Auto Refinance Glossary To Steer You In the Right Direction
The terms and definitions related to loans can be confusing, and auto refinance loans are no exception. To help steer you via the language of auto refinancing, we’ve assembled the following Auto Refinance Glossary with most of the terminology that you’re most likely to come across.
ACH (Automated Clearing House)
A method for payment that involves the automatic, electronic transfer of funds between financial institutions. ACH may be used, in some cases, for automated monthly loan payment.
Loan repayment over time, with regular installment payment that covers principal and interest. An amortization table shows how the payment of principal and interest corresponds to the outstanding principal balance on the loan after each payment.
The total amount of money provided by the lender for a loan. In the case of a refinance loan, it includes the payoff amount for the previous loan, any taxes or fees due, and any product purchases, such as GAP and Extended Service Contract.
Annual Percentage Rate (APR)
APR represents the total finance charge of your loan, including the interest rate and other loan fees. It is calculated on an annualized basis and shown as a percentage of the loan amount. APR, may or may not be the same as interest rate, depending on what is included in your loan.
The applicant is the person applying to be the primary borrower on a loan. In some cases, there is a co-applicant, who is a second applicant and also becomes a borrower on the loan. If there is a co-applicant, both parties are responsible for the loan.
The individual(s) who obtained credit from a lender and have an obligation to repay the loan. Also, please see about a Co-Borrower.
This third-party website provides a vehicle history report for vehicles. The vehicle’s VIN (Vehicle Identification Number) is used to track the vehicle history. Some lenders use this information to evaluate whether your vehicle meets their lending guidelines for collateral.
Collateral is the specific asset that secures the loan. In the event of default on a loan, the lender has rights to the collateral.
A report provided by a Consumer Reporting Bureau provides information on a consumer’s credit history. The report typically includes at least one type of credit score as well as information on past payment history and outstanding debt.
Consumer Reporting Bureau (or Agency)
A third-party organization that tracks and reports on consumer credit history. The credit bureau report is used by lenders as a tool to evaluate a potential borrower’s creditworthiness.
Various third-party credit bureau agencies provide credit scores that reflect your financial history and ability to repay debts. Lenders use credit scores as part of their evaluation process to determine if an applicant qualifies for a loan and to set the interest rate and other loan parameters.
An amount that is owed by one party to another.
Debt to Income (DTI) Ratio
The ratio of your debt to your income is a key risk factor for lenders. To calculate DTI, the lender considers your monthly debt as a percentage of your monthly gross income. The higher the DTI, the higher the risk level to the lender.
Department of Motor Vehicles
A state agency that handles vehicle registration, titles, and licensing. Sometimes called the Department of Transportation.
As your vehicle ages, it loses value, or depreciates, due to mileage as well as wear and tear.
Some lenders, lending programs and dealers charge a documentation fee to consumers as part of processing their purchase/loan.
The cash a consumer pays towards a purchase or new loan. The Down Payment is not financed.
The monthly date on which a loan payment is due.
Extended Service Contract (ESC)
ESC is an optional product that you can purchase to cover costs associated with repairing your vehicle. Different plans offer different terms of coverage and various levels of coverage. Some even provide additional protections, such as the costs associated with towing and lodging if you get stranded out of town. This product is typically available for used vehicles and can be included in a refinance. To learn more, please see Protect Your Vehicle With an Extended Service Contract.
The cost of credit stated in a dollar amount.
A loan that has a pre-set, constant interest rate that does not change over the life of the loan.
Guaranteed Asset Protection (GAP)
GAP is an optional product that you can purchase to cover the difference between the vehicle value and the amount outstanding on your auto loan in the event of a total loss of your vehicle. Different coverage plans provide different levels of protection, such as covering your insurance deductible. GAP stays with the loan, so if you refinance, you should look into canceling your old policy, which may result in a pro-rated refund. New GAP can be added to the refinance loan.
This is the cost, expressed as a percentage of the loan amount, that is charged by the lender for use of the funds for the loan.
A fee a lender charges if a monthly loan payment is made after the payment due date. The amount of the fee is typically defined in the loan agreement.
The lender has a lien, or legal claim, on your vehicle since it is used as collateral for your loan.
Loan to Value (LTV)
This ratio of the value of your vehicle to the total amount of the loan is used by lenders to evaluate the risk associated with the loan. It helps set the maximum loan amount that can be provided, based on the vehicle’s value, as defined by a third-party valuation guide.
Manufacturer’s Suggested Retail Price (MSRP)
The new vehicle sales price suggested by the vehicle’s manufacturer.
The date on which the final loan payment, for the full outstanding balance, is due.
The amount due each month for your auto loan. It includes both principal and interest.
Non-Sufficient Funds Fee (NSF)
A fee a lender charges if a payment doesn’t clear, such as if there aren’t enough funds for a check that is provided as a monthly loan payment. The fee amount is typically disclosed on the loan agreement.
Note and Security Agreement (NSA)
The legal contract between the borrower(s) and the lender for the loan. The NSA defines the specific terms of the loan, such as the interest rate/APR, Term of the loan, monthly payment, late fees, Non-Sufficient Funds fees, etc.
The features on your vehicle that were added in addition to a standard trim package. Examples include special seats, a special audio system, or a sunroof. The features add value when the vehicle value is being defined.
Payment amount required to pay off the remaining balance on a loan.
A fee that is charged as a penalty in the event a loan is paid down or paid off prior to the completion of the loan term. Any prepayment penalty is defined in the loan agreement.
The unpaid balance of a loan, not including interest.
Principal Reduction Payment
A payment made to a lienholder that is applied 100% to outstanding principal balance rather than towards principal and interest.
Proof of Employment
In some cases, a lender may require that your employer provides a statement or document to prove that you are employed with them.
Proof of Income
Some lenders require documentation, such as a current paystub or tax returns, to prove your income level.
Proof of Insurance
A copy of your insurance policy or insurance card, showing your name and the amount of coverage, is often required as part of financing/refinancing a vehicle.
Proof of Residence
Proof of your address from a document such as a utility bill or lease may be required as part of the financing/refinancing process.
The document that proves that you have registered your car with your State. A copy of the registration is often required as part of the finance/refinance process.
Taxes are due when you purchase a new vehicle or when you buy out a lease. In some states, the tax may be due if you switch who is on the title of a vehicle.
Simple Interest Loan
A loan that calculates interest based on the outstanding principal balance of the loan.
Term of loan
The length of the loan in months or years.
The legal document that proves the vehicle’s ownership and a lienholder’s security interest in the collateral. Also referred to as the Certificate of Title.
A lender’s process for evaluating a loan application. It typically includes review and verification of the applicant’s credit, the collateral, and the proposed deal structure.
A regulation that defines a state’s maximum allowable interest rate on a loan.
Vehicle Identification Number (VIN)
The unique 17-digit number that identifies every vehicle. It is found on the driver’s side of the dashboard, on the driver’s side door jamb of the vehicle, and often on the owner’s Proof of Insurance.
Your vehicle’s value is defined through one of several third-party valuation guides, such as Kelley Blue Book (KBB.com), Black Book, or NADA. This value is the amount that the vehicle could be sold for, either at retail or wholesale, depending on the lender’s guidelines.
A guarantee from a vehicle manufacturer that covers a new vehicle for specific mechanical problems for a defined number of miles or length of time.
Do you still have questions?
If this Auto Refinance Glossary did not answer a particular term or definition related to auto loans and you would like to find out more about Auto Refinancing, please Contact US.