Obligation - A contractual obligation is where the
borrower is legally accountable to pay back money borrowed from a lender.

Co-Owner - A co-owner is someone who has equal ownership of the vehicle with another individual.

Cosigner - A cosigner is someone who takes equal financial responsibility for a loan. Usually someone would need a cosigner if they did not have enough credit to support the loan they are trying to acquire.

Credit - Credit is a mutual agreement between a lender and a borrower that money will be loaned and then repaid.

Credit Bureau - The credit bureau is an agency that keeps track
of everyone’s credit history. The three major credit reporting
agencies are:


Equifax®
P.O. Box 740241
Atlanta, GA 30374-0241
Phone: (800)-685-1111 


Trans Union®
P.O. Box 1000
Chester, PA 19022
Phone: (800) 916-8800 


Experian® (formerly TRW)
P.O. Box 2002
Allen, TX 75013
Phone: (888) 397-3742



Credit Card - A credit card is a card that represents a certain
amount of money that a lender is willing to loan the cardholder.
The cardholder can make purchases with this card up to the amount approved.

Credit History - Credit history shows a person’s past experience
with debts.

Credit Life Insurance - Credit life insurance pays of a borrower’s
debt in the event that they die.

Credit Ratio - Credit Ratio is figured differently depending on
the loan. For a FHA/VA loan it is figured by taking the borrower’s
monthly payment and dividing it by there income after taxes.
Credit ratio for a conventional loan is figured by taking the
amount of the monthly payments that the borrower owes and
dividing it by their monthly income before taxes.

Credit Report - A credit report shows a person’s history of repaying
debts.

Credit Score - A person’s credit score shows a lender how much
of a risk they are taking by lending money to the borrower.
It shows a person’s creditworthiness.

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Credit Scoring System - The credit scoring system is used by creditors
to determine someone’s creditworthiness based on their credit history.



Creditor - A creditor is someone who lends money.

Credit-related Insurance - Insurance to protect your creditworthiness
for instance in the event of a disabling accident (disability insurance)
or total loss of the vehicle where the value of the vehicle is less
than the amount owed (GAP insurance).

Creditworthiness - Creditworthiness is whether someone has repaid loans in the past and will be able to pay off loans in the future.

Customer Incentive - Customer incentive is also known as a rebate. It is where the manufacturer will send the buyer money back to help encourage the sales of a particular product.
 
Dealer Charges - Dealer charges are fees charged by the dealership for any additional services or products that are not included in the automobile’s price.

Dealer Holdback - Dealer holdback is when the manufacturer pays
an allowance to the dealer so that the dealer can buy the automobile for less than the invoice price.

Dealer Incentive - Dealer incentive is where the dealership is sent a special payment from the manufacturer to help promote sales of a particular vehicle.

Dealer Invoice - A dealer invoice is the price that the manufacturer charges the dealership for the automobile and any extra features.

Dealership - A dealership is an agency that is authorized by a
manufacturer to sell their products.

Dealer Sticker Price - The dealer sticker price is the manufacturer’s suggested retail price or the amount that the manufacturer recommends selling the vehicle for. This is also called “MSRP” or “List Price”.

Debit Card (EFT Card) - A debit card or EFT card is similar to
a credit card in the way that it is used but instead of the money
coming from a lender it comes from the cardholder’s bank account.

Debt - Debt is the responsibility of the borrower to pay back money borrowed.

Debt Ratio - Debt ratio is how much a person makes compared to
their debt. It is figured by taking the amount owed each month
and dividing it by your income before taxes.

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Default - Default is when the borrower does not make the agreed
payments on the loan or does not meet the conditions agreed upon  in the contract.

Deferment - Deferment is getting permission from the lender to
skip a payment which is then added on to the end of the loan causing the duration of the loan to be extended.

Deferred Interest - Deferred interest is when the monthly payment does not cover the interest owed and the unpaid interest is added to the unpaid balance of the loan. In some cases a borrower could owe more than the original amount borrowed. This is also called negative amortization.

Deficiency Balance - A deficiency balance is the amount that a
borrower owes after the lender has repossessed their vehicle, sold it, and taken the amount that they received for it off of the loan.

Delinquency - Delinquency is when the borrower does not make payments on the loan by the dates agreed upon in the contract.

Depreciation - Depreciation is an automobile gradually loses its value.

Destination Charge - A destination charge is the amount that the
dealership was charged from the manufacturer to have automobile sent to them. This amount is included in the cost of the vehicle.

Disability - Disability insurance pays a person’s debt if that
person has been injured or is ill and cannot work.

Disclosures - Disclosures are pieces of information that are given
to the consumer about a vehicle’s previous history like accidents or repairs.

Disclosure Statement - A disclosure statement is listed on the
loan document showing the full amount financed and any additional charges or fees.

Discount Points - Discount points are purchased to lower the interest rate on the loan. Each point counts as one percent of the loan.

DMV - DMV stands for the Department of Motor Vehicles.

Down payment - The down payment is the amount of money paid at the time of purchase. The amount paid along with the loan amount equal the purchase price of the vehicle. Most of the time Conventional loans have a down payment of 10 to 20 percent of the sales price.

FHA and VA loans normally either do not require a down payment or it is up to 5 percent of the purchase price.

Due Date - The due date is the date that the borrower agrees to
pay the lender by each month.
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Earnest Money - Earnest money is money given by the consumer to the seller to show that they are serious about the purchase.
This is included in the purchase price.
 
Elderly Applicant - An elderly applicant is someone who is 62 years of age or older as stated in the Equal Credit Opportunity Act.

Electronic Fund Transfer (EFT) Systems - Electronic Fund Transfer or EFT Systems are a way to transfer money electronically instead of by using a check.

Employment Insurance - Employment insurance covers your monthly payment if you loose your job involuntarily but unfortunately this is not available in every state.

Equal Credit Opportunity Act (ECOA) - The Equal Credit Opportunity Act or ECOA is a federal law that prohibits lenders from discriminating
based off of someone’s race, color, religion, national origin, age, sex, marital status or if the person receives some type of financial assistance from a public source.

Equity - Equity is the difference in what is owed on a vehicle
and how much the vehicle is worth.

Extended Service Contract - An extended service contract will cover repairs on a vehicle that are not related to normal wear and tear. The customer will normally have a deductible on each visit.

Extended Warranty - An extended warranty covers certain problems with the vehicle that are outlined in the contract after the manufacturer’s warranty has expired.

Extension - An extension is a change that is made to the loan
causing the duration of the loan to be longer.

Fair Credit Reporting Act - The fair credit reporting act is a
law that protects the consumer by having guidelines that creditors and reporting agencies must follow to exchange or correct information on one’s credit report.

Fair Market Value - Fair market value is the amount that is agreed upon by the buyer and seller as being a reasonable price for the vehicle.

FDIC - FDIC stands for Federal Deposit Insurance Corporation.

Finance Charge - A finance charge is the amount that credit will
cost the borrower.

Finance Company - A finance company is a business that loans a
borrower funds and the borrower pays them back based on the terms of the contract.

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Finance Contract - The finance contract is the legal written agreement between the borrower and the lender that includes all conditions of the loan.

Fixed Rate Loan - A fixed rate loan is where the interest rate
on the loan never changed throughout the duration of the loan.

Franchised Dealer - A franchised dealer is a dealership that the
manufacturer has authorized to sell their vehicles and normally
the franchise name will include the name of the manufacturer.

Gas Guzzler Tax - The gas guzzler tax is a tax collected by the
IRS on the sale of new model year automobiles whose gas mileage does not meet a certain standard. This tax only applies to cars.

General Warranty Deed - A general warranty deed is a deed in which shows all of the seller’s interest along with the title to the buyer but also states that if there is a lien on the title then the buyer can hold the seller responsible.

Grace Period - A grace period is a time frame that a payment can
be received in after the payment is actually due and there not be a late fee.

Grantee - A grantee is the person in the contract who is purchasing the vehicle.

Grantor - A grantor is the person in the contract who is selling
the vehicle.

Gross Monthly Income - Gross Monthly Income is the full amount
that the borrower makes in one months time before anything is
deducted from his income such as taxes.

Guarantee - Guarantee is a promise by one party to pay a debt or
perform an obligation contracted by another if the original party
fails to pay or perform according to a contract.


Guaranteed Automobile Protection (GAP) - Guaranteed automobile protection or GAP coverage can be purchased by the consumer to cover the remaining amount on the loan in the event that there is a total loss of the vehicle.

Guarantor - A guarantor is a person that has accepted the
responsibility of paying someone else’s debt.

Hazard Insurance - Hazard insurance is a type of insurance that
will cover the insured person’s property against different types
of natural disaster such as fire or storms.

Impound - Impound is the amount that the lender holds back from a borrower’s monthly payment for taxes, hazard insurance, etc. This is also called reserves.

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Independent Dealer - An independent dealer is a dealership that
has no affiliation with the manufacturer of the product they sell.

Inspection - Inspection is an action to determine the worth or
condition of the vehicle.

Installment Plan - An installment plan is a form of credit where
the buyer pays regular payments for specific time frame.

Insurance - Insurance is purchased by the consumer to reimburse
them in the event that there is a loss.

Insurance Premium - An insurance premium is the amount that the insured has to pay in order for the insurance company to cover them in the event of a loss.

Interest - Interest is the percentage that the borrower will owe
above the amount of the loan to the lender as payment for the loan.

Interest Rate - The interest rate is mostly relevant to the lender
because it is used to determine how much the lender will receive on the principal of the loan in a year’s time. The interest rate makes up part of the annual percentage rate which is mostly relevant to the borrower.

Investor - An investor is a lender’s source of funding.

Invoice Price - The invoice price is what the manufacturer charges the dealer for the automobile.

Joint Account - A joint account is when two or more people have an account with a financial company and are equally financially
responsible for all transactions.

Judgments - Judgments are when a debt is ordered by a court that it must be repaid. The creditor may ask that wages be garnished in order for it to be repaid.

Kelley Blue Book - Kelley blue book lists the wholesale and retail
value of a used automobile

Late Fee - A late fee is charged in the event that the lender receives the borrower’s payment after the agreed upon due date.

Late Payment - A late payment is a payment that is received after the due date.

Lease - A lease is where a person can pay to use an automobile
for a certain time period but they never own the vehicle.

Lemon Law - The lemon law is a collection of state laws that protects the buyer from the sale of vehicles that are continuously defective.

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Lender - The lender is the person or company that loans the borrower money with a contractual obligation to pay them back under the specific terms that they agreed upon.

Lessee - A lessee is someone who has temporary use of an automobile because they signed a lease.

Lessor - A lessor is a business that lends vehicles temporarily
in exchange for regular payments.

Liability Insurance - Liability insurance covers the policyholder
for up to a certain amount for the damage to another person’s property or the injury of another person.

Liability on an Account - Liability on an account is a debt that
one is legally obligated to pay back.

List Price - The list price is the price that the manufacturer
suggests selling the car for.

Loan - A loan is where a company lends a person money with an agreement that it will be paid back under certain terms.

Loan Agreement - The loan agreement is the contract between the borrower and the lender that shows all of the details of the loan.

Loan Balance - The loan balance is the amount that the borrower
still owes the lender on a loan.

Loan Term - The loan term is the amount of time that the borrower has to pay the loan back in its entirety.

Loan-to-Value Ratio (LTV) - Loan-to-value ratio or LTV is expressed as a percentage where the amount of the loan is divided by the amount that the vehicle is worth.

Lock Term - A lock term is an amount of time that the borrower
is guaranteed a particular percentage rate. This is usually the
time period between the time that a loan is applied for and when
the loan closes to ensure that the rate does not increase.

Manufacturer - The manufacturer is the maker of the vehicle.

Manufacturer’s Rebate - The manufacturer’s rebate is a promotion that is offered by the manufacturer to the consumer to increase the sales of a particular product.

Market Value - Market value is the highest amount that a buyer will pay for a vehicle and the lowest that the dealer would be willing to sell the vehicle for.

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Marketable Title – A marketable title is where a person owns the
vehicle outright and there are no liens on the title or any other
issues. The seller is free to sell the title with no obligation to
any other company.

Mark-up - Mark-up is the difference between what the dealer bought the car for and the amount of money that the dealer sells the car for.

Maturity Date - The maturity date is the date that the loan will
be paid off.

Monroney Sticker - The monroney sticker shows what the MSRP is
on the vehicle as well as the list of options and is required for
all new vehicles by federal law.

Monthly Payment - The monthly payment is the amount of interest and principal on the loan that the borrower is responsible to pay by a certain date.

MSRP - The manufacturer’s suggested retail price or “MSRP” is the amount that the manufacturer recommends selling the vehicle for.

NADA - NADA stands for the National Automobile Dealer Association. NADA helps with legal issues and regulations and performs research on different aspects of the automobile industry to help improve the industry.

Negative Amortization - Negative amortization is when the monthly payment does not cover the interest owed and the unpaid interest is added to the unpaid balance of the loan. In some cases a borrower could owe more than the original amount borrowed. This is also called deferred interest.

Negative Equity - Negative equity is when a person owes more on
a vehicle than the vehicle is worth.

Net Effective Income - Someone’s net effective income is their
total income after taxes.

Net Worth - Net worth is the value of their assets less their debt.

Odometer - An odometer keeps track of the automobile’s mileage.

Open Credit - Open credit is required to be fully paid monthly.

Open-End Credit - Open-end credit is a reusable line of credit,
such as a credit card.

Open-End Lease - An open-end lease is where a person may owe a balloon payment at the end of the lease depending on the condition of the property once it is turned back in.

Optional Equipment - Optional equipment is equipment that is not on the basic model of the car but the consumer can choose to have it included for a higher price.
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Overdraft Checking - Overdraft checking is where a person can use their EFT card to make purchases or withdraw funds for more than their actual balance and they pay interest on the amount that is over and above their balance.

Payment - A payment is the portion of the principal and interest
that the borrower pays each month to the lender.

Payment to Income Ratio - Payment to income ratio is best when
under 15%. This is figured by comparing a person’s car payment
to their income before taxes.

Pink Slip - A pink slip is the automobile’s title.

Point-of-Sale (POS) - Point of sale is a way that a consumer can
make a payment and the money is taken from their bank account
without having to use a check.

Points - Points represent interest. One point would represent one
percent.

Power of Attorney - Power of attorney allows one person to make
legal decisions for another person.

Preparation Charges - Preparation charges are fees that the dealer charges the consumer for getting the purchased vehicle ready for pick up.

Prepayment Penalty - A prepayment penalty is when the consumer is monetarily penalized for paying off a loan before the agreed upon length of the loan.

Principal - The principal is the amount that is being financed before any interest is added.

Principal Balance - Principal balance is the amount of the loan
that is still owed.

Q-form - A q-form is a collection of questions on a form that the
applicant will fill out in order to apply for a loan.

Qualify - To qualify is when the borrower has been approved for
the loan.

Quote - A quote is how much the vehicle with cost the buyer.

Rate - Rate is a yearly percentage of the principal that is paid
as interest on the loan.

Rebate - A rebate is where the manufacturer will send the buyer
money back to help encourage the sales of a particular product.
This is also known as a customer incentive.

Recision - Recision is when a contract is cancelled.

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Regulation Z - Regulation Z is the part of the Truth-In-Lending
Act that requires the lender to disclose the terms of the loan.

Repossession - Repossession is when the lender takes back the vehicle that they financed because the borrower has not made payment or abided by the contract that was agreed upon.

Retail Blue Book Value - The retail blue book value shows how much a used car is worth if sold by an individual or if sold by a car dealership.

Revolving Credit - Revolving credit is credit that does not have
a specific monthly payment and do not have specific duration of time. This is reusable credit such as credit cards.

Salvage / Branded Title - A salvage or branded title is a car that
has been totaled and the insurance company has purchased it and then resells the vehicle once repaired.

Secured Loan - A secured loan requires the borrower to provide
collateral.

Security - Security is property that the borrower offers as collateral.

Security Interest - Security interest is the lenders right to be
able to take the property that the borrower offered as security.

Service Charge - A service charge is a fee charged for a certain act performed.

Simple Interest - Simple interest is usually computed annually
as a flat rate. The daily amount of interest is figured by taking the amount of the loan and multiplying it by the interest rate.

Snake Oil - Snake oil are items or services that can be added on to the automobile by the dealership. These items are usually overpriced and dealers refer to them as snake oil because it bites you.

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SSN - SSN stands for social security number.



Sticker Price - The sticker price is another term used for MSRP
or the list price. This price is the amount recommended by the manufacturer.

Tax - A tax differs from state to state and is based on how expensive the automobile is. There are additional taxes for different types of vehicles as well depending on the state.

Term - The term is the duration of the loan.

Title - The title is the official evidence that a person owns the
vehicle.

Title Search - A title search is done to find out who legally owns
a certain property by a detailed exam of municipal and public records. A title company would be the best choice to do a title search.

Trade-in Value - Trade-in value is the worth of the vehicle that
the buyer is using as a portion of the purchase.

Truth-In-Lending Act - The Truth-In-Lending Act is a law that requires that the terms of the loan agreement and all costs involved appear on the contract between the lender and the borrower.

Unapplied for Credit - Unapplied for credit is where credit was not applied for but show up because they are unpaid bills.

Underwriting - Underwriting is verifying the applicants information and deciding whether to approve or deny the application for the loan.

Upside-down - Upside-down is a term used to refer to a customer
who owes more on a vehicle than the vehicle is worth.

Vehicle Identification Number (VIN) - The vehicle identification
number or VIN is a code that is seventeen characters long and identifies each vehicle in the world individually.

Verification of Employment - Verification of employment is when
the borrower’s place of employment gives written documentation that the borrower is employed there, their position, and income.
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Warranty - A warranty is a promise from the dealer or manufacturer that the automobile will perform to a certain standard and if it does not the warranty will cover repairs for specific amount of time.

Wholesale Blue Book Value - The wholesale blue book value is the
amount that a used automobile can be purchased by a dealership.

YTD - YTD stands for year to date.