Car Loan Glossary: APR, Negative Equity, GAP and More

A

Add-on: An extra product or service a dealer sells with the car, such as GAP, a service contract, paint protection or window etching. Add-ons are optional unless a law says otherwise, and each one raises the amount you finance. More: Add-ons, GAP and service contracts
Amount financed: The credit you actually receive: the cash price plus any taxes, fees and add-ons you finance, minus your down payment and trade-in credit. It is one of the boxes the Truth in Lending Act requires on every car loan disclosure. More: Retail installment contract
Annual percentage rate (APR): The yearly cost of credit, shown as a percentage, that includes the interest rate and certain finance fees. Because every lender must calculate it the same way, the APR is the number to compare between offers. More: Understand APR

B

Balloon payment: A final payment much larger than the regular monthly ones. A balloon lowers the monthly payment, but you must pay, refinance or return the car when it comes due. More: Choose a loan term
Buy here, pay here (BHPH): A used-car dealer that finances the cars it sells and collects the payments itself, often weekly or every two weeks. BHPH lots mainly serve buyers with weak credit, and their rates and prices tend to be high. More: Buy here pay here
Buy rate: The interest rate at which a lender agrees to buy a dealer's retail installment contract. The dealer may write your contract at a higher rate and keep part of the difference. More: Dealer financing
Buyers Guide: The sticker the FTC requires on the window of a used car offered by a dealer. It says whether the car comes with a warranty or is sold as is, and its terms override anything in the sales contract that contradicts them. More: Used car loans

C

Captive lender: A finance company owned by a carmaker, such as the finance arm of a major brand. Captive lenders fund many dealer contracts on new cars and are the usual source of promotional rates such as 0% APR. More: New car loans
Cash-out auto refinance: A new loan on a car you already own that is larger than your payoff, so you receive the difference in cash. It turns equity into money but raises the balance and the risk of owing more than the car is worth. More: Cash-out auto refinance
Certificate of title: The state document that shows who owns a vehicle and lists any lienholder. Many states now keep titles electronically while a loan is open.
Clean vehicle credit: The federal tax credit for buying a new or used electric or plug-in hybrid car. Under the July 2025 budget law, it is not available for vehicles acquired after September 30, 2025. More: Electric vehicle loans
Co-borrower: A second borrower who signs the loan and usually shares ownership of the car, with both names on the title. Both co-borrowers owe the full debt. More: Cosigner car loans
Cosigner: A person who signs your loan to back it with their credit but does not own the car. If you miss payments, the lender can collect the whole balance from the cosigner, and the late payments appear on their credit report too. More: Cosigner car loans
Credit score: A three-digit number, usually from 300 to 850, that sums up your credit report. Lenders use it to set your rate tier. Our sister site Funditia explains how credit scores work.
Credit tier: The band a lender places you in by credit score, often named super-prime, prime, near-prime, subprime and deep subprime. Each step down usually adds several percentage points to the APR. More: Bad credit car loans

D

Dealer reserve (dealer markup): The extra interest a dealer adds on top of the lender's buy rate, part of which the lender pays back to the dealer as compensation. Markups are often capped by the lender, and you can ask whether the rate includes one. More: Dealer financing
Debt-to-income ratio (DTI): Your monthly debt payments, including the new car payment, divided by your gross monthly income. Lenders use it to judge whether you can carry another payment. More: Get preapproved
Default: A breach of the loan contract, most often a missed payment, that lets the lender use its remedies. The contract and state law define when default happens and whether you must get a notice first. More: Behind on payments
Deficiency balance: What you still owe after a repossessed car is sold and the sale money is applied to the loan and the costs of repossession and sale. The lender can try to collect it or sue for it unless state law limits that. More: Deficiency balance
Documentary fee (doc fee): The fee a dealer charges for preparing the sale and title paperwork. Some states cap it or set a threshold, others do not limit it; the cap for your state is on its state laws page. More: Out-the-door price
Down payment: The cash you pay toward the car at the time of sale. A larger down payment shrinks the loan, lowers the payment and makes it less likely you will owe more than the car is worth. More: Down payment

F

Finance charge: The total dollar cost of the credit over the life of the loan: interest plus certain fees charged as a condition of the loan. It appears as its own box on the Truth in Lending disclosure. More: Understand APR

G

GAP coverage: Guaranteed asset protection pays some or all of the difference between your insurer's payout and your loan balance if the car is totaled or stolen. It is optional, and its price varies widely between dealers, lenders and insurers. More: Add-ons, GAP and service contracts

H

Hard inquiry: A credit check made when you apply for credit. It can lower your score by a few points for a while, but scoring models usually count several car-loan inquiries made within a short shopping window as one. More: Get preapproved

I

Invoice price: What the manufacturer bills the dealer for a new car. Holdbacks and incentives mean the dealer's real cost is often lower than the invoice. More: New car loans

L

Lease buyout: Buying the car you have been leasing, either at the end of the lease for the residual value or earlier for a payoff amount set by the leasing company. Many buyers finance it with a lease buyout loan. More: Lease buyout loans
Lemon law: A state law that gives the buyer of a new car with a serious defect that repeated repairs did not fix the right to a replacement or refund. A few states extend similar protection to some used cars.
Lien: A lender's legal claim on the car until the loan is paid. The lien is recorded on the title, so you cannot sell the car with a clean title until it is released. More: Retail installment contract
Lienholder: The lender or finance company whose lien is recorded on the car's title. After the last payment, the lienholder releases the lien so the title shows you as the sole owner.
Loan term: How long you have to repay the loan, usually 36 to 84 months. A longer term lowers the payment but raises the total interest and keeps you upside down longer. More: Choose a loan term
Loan-to-value ratio (LTV): The loan amount divided by the car's value. Lenders often cap it, so a loan above the car's value, from negative equity or add-ons, can be harder to get. More: Auto refinance

M

Money factor: The way leases express the finance charge, as a small decimal such as 0.0025. Multiplying it by 2,400 gives a rough APR equivalent; 0.0025 is about 6%.
MSRP: The manufacturer's suggested retail price, printed on the window sticker of a new car. The selling price can be above or below it. More: New car loans

N

Negative equity: Owing more on your car than it is worth. When you trade in such a car, the shortfall is often added to the new loan, which raises both the balance and the payment. More: Trade-in and negative equity

O

Out-the-door price: The full amount to buy the car: the selling price plus taxes, title and registration, the doc fee and any add-ons, minus rebates. Asking for it in writing is the way to compare dealers. More: Out-the-door price

P

Payoff amount: What it takes to close the loan on a given date: the principal plus interest accrued to that day and any fees. It differs from the balance on your statement, so ask the servicer for a quote good through a specific date. More: Auto refinance
Preapproval: A conditional offer from a lender, after a credit check, stating the amount, rate and term it would lend on. A preapproval lets you compare the dealer's financing with an offer you already hold. More: Get preapproved
Precomputed interest: A loan where the full interest for the whole term is calculated up front and added to the balance. If you pay early, you get a rebate of unearned interest, but the method used can leave you paying more than on a simple interest loan. More: Retail installment contract
Prepayment: Paying more than the scheduled amount or paying the loan off early. On a simple interest loan this cuts the interest you pay; check your contract for any prepayment penalty, which some states ban. More: Choose a loan term
Prequalification: An estimate of what a lender might offer, usually based on a soft credit check. It does not bind the lender, and the final rate can change after a full application. More: Get preapproved

R

Reaffirmation agreement: An agreement in a Chapter 7 bankruptcy to keep paying a car loan so you can keep the car, which makes you personally liable for the debt again. It must be filed with the court and can be canceled within a set period. More: Car loans after bankruptcy
Rebate: A cash incentive from the manufacturer that lowers the price of a new car. Some offers make you choose between the rebate and a low promotional APR. More: New car loans
Redemption: Your right to get a repossessed car back before it is sold by paying the full loan balance plus the costs of repossession. The lender's notice tells you the deadline and the amount. More: Repossession
Refinance: Replacing your car loan with a new one, usually from a different lender, to get a lower rate, a different term or a lower payment. A longer new term can raise the total interest even at a lower rate. More: Auto refinance
Reinstatement: Getting a repossessed car back by paying only the past-due amounts and costs, then continuing the loan as before. Only some states give this right, and lenders may also agree to it. More: Repossession
Repossession: The lender taking back the car after you default. In many states it can happen without warning, but the repossessor may not breach the peace, for example by using force or entering a closed garage. More: Repossession
Residual value: The value the leasing company predicts the car will have at the end of the lease. It is written into the lease and is usually the price at which you can buy the car when the lease ends. More: Lease buyout loans
Retail installment contract: The contract you sign when a dealer finances your car. The dealer is the original creditor and usually sells the contract to a bank, credit union or finance company, which then collects the payments. More: Retail installment contract
Right to cure: A state-law right to keep the car by paying only the missed payments and allowed costs: either a written notice and a set time to catch up before the lender may repossess, or the right to reinstate the loan after a repossession. Not every state has one; check your state's page. More: Behind on payments
Rule of 78s: An old method of rebating interest on a precomputed loan that front-loads interest into the early months. It leaves less of a rebate when you pay off early, which is why federal law and many states restrict it. More: Retail installment contract

S

Service contract: An optional plan, often called an extended warranty, that pays for certain repairs after the factory warranty ends. It is sold separately from the car, and its price is often negotiable. More: Add-ons, GAP and service contracts
Servicer: The company that collects your payments, answers questions and handles payoff quotes. It may differ from the dealer that sold you the car or from the company that owns the loan. More: Behind on payments
Simple interest: The usual way car loans charge interest: daily on the balance you still owe. Paying early or extra saves interest, and paying late costs more of each payment in interest. More: Understand APR
Soft inquiry: A credit check that does not affect your score, used for prequalification offers and for checking your own report. Only you see soft inquiries on your report. More: Get preapproved
Spot delivery: Letting you drive the car home before the financing is final. If the dealer later cannot sell the contract on the agreed terms, it may call you back to sign a new deal, which is how yo-yo financing starts. More: Yo-yo financing
Starter-interrupt device: A gadget installed in a financed car that lets the lender keep the engine from starting when payments are late, often paired with GPS tracking. Several states regulate when and how it may be used. More: Buy here pay here
Surplus: Money left over when a repossessed car sells for more than the loan balance and the costs of repossession and sale. The lender must pay the surplus to you. More: Deficiency balance

T

Thin credit file: A credit report with too few accounts or too short a history to produce a score. Lenders may then ask for a larger down payment, proof of income or a cosigner. More: No credit car loans
Total of payments: The sum of every payment you will make if you pay as scheduled: the amount financed plus the finance charge. It is shown on the Truth in Lending disclosure and shows the full cost of a long term. More: Retail installment contract
Trade-in: Your current car, given to the dealer as part of the payment for the next one. The trade-in value reduces what you finance, unless you still owe more on it than it is worth. More: Trade-in and negative equity
Trade-in sales tax credit: In most states, sales tax applies only to the price of the new car minus the value of your trade-in. A few states tax the full price, so the trade-in saves less there. More: Trade-in and negative equity

U

Upside down (underwater): Owing more on the loan than the car is worth, the same thing as negative equity. It is common in the first years of a long loan with little money down. More: Upside-down car loan

V

Voluntary surrender: Returning the car to the lender yourself when you can no longer pay. It saves towing costs, but the lender still sells the car and you can owe a deficiency, and it is reported much like a repossession. More: Voluntary surrender

Y

Yo-yo financing: When a dealer lets you take a car home, then says the financing fell through and pressures you to sign a new contract at worse terms. Check your contract and your state's rules before you sign again. More: Yo-yo financing