Car Buying Glossary

The yearly interest rate you pay on a loan, including fees. A lower APR means less interest paid over the loan term. Always compare APRs when shopping for financing - dealers often mark up the rate by 1-3%.

Extra products or services the dealer adds to the vehicle, such as paint protection, fabric protection, window etching, or nitrogen-filled tires. These often have huge profit margins (500%+) and are usually unnecessary.

The wholesale value of your trade-in - what the dealer would pay for it at auction. This is typically lower than the retail value (what they'll sell it for). Understanding this helps you negotiate a fair trade-in offer.

When a salesperson or manager tries to get you to agree to a higher payment or price than originally discussed. They might say "we can't make that deal work" and come back with a higher number.

A large final payment due at the end of a loan term. Common in some lease-to-own arrangements. While it lowers monthly payments, you'll owe a big lump sum at the end - often $5,000-$15,000.

A document that lists everything you're paying for: vehicle price, trade-in value, fees, taxes, and add-ons. Always review this line by line before signing anything.

In a lease, this is the negotiated price of the vehicle. Just like when buying, you can negotiate the cap cost down. A lower cap cost means lower monthly lease payments.

The sales technique used to get you to commit. Salespeople are trained in dozens of "closes" - trial closes, assumptive closes, urgency closes. Recognize when you're being closed and take your time.

What the dealer supposedly paid for the vehicle. However, this doesn't include holdback and dealer incentives, so the true cost is usually 2-4% lower than invoice. Sites like Edmunds show invoice pricing.

A legitimate fee (usually $1,000-$2,000) for shipping the car from the factory to the dealer. This is non-negotiable and the same for all dealers. However, any "additional dealer delivery fee" is negotiable.

A fee dealers charge for paperwork. This varies wildly by state ($0 to $800+). Some states cap it. While often non-negotiable at individual dealers, you can shop dealers with lower doc fees.

Cash you pay upfront to reduce the amount financed. A larger down payment means lower monthly payments and less interest paid overall. Aim for at least 20% down to avoid being underwater on your loan.

Additional coverage beyond the manufacturer's warranty. Dealers mark these up by 100-200%. If you want one, wait - you can buy it anytime before the factory warranty expires, often at a much lower price.

The difference between what your car is worth and what you owe on it. Positive equity means your car is worth more than your loan balance. Negative equity (being "underwater" or "upside down") means you owe more than it's worth.

The department (and person) who handles your financing paperwork and tries to sell you add-on products. The F&I manager often makes more profit on a deal than the entire sales department. This is where most upselling happens.

A negotiation worksheet that confuses buyers by mixing price, trade-in, down payment, and monthly payment together. This lets dealers move numbers around to hide what you're really paying. Refuse to negotiate using the four-square.

Covers the difference (gap) between what your car is worth and what you owe if it's totaled. Can be useful if you have a small down payment, but dealers charge $500-1,000 when your auto insurance company may offer it for $30-50/year.

A hidden 2-3% rebate paid by manufacturers to dealers on each car sold. This means even at "invoice price," dealers still make profit. Salespeople may not even know about holdback.

The price the dealer paid the manufacturer for the car (on paper). Due to holdback and incentives, the true dealer cost is usually lower. Still, knowing invoice price gives you negotiating leverage.

Essentially a long-term rental. You pay for depreciation plus interest (money factor), not the full car value. Lower payments but you own nothing at the end. Watch for mileage limits and wear-and-tear charges.

The ratio of your loan amount to the car's value. If you borrow $25,000 on a $20,000 car, your LTV is 125%. High LTV (over 100%) means you're underwater from day one. Aim for under 100%.

The "sticker price" - what the manufacturer recommends the car sell for. In a normal market, you should pay below MSRP. During shortages, dealers may charge "market adjustments" above MSRP.

The interest rate on a lease, expressed as a decimal. Multiply by 2,400 to get the approximate APR. For example, a money factor of 0.00208 = about 5% APR. Dealers can mark this up just like loan rates.

When you owe more on your car than it's worth. If you trade in with negative equity, that amount often gets added to your new loan - starting you underwater again. Try to pay down the loan or keep the car until you have positive equity.

The total amount you'll pay, including all taxes, fees, and charges. This is the number that matters. Always negotiate the OTD price, not the sticker price, monthly payment, or any other number.

Inflating your monthly payment to include products you didn't agree to (warranties, insurance, protection packages). The F&I manager might quote "$450/month" when your actual payment should be $380.

A fee charged if you pay off your loan early. Most auto loans don't have this, but always verify before signing. If there's a prepayment penalty, consider a different lender.

Money offered by the manufacturer to incentivize purchases. Can be taken as cash off the price or sometimes as a lower interest rate (but usually not both). Compare which option saves you more.

In a lease, the predicted value of the car at lease end. Higher residual = lower monthly payments. This is set by the manufacturer and isn't negotiable, but it affects which cars lease well.

When you drive off with the car before financing is finalized. Days later, the dealer calls saying financing "fell through" and you need to sign for worse terms or return the car. This is often a scam to get you to accept a worse deal.

Your current vehicle that you sell to the dealer as part of your purchase. The trade-in value reduces the price of your new car (and the sales tax owed in most states). Get quotes from CarMax, Carvana, and multiple dealers before negotiating.

The length of your loan, typically 36, 48, 60, 72, or 84 months. Longer terms mean lower monthly payments but more interest paid overall. Avoid 72+ month loans - they increase your risk of being underwater.

A vehicle that has had a previous owner. "Certified Pre-Owned" (CPO) means it passed the manufacturer's inspection and comes with an extended warranty. Non-CPO used cars should always get an independent inspection.

A unique 17-character code identifying every vehicle. Use it to get a vehicle history report (Carfax, AutoCheck) and to verify the car matches the paperwork. The VIN is on the dashboard and driver's door jamb.

The federally required label showing MSRP, standard equipment, optional equipment, fuel economy, and safety ratings. If a dealer has removed it or added a second sticker with "market adjustment," be very cautious.