Media post: Car dealership financial lingo

Like any specialized marketplace, car dealerships have their own lingo. Perhaps you are going to work for dealership soon or you are just interested in what goes on. Here is a quick guide to some of the more common phrases you will encounter.

Annual Percentage Rate (APR): Also called a finance rate, this is the interest rate on a car loan.

Balloon Payment: This is the final payment that occurs at the end of a “balloon loan.” A balloon loan is one that that pays off only a portion of a vehicle during its term and requires a large sum (the “balloon”) to be paid at the end.

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

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

Dealer Incentives: Special offers from car manufacturers to their dealers that incentivize them to sell more vehicles. The sales staff at Starr Motors explain that these are sometimes money back but may be other things.

Dealer Invoice: The amount a manufacturer charges its dealers for a car.

Dealer Prep Fees: Charges added to the purchase price of a new car to cover the cost of prepping a car for sale after transport to the dealership.

Default: Failure to make payments or otherwise abide by the terms of a financing contract.

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

Documentation Fee: Charges intended to cover the cost of processing the paperwork involved in the sale of a car. These are usually in the $100-$150 range.

Down Payment: Cash paid up-front by a borrower to reduce the amount financed in a lease or loan.

Excess-Mileage Charges: Penalties paid at the close of a lease if the lessee drives the vehicle a greater distance than the limit agreed to in the contract.

Extended Warranty: This is an agreement to cover certain specific service and repairs beyond the life of the manufacturers factory warranty.

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

Lease: Basically a long-term rental in which the dealer buys a car and allows the lessee to use it for a specific period of time while making monthly payments. At the end of the lease period, the lessee can either buy the car or return it to the dealer, depending on the type of lease.

Lessee: The person leasing a car.

Lessor: The finance company or party to which a lessee makes payments.

MSRP: Acronym for Manufacturers Suggested Retail Price.

Prepayment Penalties: Charges for paying off a loan early. People with good credit shouldn’t have to accept prepayment penalties.

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

Rent Charge: The portion of your lease payment that goes toward financing instead of principal reduction.

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

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

Walk-Away Lease: A lease that gives the lessee the option of either buying the car at the end of the term at a set price or walking away without liability. Walk-away leases are what nearly all car companies and banks offer today.