15 Auto Loan Terms Explained

You finally found the car of your dreams. But as you discuss financing, your excitement might turn to confusion as you see unfamiliar terms on the contract. Here’s a glossary of auto loan terms to help you better understand the lingo—and get the best deal possible.

Annual Percentage Rate (APR)

The rate of your total cost each year to borrow money. It combines your interest rate plus any fees into one figure that’s expressed as a percentage. The higher the APR, the more you’ll ultimately pay to purchase the car. 

Credit Report

A statement with information about your credit activity, loan-paying history and the status of your current credit accounts. Your credit report is not the same thing as your credit score.

Dealer Incentive

A promotion offered by manufacturers to boost sales. Dealers sometimes pass along those savings to buyers.

Dealer Prep Charge

This negotiable charge represents the dealership’s cost to prepare your car for sale after it arrives from the factory.

Dealer Price Sticker (also known as Monroney Sticker)

By law, this sticker on a car’s window must clearly show the car’s base price (the cost without the dealer’s options and fees), the manufacturer’s installed options, the manufacturer’s suggested retail price (the cost with the dealer’s options and fees) and the car’s fuel economy.

Debt-to-Income (DTI) Ratio

A buyer’s monthly debt payments divided by their gross monthly income, expressed as a percentage. The number measures a buyer’s ability to manage monthly auto loan payments.

Destination Charge

The cost of transporting your vehicle to the dealership from the factory or port of entry. This delivery fee is listed on the Dealer Price Sticker of every new car.

Documentation (Doc) Fee

The dealership’s cost to prepare and file the sales contract and other documents. A few states limit this fee, but most don’t.

Down Payment

This cash payment, made at the time of purchase, lowers the amount of money you’ll need to borrow.

Finance and Insurance (F&I) Office

After you agree on a purchase price with a car salesperson, you’ll be directed to this department to draw up the sales contract and finalize your financing.

Lien

Created when you take out a loan, this is the lender’s legal right to possession of the vehicle until the loan is repaid. When the loan is paid off, the lien is released.

Manufacturer’s Suggested Retail Price (MSRP)

Also known as the list price or sticker price, it is the recommended selling price from the manufacturer (but not necessarily what you will pay). It differs from the car’s base price because the MSRP includes dealer options and fees.

Term

The total length of time on your loan.

Loan-to-Value (LTV) Ratio

A percentage that expresses the amount you’ll need to borrow compared to the value of the vehicle.

Trade-In Value

The amount that the dealership will pay for your old vehicle. If you decide to trade your old vehicle in, that value is subtracted from the sales price of the vehicle you want to buy and will reduce the amount of money you’ll need to borrow.