Doug's Credit Center Blog

Common Auto Financing Terms

These common auto financing terms below will help you understand what you are committing to when purchasing that car of your dreams.

Annual Percentage Rate- The APR is a critical piece of information to use when comparing loan options. The simple APR is only the interest which is added to the principal of the loan each month times 12. This number alone does not tell you much. The EFFECTIVE APR or EAPR is the true cost of obtaining credit.

The Truth in Lending law mandated that the EAPR (Often called APR, but not simple APR) is described in a way that reflects the total cost of purchasing on credit, including any fees, service charges, loan origination and other expenses. The law also mandated that lenders use the same formula when calculating the annual percentage rate so each creditor’s information means the same thing. This means comparing loans between creditors is easily done, benefiting the consumer. The lower the APR, the better – especially when you buying used cars with bad credit.

Amount Financed- The amount financed represents the total amount which will be included in the financing of the vehicle, including the cost of the vehicle, fees, taxes, interest, cost of credit checks and other miscellaneous expenses. Any charges which will be paid at the time of the loan closing are subtracted out of this amount. This sometimes includes taxes and a percentage paid as a down payment.

Principal- The principal part of the loan is the amount borrowed when considering a new loan. Once the loan is being paid each month, principal means the amount originally borrowed which still remains unpaid, excluding interest. so if you pulled out an $18,000 loan with zero down payment, the $18k is your principle and any additional money paid to the bank due to your APR is the interest.

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