The car money glossary

How to use it: tap a letter on the rail to jump. Where a word has a longer treatment elsewhere on Budget Pilot, the definition links to it. Definitions describe how a term is generally used; your own contract's definitions section is the one that binds you, and it occasionally disagrees with common usage.

Acquisition fee lease

An administrative charge for setting up a lease. It may be paid up front or folded into the capitalized cost, where it quietly earns rent charge for the whole term.

Actual cash value insurance

What a car was worth just before a loss, allowing for age, mileage and condition. It is usually the ceiling on a total-loss payout, and it has no memory of what you paid or what you still owe.

Amortization

The schedule by which a loan's payments are split between interest and principal. Early payments lean toward interest; later ones mostly reduce the balance.

APR annual percentage rate

The yearly cost of credit expressed as a rate, including certain fees as well as interest. It is the number to compare between loan offers, since two loans with the same stated interest rate can carry different APRs.

Balloon payment

A large final payment at the end of a loan whose regular payments did not fully pay it down. Low monthly figures with a balloon behind them are cheaper only until the last month.

Buyer's order

The dealer's itemized sheet of the sale: price, fees, taxes, trade-in, and the amount due. Read it before the financing paperwork, because every number downstream comes from it.

Capitalized cost lease

The lease's equivalent of a purchase price: what the car is being leased for, plus anything added into it. Lower it and the payment falls.

Cap cost reduction lease

Cash, rebates or trade-in equity applied to reduce the capitalized cost. It is a down payment by another name, and if the car is totaled early it is usually not refunded.

Collision coverage

Insurance that pays to repair or replace your car after it hits something or something hits it, minus your deductible.

Comprehensive coverage

Insurance for damage that is not a collision: theft, hail, flood, fire, a deer, a falling branch.

Co-signer

A second person who promises to repay a loan if the borrower does not. In practice, the co-signer owes the full debt.

Deductible

The part of a covered claim you pay before the insurer pays the rest. A higher deductible usually means a lower premium and a bigger bill on a bad day.

Depreciation

The loss in a car's value over time. It never shows up as a bill, yet on many cars it is the largest single cost of ownership.

Disposition fee lease

A charge some leases apply when you return the car at the end instead of buying it. Whether it applies, and when it is waived, is set by the lease. More in the disposition fee.

Down payment

Cash paid at purchase so that less is borrowed. It lowers the payment and the interest, and it gives the loan a cushion against depreciation.

Equity

The car's market value minus what you owe on it. Positive equity is money you could walk away with; negative equity is money you would have to bring.

Extended warranty

Common shorthand for a vehicle service contract: a separately priced promise to pay for certain repairs after the factory warranty ends. It is optional, and its price is often negotiable.

Finance charge

The total dollar cost of the credit across the full term, as disclosed on the contract. Put it next to the amount financed and the loan's real price is visible at a glance.

Gap coverage

Coverage for the difference between what an insurer pays on a totaled car and what is still owed on the loan or lease. It matters most when the balance runs ahead of the car's value.

Invoice price

What the dealer is billed by the manufacturer for a new car, on paper. Incentives and holdbacks mean it is not necessarily what the dealer ultimately paid.

Liability coverage

Insurance that pays for injuries and property damage you cause to others. Every state sets its own minimums; the minimum and the sensible amount are rarely the same number.

Lien, lienholder

A lien is a lender's legal claim on the car until the loan is repaid; the lienholder is whoever holds it, and is usually listed on the title.

Loan-to-value

The loan balance divided by the car's value, as a percentage. Over 100% means you owe more than the car is worth. See loan-to-value on a car loan.

Money factor lease

The lease's financing charge written as a small decimal. Multiplying it by 2,400 gives a rough annual-rate equivalent; the money factor, and how to convert it walks through why.

MSRP

The manufacturer's suggested retail price. A starting point for a new car's price, not a verdict.

Negative equity

Owing more than the car is worth. Also called being underwater. Rolling it into the next loan does not make it disappear; it relocates it.

Out-the-door price

The full cost to drive away: price, taxes, title, registration and every dealer fee. The one figure worth asking for in writing before talking payments.

Payoff amount

What it takes to close a loan or lease on a given date, including interest accrued to that day and any fees. It differs from the balance on your statement, and it is valid only for the date it is quoted.

Premium

The price of an insurance policy for its term, whether paid at once or in installments.

Principal

The amount borrowed, or the part of it still unpaid. Interest is charged on it.

Purchase option price lease

The price at which the lease lets you buy the car, usually the residual plus any stated fee. Taxes and state charges may be added at the time of purchase.

Rent charge lease

The finance portion of a lease payment, calculated from the money factor. It is interest in everything but name.

Residual value lease

The car's projected value at lease end, set when the lease is signed. You pay for the drop from capitalized cost to residual.

Simple interest

Interest calculated on the outstanding principal for the days it is outstanding. Most auto loans work this way, which is why paying early in the cycle, or paying extra, trims the interest.

Sinking fund

Money set aside a little at a time for a known future bill: tires, registration, the next car. It turns a lump into a monthly line.

Term

The length of a loan or lease, in months. Longer terms lower the payment and raise the total paid.

Title

The state document recording who owns the car and who holds a lien on it. Requirements and fees vary by state; your motor vehicle agency sets them.

Total of payments

Every scheduled payment added together, as disclosed on the contract. Set it beside the agreed price before signing anything.

Trade-in allowance

What a dealer credits you for your old car. Judge it apart from the new car's price, or one can be traded against the other without you noticing.

Upside down see Negative equity

The informal term for owing more than the car is worth.

Wear and tear lease

The normal aging a leased car is allowed to show at turn-in. Damage beyond the lease's definition of normal is billed as excess wear. The definition lives in the lease, not in anyone's opinion at the inspection.

One habit this list is meant to encourage: when a word on a contract is not here, or a salesperson uses one of these in a way that does not match, ask for it in writing. Terms are cheap to explain and expensive to misunderstand.