Common Auto Buying Terms

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The English language has become increasing common throughout the world, yet when consumers walk into car dealerships, it’s as if the entire car dealership is speaking an entirely different language, a language not taught in school. This puts the car-buyer at a disadvantage. This language is so obscure that it is its own foreign language that nobody understands. This makes buying a car tough. Some who are old enough to remember may compare this language to the Orkan language spoken in the old TV series Mork and Mindy. The volume of unfamiliar language consumers encounter while in car dealerships during their car-buying experience, compiled with an inefficient and commonly misunderstood car sales process, makes the entire car-buying cycle an overwhelming and incredibly stressful experience.

An informed buyer is often a car dealer’s toughest customer. Some dealers refer to these customers as their worst nightmare. To help educate our clients about the car-buying process, related words, phrases, and concepts, we have compiled a list of common auto-buying terms dealers often associate with the car-buying process. Please read the auto buying terms carefully as few people understand them, and it may impact your negotiation for your new vehicle as well as the financial component of your transaction. We have also incorporated many of the most commonly misunderstood terms in our list below. The words and phrases are listed in alphabetical order for your convenience.

The basis for the calculating the monthly payment.

An acquisition fee is also known as an initiation fee or a bank fee.  This is charged by the lessor.  Be careful because the dealer has the ability to make a profit by increasing this fee.  Acquisition fees typically range between $500-$800.  This can vary.

This is the price of a vehicle including the standard equipment, factory warranty, freight and destination charges only.  This does not include the cost of any additional options.

This is a dealership slang term describing everyday transportation that is not in perfect condition.

This is the negotiated price of the vehicle plus any add-on fees.  Depending on your geographic location, this could include taxes, acquisition fee and other fees and accessories (if applicable) too.

The Capitalized cost in a lease transaction is an up-front payment made at the start of the lease that exceeds the minimum amount due at signing.  This amount can come from the lessee’s cash, rebate or trade-in.  It is important to understand that the lessee must pay sales tax on any cap-cost reduction amount.

This is the manufacturer’s own financial institution.  BMW Financial, Lexus Financial, Ford Motor Credit and Toyota Motor Credit are all examples of Captive Finance companies.

Closed-End Lease contracts discloses the vehicle’s residual value at the end of the lease term on the contract.

This is an incentive from the manufacturer typically referred to as “marketing support.”  You can use this incentive as leverage in your negotiation, but the dealer is not required to pass this on to you.

These are any fees charged by the dealer for additional services or products such as paint protection packages, window etching or extended warranties.

This is an amount paid to the dealer from the manufacturer for each new car sold.  This may be calculated as a percentage of invoice or Manufacturer’s Suggested Retail Price (MSRP) which may or may not include options.  This can be a fixed amount too.

Sometimes the dealer charges extra for getting the car ready.  This is a “Dealer Prep” charge.

This is where the consumer arranges the auto loan directly through a bank or credit union instead of arranging financing through the dealer.

The disposition fee is charged by the lender at the end of your lease should you decide to return the vehicle.  This fee is designed to offset some of the lender’s costs.  This fee is not a profit center for the dealership.  The dealership does not have any control over it; therefore they cannot waive, discount or negotiate this fee.

Equity exists when the value of the vehicle exceeds the amount owed on the loan or lease.  For example, if $5000 is owed on the vehicle and it is worth $10,000, the consumer has $5000 equity.  This amount can be used as down payment on their car-buying purchase or lease.

This is where the lessee exceeds the allowed miles on their lease.  Generally, the leasing company (lessor) will charge a per-mileage charge at the end of the lease for each mile exceeded on the lease.

This is an additional charge at the end of the lease for each mile exceeded on the lease contract.  The mileage charge is typical between 15 cents to 25 cents per mile.  Most leasing companies charge closer to 25 cents per mile on luxury vehicles.  Depending on the vehicle, the leasing company can charge as much as $1.50 per mile or more.  Pre=paying for excess miles upfront on your lease generally costs less than the final mileage charge.  This may be a good question to ask before finalizing your lease transaction.

This is visible damage to a vehicle that is above and beyond what is considered normal wear and tear. Generally, excess wear and tear is damage measuring the size of a credit card or larger (some restrictions apply).  Any charges for excess wear and tear is charged at the end of your lease by the leasing company.

GAP is a debt cancellation policy.  GAP stands for Guaranteed Auto Protection.  In the event of a total loss on your vehicle, GAP protection covers the difference between the market value of your vehicle from the amount owed on your loan or lease.

This is the charge to the dealer from the manufacturer.  This amount includes the cost of freight and delivery charges.

see “Rebates”

This is the person who signs the lease contract.  This is typically a consumer but it can be a business too.

This is the person or finance institution who owns the vehicle and leases it to the lessee (consumer).  The lessor funds the lease.  The lessor can be a dealer, a leasing company, or a financial institution.  Typically, the financial institution is a bank or credit union.

Is an individual or company, typically a bank or credit union with a financial interest in the vehicle.

This is the ratio between the sales price or appraised value versus the loan amount.  To calculate this ratio, divide the price or value into loan amount.  Example:  a vehicle with a $10,000 price and an $5,000 loan would have a loan-to-value ratio of 50 percent.

The price for which the car or vehicle will currently sell.

This is the minimum amount due at lease inception.  The fees can include any or all of the following:  first payment, license fees, tag fees, registration, documentation fees and bank fee (acquisition fee).  Keep in mind, if you select a 36- month lease option, you will have 35 remaining payments due to making the first payment at lease inception.

The term “money factor” specifies a finance rate for a car lease.  Though it may be similar to an interest rate, it is not exactly the same and is expressed differently.  The money factor determines how much finance charge or “rent charge” you will pay each month during your lease.  The money factor is not disclosed in lease contracts.  Dealers can mark this up to make a profit, so it is very important to ask for their “buy rate” and “sell rate.” This will help you to determine the mark-up.  For comparison purposes, you can convert the money factor into an interest rate simply by multiplying it by 2400.  Example:  .00100 (money factor) X 2400 = 2.4%

Manufacturer’s Suggested Retail Price (MSRP) including or excluding options.

Negative Equity exists when the amount owed on the vehicle loan or lease exceeds its current market value.

A fixed amount of money to the buyer for purchasing or leasing a vehicle.  Be care though, some rebates are only available for leases and others are only available for financing or purchasing.  Rarely (almost never) are they compatible to combine.

This is the amount charged on a lease in addition to the depreciation and any other amortized costs.

The residual is the unpaid amount on your lease.  High residuals commonly equate to a low monthly payment.  Many refer to the residual as the amount you can buy the vehicle for at the end of your lease.  This can be true, however most dealership will charge an additional fee, usually between $150-$300 above the residual if you choose to buy your vehicle.  This will be disclosed in your lease contract.  The dealer doesn’t always charge a fee above your residual, but be aware this can be a common practice.

This is the amount a dealership allows for your trade-in.  This amount varies depending on the vehicle’s condition.  Vehicles with new tires and little or no cosmetic damage will have higher trade-in values than vehicles needing repairs.

This is a situation where your vehicle’s trade-in value is lower than the outstanding balance owed on its loan or lease.  This is also referred to as negative equity.