Have you been looking at new or used vehicles online? Perhaps you’re ready to go to a dealership and you’d like to be prepared with your financing. At First Bankers Trust, we understand that confusing car buying terminology can be frustrating when you’re looking to finance your next car purchase. Rather than further complicate the process, we created this guide to give you a better understanding of common auto lending terminology. Hopefully it will ease your mind as you apply for your next auto loan.
What is APR?
APR stands for Annual Percentage Rate, which reflects the annualized cost of borrowing money, including any fees as well as the interest rate. Okay, let’s break that down:
- Annual: The cost of borrowing money over the course of a year
- Percentage: In mathematics, a percentage is a fraction of 100. Thus, the interest rate on your auto loan is a portion of the principal amount. The APR on your auto loan may be different from the interest rate because APR accounts for any fees as well as the interest rate charged.
- Rate: The price of borrowing money, i.e., the interest rate on a loan. Can be variable (subject to change every so often as outlined in the loan terms) or fixed (stays the same over the life of the loan).
How is APR different from the interest rate?
Interest rate is just one component of the APR, but a lower interest rate can lead to a lower APR.
Why is APR important?
Knowing the APR gives you a better idea of how much a loan will actually cost you. Comparing interest rates is one thing, but you should also compare APRs to make sure you’re getting the best deal all around.
What is a Blue Book (or Book Value)?
Dating back to the late 1920s, the Kelley Blue Book (KBB) was a physical publication used by car dealerships to determine market value and pricing. KBB is now an online resource but remains the standard in determining market value for new and used vehicles. You can obtain a free estimate of value for your current vehicle or check the pricing on vehicles you are interested in purchasing. If the “book value” is significantly different from the sale price, you may be able to negotiate a lower purchase price.
What does it mean to have a cosigner?
When you apply for an auto loan, your lender will want to make sure you are eligible for financing a car purchase based on your credit score. If you cannot qualify for an auto loan on your own, you may be able to add a co-signer with a good credit score and history. However, a co-signer is responsible for paying back the loan if you default, so it’s a big responsibility. Make sure that you are not borrowing more than you can afford to make payments on before asking someone to cosign on your own.
What is a down payment?
Just as a home buyer makes a down payment on their home purchase and finances the rest, car buyers are also expected to put some money down. If this is your first car purchase, you’ll have to save for a down payment. If not, you would typically use your current vehicle’s trade-in value as your down payment or sell it privately and use some or all of the proceeds as a down payment. If your car is totaled in an accident, you can use whatever’s left after paying off the current loan to put down on your next ride.
While there are no hard rules around vehicle down payments, the more you can put down, the less you will need to borrow, which may help you get a better interest rate. And, of course, the less you need to borrow, the lower your monthly payments will be.
Try to avoid “rolling over” your current auto loan into a new one.
If you purchase a new or used vehicle from a dealer, you may receive emails from that dealer offering to help you trade in your current car before the loan is paid off. Essentially, this means refinancing your current auto loan into a new one and adding the cost of the new car you’re purchasing. This is usually not a good financial move, so try to pay off your current loan first or at least develop enough equity in it that you can pay it off by selling the car.
What is a Title?
Similar to other types of physical property such as real estate, a vehicle title is the proof that you own the car. However, when you finance your vehicle purchase, the lender will hold onto the title until the loan is paid off, at which point you will receive it in the mail.
What does it mean to pre-qualify for an auto loan?
Getting pre-qualified or pre-approved for an auto loan means that your lender takes basic information such as your social security number and annual income to check your credit score and provide you with an estimate of the total amount you could borrow, as well as the interest rate you qualify for. The benefit of getting pre-qualified with a local lender like First Bankers Trust is that you know in advance what kind of price range you should be shopping in.
Get auto loan help in West Central IL!
Wherever you are in the car buying process, now you are equipped with knowledge of the car loan terminology you need to be a savvy buyer. Still have questions? Our team at First Bankers Trust is happy to help you. Serving our communities since 1946, First Bankers Trust Company has lived by the motto that customers are always FIRST. We strive to be the best bank with installment loans in Quincy, IL by meeting and exceeding our customers’ needs. With an auto loan from First Bankers Trust, buying the new or used vehicle you want can be quick and easy. Learn more about how to get a car loan in West Central IL or apply online for an auto loan today!