Car Dealer Financial Terms

Here is a brief guide to some of the common phrases you should know about whether you are planning on going to work for a dealership or just want to know more of exactly what goes on in the process of getting a vehicle into one’s hands from a car dealership:


Balloon Payment: This is the last payment that happens to mark being done with paying off a “balloon loan.”  A balloon loan is one that a person takes out and pays off just a portion of a vehicle during its term and mandates a big sum (the “balloon”) that will be due at the end.

Buyout Price: The price of buying a vehicle at the end of the lease term. If you think you may buy your vehicle at the end of the lease, compare the costs of buying outright to those of buying after a lease.

Dealer Holdback: A tiny percentage of a vehicle’s cost that a manufacturer pays back to a dealership after the car has been sold. This is what allows dealerships to sell vehicles at the invoice price, or lower, and still make a small profit.

Dealer Incentives: Special offers from vehicle manufacturers to their dealers that incentivize them to sell more vehicles.  The Starr Motors’ sales staff explains that these are sometimes money back but could be other things.

Default: Failure to make payments or otherwise abide by a financing contract’s terms.

Destination Charge: The amount charged for transporting new cars from a factory to the dealership. These are real costs that the dealership has to pay and generally are not negotiable.

Extended Warranty: This is an agreement to cover specific service and repairs beyond the manufacturer’s factory warranty life.

Finance Rate: The interest rate on a loan. A percentage of the amount borrowed a lender charges once a year for the use of its money.

Invoice Price: The amount of money the car dealership pays a vehicle company for the new car.

Lease: Basically a long-term rental in which the dealership purchases a car and allows the lessee to use it for a specific period of time while making payments every month. At the end of the lease period, the lessee can either purchase the car or return it to the dealer, depending on the kind of lease.

MSRP: Acronym for “Manufacturers Suggested Retail Price.”

Prepayment Penalties: Charges for paying off a loan before the date it is all due by. Those with good credit shouldn’t have to accept prepayment penalties.

Pre-Qualify: To have a lender confirm you’re eligible for a loan without you committing to accepting it.

Title: The official, legal document with specific information about the car. The title is proof of ownership and transfers ownership from the former owner to the new one.

Trade-In Value: The price a dealership will pay for your current car when selling you a new one. Dealer trade-in is almost always lower than the price possible if you sell your car yourself.

Upside Down: When you owe more on a loan than your vehicle’s worth.

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