Let’s face it, shopping for a new car can be very exciting, but shopping for a car loan can be stressful and in many cases confusing. Having a good understanding of common terms used in car loans can help lessen your anxiety and make you feel confident about your financial decision. While there are many perplexing terms used in auto loan documentation, we will examine some of the most common and some of the most commonly misunderstood terms used in the industry.

Common Car Loan Terms

Lender

In many cases the lender will be the bank from which you borrow money. In some instances, the dealer will offer financing. Ultimately, the lender is the institution who loans you the money, and to whom you are indebted.

Principal

The amount loaned.

Maturity Date/Term

The date the loan should be paid back in full. This could also be referred to as the length of the loan. A common car loan term is 60 months.

Interest Rate

The percentage that the lending institution charges for borrowing money. This is charged on the principal, or in other words, the amount that needs to be paid back. This is not always assessed on an annual basis, so a seemingly low interest rate assessed twice a year may not be such a bargain.

Variable Interest Rate

An interest rate that is not fixed, but that fluctuates in relationship to the prime rate or index. It is possible to get a good deal on a variable interest rate, but this is usually only the case if the prime rate is low and the loan term is very short. If the loan term is long, you run the risk of the rate increasing which could lead to higher monthly payments.

APR

This is the annual percentage rate, and is not always the same as the interest rate. This represents the annual rate that is charged, and as such, is the actual annual cost to the consumer over the course of the auto loan. The APR will allow you to more easily shop and compare car loans, since it equates all loans to the same annual rate.

Amortization

The process by which the amount of your fixed monthly payment applied to the principal increases over time and the amount applied to interest gradually decreases. You will pay mostly interest on the front end of a loan, and mostly principal as the term draws to a close in order to keep your monthly payments the same.

Title

Commonly referred to as a pink slip, this legal document is issued by the DMV and indicates who owns the vehicle.

Default

This refers to a situation where the borrower violates the loan agreement, typically by not making the agreed upon monthly payments.

The next time you are shopping for a car loan keep these common auto loan terms in mind and don’t feel stressed. It is in the lender’s best interest to make sure that you are educated about the terms of your loan. The car buying experience should be an exciting one, so don’t be afraid to ask questions about your car loan if there is something you don’t understand.