The 2023 Car Buyer's Financial Terms Dictionary

Understanding the financial terms used during the car-buying process can help you feel more confident during your next vehicle purchase.

By Elliot Rieth Jan 18, 2024

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QuickTakes:

Whether you're a first-time car buyer or it's been years since you made your last vehicle purchase, you could come across a number of potentially confusing terms during the car-buying process. Before you start shopping for your next new vehicle, learning a few common financial terms or refreshing your memory before stepping into the dealership could help you search for the right deal.

This glossary of financial terms can serve as a reference, but don't hesitate to ask your dealer questions to better understand what's happening at every stage.

Car-Buying Financial Terms You Should Know

Car Lease

Leasing a car means that you will pay a set amount of money per month in order to have the right to drive a car, but you won’t own it. Leases are typically set for a certain amount of time (for example a three-year lease or a five-year lease), and at the end of the agreement, you will return the vehicle — or you might be eligible to buy out your lease and keep the car. However, not all leases have this option, so check with your dealer before signing.

Loan Principal

The principal of your loan is the money you originally borrowed from your lender to finance a vehicle purchase. This amount is also used to determine your interest rate, which is calculated as a percentage of your principal.

Interest Rate

Your interest rate is the calculated annual percentage of the outstanding amount of the loan. This interest is the fee you pay for borrowing money from a lender, and rates are typically determined by financial factors including the principal, current economic conditions, your credit, your loan term, and others.

Car Title

Car titles are documents that prove an individual's ownership of a vehicle. These government-issued papers include information such as the vehicle identification number, sometimes called a VIN, car make and model, owner's name and address, odometer reading, and issue date. Titles are not the same as registration or proof of insurance, as titles only cover ownership itself. If you've taken out an auto loan to purchase your vehicle, your lender will usually hold the title until you've paid off your loan in full.

Manufacturer's Suggested Retail Price

The manufacturer's suggested retail price (MSRP), also known as the list or sticker price, is only a recommendation set by the original manufacturer. These prices are set to create profitability for the manufacturer, dealer, and other involved parties. The price your dealer sets may be higher or lower than MSRP, depending on their sales strategy, so research your car's MSRP before negotiating.

Vehicle Rebate

Rebates are financial incentives for car buyers that offer money back on a vehicle purchase. These rebates can be used to lower the overall cost of your vehicle, but may require you to meet certain criteria to qualify. Rebates are typically advertised as a cash amount rather than a percentage.

Default on a Loan

Defaulting on a loan occurs when you fail to make the required monthly payments on your loan for more than 90 days. If your loan goes into default, you risk damaging your credit and financial standing. Your lender could also seize collateral for a secured loan or attempt debt collection for an unsecured loan.

Blue Book Value

Kelley Blue Book is a company that offers car buyers a guide with current new-car prices and trade-in values. The Blue Book value of your vehicle is what Kelley Blue Book currently lists as its monetary worth, according to their experts. This value is often used as a standard across the automotive industry.

GAP Insurance

Guaranteed asset protection (GAP) insurance is optional auto insurance that covers the difference between your loan principal and your car's depreciated value. Because vehicles lose their value over time, GAP insurance helps you pay the difference between your car's current value and what you still owe on your original loan if your car is totaled or stolen.

Upside-Down Loan

Being upside down on your loan, also known as being underwater or negative equity, means your remaining loan balance is higher than the current fair market value of your car. As your car depreciates, it may lose value quicker than you can pay off your loan. Upside-down loans are especially risky if you're involved in an accident or need to sell your car before you pay off the loan, as you may end up having to pay the difference between your outstanding balance and the value of your vehicle.

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Elliot Rieth

Elliot Rieth is a writer who was born and raised in Michigan, the center of the American automotive industry. With a background in the industry that spans from sales to digital marketing, Elliot has years of experience working directly with dealers and OEMs to create digital content and educate potential customers. When Elliot isn’t writing about horsepower or EVs, he can be found with his two greyhounds enjoying a new book or record.