When you’re getting an auto loan – subprime or otherwise – there are a lot of terms thrown around that you might not be familiar with. The best way to go into any situation is to be prepared, so we’re going to help arm you with the knowledge you’ll need when it comes to financing a vehicle.
Basic Loan Terms to Know
It’s good to know the basics of lending if you’re going to be getting a loan. Here are some words and phrases you should know:
- Financing – this is what you’re doing when you get a loan. Financing means the act of borrowing money to make a purchase.
- Principal – the amount of money you’re borrowing.
- Interest Rate – interest is what you’re charged for borrowing money. An interest rate is used to calculate how much you’ll pay the lender to make the loan. Interest rates vary based on the prime interest rate (the rate banks charge their best borrowers), the lender, your credit score, and more.
- Simple Interest – Most auto loans are simple interest, which calculates interest daily based on your unpaid loan balance.
- Interest Charges – the amount of money you pay in interest over the term of a loan.
- Term – this is the length of the loan. For auto loans, the term is always expressed in the number of months.
- Down Payment – this is the initial amount of money you pay up front when making a purchase with financing. A good sized down payment helps show a lender you’re serious about your loan.
These phrases can be applied directly to the numbers in a loan. For example: you finance a car for $20,000 at seven percent for 60 months. The principal is $20,000, seven percent is your interest rate, and 60 months is the loan term. If you pay this loan as scheduled, you’ll pay $23,761.44 at the end of five years. Out of that amount, $3,761.44 will be interest charges.
Common Notions in Auto Lending
There are other common concepts in auto lending that you’ll need to know as you go through the process of getting a car loan. Some have to do with the process of trading in or selling a vehicle.
- ACV – This stands for actual cash value. This is the fair market value of a vehicle at any point in time, such as when it's sold or traded in.
- Equity – You have equity in a vehicle if the loan balance is less than the vehicle’s ACV.
- Negative Equity – You have negative equity if the loan balance is more than the vehicle’s ACV, which is also known as being upside down or underwater.
Knowing these terms can help you understand when to get the most money out of your vehicle. If you use a large down payment, or make early loan payments, you can reduce the amount of time your vehicle spends underwater.
If you sell or trade in a vehicle with equity, you can keep the cash, or use it as a down payment on the new car. If there’s negative equity, you’ll either need to make up the difference between the ACV and the loan balance out of pocket or roll it into the new loan.
Start Your Search Here, Now
Now that you know the basics behind the most common concepts in auto financing, it’s time to start searching for the right lender for your situation. Because bad credit car buying is different, you’ll also want to take a look at you finances and budget.
You can find the right dealer and lender combination by making sure that the dealer you visit can handle your situation. If you have bad credit, not all lenders will be able to work with you and it’ll be very hard to get pre-qualified for a direct loan. Visiting a special finance dealer that has subprime lenders available can be the key to getting the auto financing you need.
Luckily, here at Auto Credit Express, we work with an extensive network of these dealers. So, what are you waiting for? Fill out our no-obligation online auto loan request form today to get started!