Auto Financing Glossary
The terminology associated with the purchase and financing of a car can be confusing for anyone, let alone a first-time buyer. So we have put together a handy glossary of terms that you can refer to whenever you come across an industry term.
Acceleration Clause
A clause in the loan agreement that can entitle the lender to collect the balance owing by the buyer sooner. It can also allow the lender to collect the total balance owing immediately.
Agreement of Sale
The document that details the specific terms of the purchase of the vehicle by the buyer from the seller. Also referred to as the Purchase Agreement or the Bill of Sale.
Amortization
The repayment of a debt with a fixed schedule in regular installments over a specified period of time.
Annual Percentage Rate (APR)
The annual cost of a loan expressed as a percentage that includes the interest and any other costs or fees associated with the loan.
Asset
Any property the borrower has that could be used to repay the loan, such as real estate, stocks or vehicles.
Bad Credit
A below average credit score that can indicate a risk to some lenders. It is still possible to secure a loan with bad credit.
Black Book / Canadian Black Book
Reference book used to determine the current or future trade-in or resale value of a vehicle for a specific geographic area. Sometimes referred to as Blue Book value, because of the similar Kelley Blue Book also commonly used in the U.S.
Collateral
Property owned by the borrower supporting the loan that can be seized by the lender in the event of default.
Cosigner
Another individual who assumes equal responsibility with the borrower for a loan.
Credit Bureau
A company or agency that keeps a record of your credit history.
Acceleration Clause
A clause in the loan agreement that can entitle the lender to collect the balance owing by the buyer sooner. It can also allow the lender to collect the total balance owing immediately.
Credit History
The record of a borrower’s relationships with all lenders over time, including all borrowing and repayment transactions.
Credit Score
A score between 300 and 900 that is used to determine the risk associated with lending to a borrower. In Canada, the score is calculated using the FICO Formula that factors credit history, the current amount owing, length of credit and other factors.
Debt-to-Income Ratio
The percentage of a borrower’s annual income that goes to paying down their total current debt amount.
Default
Breaching the terms of a loan agreement, most often due to the failure to repay.
Delinquency
A negative state of a loan due to payment being late or overdue. If a loan remains in delinquency for too long, the borrower will be deemed to have defaulted on the loan.
Depreciation
The gradual decrease of a vehicle’s estimated value due to age and use.
Disclosure
Any known information about a vehicle’s history provided to the buyer, including previous damages and repairs or title issues.
Down Payment
Money to be paid at the time of purchase to lower the total amount financed through the loan.
Equity
The difference between the vehicle’s current value and the balance owing on the loan. Positive equity occurs as the principal portion of a loan is paid down to a point when it exceeds the remaining amount owed.
Finance Charge
The total amount of interest charges that will be paid over the term of the loan.
Gross Monthly Income
Total monthly income before any deductions such as income tax, CPP, etc.
Interest Rate
The percentage of the principal charged annually for the loan.
Invoice Price
The amount paid by a dealership to the manufacturer for a vehicle.
Lease
An alternative to financing the purchase of a car, a lease agreement grants an individual the right to use the vehicle for a specified time but does not assume ownership or create equity in the vehicle.
Lessee
An individual who is granted the temporary right to use a vehicle through a lease agreement.
Lessor
The company that grants the temporary right to use a vehicle through a lease agreement while retaining its ownership.
Lien
The right of a lender to sell the vehicle in order to obtain repayment of a loan if it has defaulted. Often mistakenly described as the lender retaining ownership until the loan has been repaid. This is not the case, as the lender has no ownership rights over the term of the loan.
Loan-to-Value Ratio
The difference between the loan amount and the vehicle’s value expressed as a percentage.
Mark-up
The difference between the invoice price and the selling price set by the dealer.
MSRP (Manufacturer’s Suggested Retail Price)
Also commonly known as the sticker price, this is the selling price recommended by the manufacturer.
Net Effective Income
The total income of a borrower after all deductions such as income taxes, CPP, etc.
Payment-to-Income Ratio
The percentage of a borrower’s income that would go towards the repayment of a loan.
Principal
The total amount owed on a car loan, excluding interest.
Proof of Income
Evidence of a borrower’s income that could be in the form of pay stubs or a recent T-4 statement.
Proof of Residence
Evidence of a borrower’s home address that could be in the form of a driver’s license, a recent utility bill or any other legal documentation that displays the borrower’s address.
Term
The total period of time covered by a loan agreement ending with the loan being fully repaid.
Title
The proof of ownership document provided by the provincial transportation ministry. Popularly known as the Pink Slip.
Trade-in Value
The dollar value that a dealer will apply towards the purchase of your vehicle in exchange for your current vehicle.
Upside-down
When the amount currently owing on a vehicle exceeds its current value. (See also Equity)
