Be an informed consumer - make sure you know key terms before purchasing and financing your next car.
If you feel like the guy across the desk at the dealership is speaking another language when you sit down to bang out a car purchase agreement, you need to take a crash course in Auto Finance-ese. Here are five of the most important terms and what they mean to you, the consumer:
1. Dealer sticker price. This is the public price of an automobile. Plastered to a car’s windshield, this number is the manufacturer’s suggested retail price (MSRP). It is meant to be the jumping-off point for the negotiations that lead to an eventual selling price. Sometimes, consumers do pay the sticker price. Saturn, for one, has a policy of always selling for sticker price. Sometimes, when cars are highly sought after, they even sell for more. But in general, if you pay the sticker price, you might have been able to negotiate a better deal.
2. Dealer invoice price. This is the price that the car dealer pays the manufacturer for the automobile. The difference between the dealer invoice price and the MSRP is the dealer’s profit and the amount you can haggle over. One thing to remember: the MSRP can often be padded as well, sometimes by $200 to $500. The size of the gap depends on the make of the car. The dealer invoice price is determined by the manufacturer and is prone to adjustments over the course of a model year, as the manufacturer tries to manage its profits and the demand for the vehicle fluctuates.
3. Annual percentage rate. The annual percentage rate, or APR, is a rate of interest, calculated yearly, that includes all the fees and charges associated with a loan. It is always tied in with a loan term. It might be, for example, 1.8 percent for 36 months, or 2.8 percent for 48 months. A lender will calculate monthly payments that reflect the APR over the term of the loan, and may include taxes, registration and closing costs, as well as destination charges if financed by a dealer. Since dealerships and other lenders charge different fees and expenses when they finance a car, the APR is the best way to compare one financing offer to another, according to Mark Bryant, LendingTree’s Director of Auto Product Management.
4. Rebate. A rebate is a gift to buyers, extended by the manufacturer (or, sometimes, the dealer) to encourage them to purchase a particular make and model. Typically, rebates are stated as a reduction in the selling price of the car, but they may also be expressed as an offer for a better rate of financing. These are called either-or offers. Rebates are most often attached to the slowest-selling vehicles. Sometimes, they’re a seller’s solution for dealing with a surplus of one make and model and surface as the end of a model year approaches. You should always ask about rebates and other incentives on a model you are interested in.
5. Dealer financing. Car dealers realized they were missing an opportunity by simply selling consumers cars, rather than selling them cars and the money to purchase them. Thus dealer financing was born. Consumers considering financing their cars this way should proceed with caution. Sometimes a favorable APR goes hand-in-hand with a bulked-up sticker price. Also, watch out for long loan terms and very low monthly payments. You’ll probably pay a higher finance charge over the long run and may go upside-down on your loan. The tradeoff is convenience: you get to buy your financing at the same place you buy your car. It’s best to check out the rates you can get from other sources before signing a deal, says Bryant.