10 Financing Terms All Car Buyers Should Know

If you've already been pre-approved by a credit union, online lender, or bank, it's essential to understand some key auto financing terms. This will help you find the best auto loan that meets your needs. Here are ten financing terms you should know:

1. Balloon Payment – If you make smaller payments for a loan and then pay a large amount at the end, it's known as a "balloon payment." It’s essential to ensure your lender is prepared for this big payment.
2. Monthly Payment – Before taking out a loan, it's essential to ensure you can afford the monthly payments. Keeping your monthly payment affordable is crucial. Remember, the amount you pay each month will determine whether you can pay off your loan by the end of the term.
3. Term – When you borrow money, there is a certain time to pay it back, usually between 12 and 84 months. A longer repayment term means your monthly payments will be smaller, but you'll pay more interest overall.
4. Gap Insurance –This insurance covers the difference between what you still owe on your car loan and the actual cash value of your car if your vehicle is ever badly damaged, stolen, or no longer in use. Gap insurance might be a good idea if you've paid off most of your car loan. It protects you from having to pay unexpected costs out of pocket.
5. Interest Rate (APR) – The lender will charge you an interest rate on a loan, usually seen as a percentage. When searching for financing, a lower interest rate can save you a lot of money over the loan period. To find the best loan option for you, reach out to several lenders and compare interest rates.
6. Credit Score – Your credit score determines how likely you are to get approved for a loan and how much interest you'll be charged. The higher your credit score, the lower the interest rate you can get. On the other hand, if your score is lower, you'll likely be charged a higher interest rate. Before you start loan shopping, make sure to check your credit score so you know what to expect.
7. Lease – Leasing a car is a flexible option for driving a new vehicle without committing to ownership. It allows you to enjoy a new car for a set period of time and then choose whether to buy it, return it, or start a new lease. However, there are some restrictions to keep in mind, like limits on modifications.
8. Principal – Knowing the principal amount is important when considering insurance quotes. The principal amount is the amount owed without interest or other charges added. It is worth noting that a lower principal amount will result in paying less total interest.
9. Depreciation – If you own a vehicle, you probably know that its value decreases rapidly during the first year. Used vehicles have already undergone most of their depreciation, which means they hold their value better than new ones.
10. Down Payment – If you put more money down when purchasing a vehicle, you can lower the amount you need to borrow. This can also decrease the interest rate on your loan over time, which means you will end up paying less in interest charges overall.

If you're thinking about buying a new car but aren't sure about the best way to finance it, we can help. Having the right information can make a big difference in your decision. With our guidance, you'll be able to choose the auto loan that works best for you. Our experienced finance department at Bill Page Honda is always available to answer any questions you may have about auto financing.