Auto loan answers | Consumer Financial Protection Bureau (2024)

Amortization describes the process of gradually paying off your auto loan. In an amortizing loan, for each of your monthly payments, a portion is applied towards the amount of the loan–the principal–and a portion of the payment is applied towards paying the finance charge – the interest.

The Annual Percentage Rate (APR) is the cost you pay each year to borrow money, including fees, expressed as a percentage. The APR is a broader measure of the cost to you of borrowing money since it reflects not only the interest rate but also the fees that you have to pay to get the loan. The higher the APR, the more you’ll pay over the life of the loan.

An auto loan’s APR and interest rate are two of the most important measures of the price you pay for borrowing money. The federal Truth in Lending Act (TILA) requires lenders to give you specific disclosures about important terms, including the APR, before you are legally obligated on the loan. Since all lenders must provide the APR, you can use the APR to compare auto loans. Just make sure that you are comparing APRs to APRs and not to interest rates

An assignee is a person or a company who buys your auto loan. For example, an auto dealer who extends credit to you may sell your loan to a bank, making the bank the assignee. You owe the money to whoever has purchased your loan. The assignee has a lien on the vehicle and can repossess if you don’t pay.

The base price is the price of the vehicle without options.

A buy rate is the interest rate that a potential lender quotes to your dealer when you apply fordealer-arranged financing.

A co-signer is a person—such as a parent, close family member, or friend—who pledges to pay back the loan if you do not. This can be a benefit both to you and your lender. A co-signer takes full responsibility to pay back the loan. Having a co-signer on your loan gives your lender additional assurance that the loan will be repaid. If you do not repay your loan, your co-signer will be liable for repayment even if the co-signer never drove your vehicle. If you’ve been asked to co-sign a loan, you should consider how it will impact your finances.

Credit insurance is optional insurance that may make your auto payments to your lender in certain situations, such as if you die or become disabled. If you are considering credit insurance, make sure you understand the terms of the policy being offered. If you decide you need insurance, there may be cheaper ways for you to obtain coverage than to buy credit insurance and add it to your auto loan. For example, life insurance may be less expensive than credit life insurance and allow your family to pay off other expenses in addition to your auto loan.

Some auto dealers as well as banks and credit unions offer “debt cancellation” and “debt suspension” products or insurance under various names. These products are similar to credit insurance in terms of their function, but fees and other features may be different.

If your vehicle is repossessed and sold, you may be responsible for paying the difference between the amount left on your loan (plus repossession fees) and the sale price. This is known as a “deficiency balance.”

A down payment is an initial, upfront payment you make toward the total cost of the vehicle. Your down payment could be cash, the value of a trade-in, or both. The more you put down, the less you need to borrow. A larger down payment may also reduce your monthly payment and your total cost of financing.

An extended warranty or vehicle service contract covers the costs of some types of repairs in addition to or after the manufacturer’s warranty ends.

If you purchase a vehicle at a dealership, the salesperson may refer you to someone in the F&I or business office. This is the part of the dealership that markets loans and optional add-ons to customers after they have agreed to buy a vehicle at the dealership.

Fixed-rate financing means the interest rate on your loan does not change over the life of your loan. With a fixed rate, you can see your payment for each month and the total you will pay over the life of a loan. You might prefer fixed-rate financing if you are looking for a loan payment that won’t change. Fixed-rate financing is one type of financing. Another type is variable-rate financing.

In order to get a loan to buy a vehicle, you must have insurance to cover the vehicle itself. If you fail to obtain insurance or you let your insurance lapse, the contract usually gives the lender the right to get insurance to cover the vehicle. This insurance is called “force-placed insurance.”

GAP insurance covers the difference (or gap) between the amount you owe on your auto loan and what your insurance pays if your vehicle is stolen, damaged, or totaled. You don’t have to buy this insurance, but if you decide you want it, shop around. Lenders may set varying prices for this product.

An auto loan’s interest rate is the cost you pay each year to borrow money expressed as a percentage. The interest rate does not include fees charged for the loan.

An auto loan’s APR and interest rate are two of the most important measures of the price you pay for borrowing money. The federal Truth in Lending Act (TILA) requires lenders to give you specific disclosures about important terms, including the APR, before you are legally obligated on the loan. Since all lenders must provide the APR, you can use the APR to compare auto loans. Just make sure that you are comparing APRs to APRs and not to interest rates.

This is the length of your auto loan, generally expressed in months. A shorter loan term (in which you make monthly payments for fewer months) will reduce your total loan cost. A longer loan can reduce your monthly payment, but you pay more interest over the life of the loan. A longer loan also puts you at risk for negative equity, which is when you owe more on the vehicle than the vehicle is worth.

A loan-to-value ratio (LTV) is the total dollar value of your loan divided by the actual cash value (ACV) of your vehicle. It is usually expressed as a percentage. Your down payment reduces the loan to value ratio of your loan.

By signing a contract with a mandatory binding arbitration provision, you agree to resolve any disputes about the contract before an arbitrator who decides the dispute instead of a court. You also may agree to waive other rights, such as your ability to appeal a decision or to join a class action lawsuit.

Manufacturer incentives are special deals, like 0% financing or cash rebates that you may have seen advertised for new vehicles. Often, they are offered only for certain models.

If you owe more on your current auto loan than the vehicle is worth—referred to as being “upside down”—then you have negative equity. In other words, if you tried to sell your vehicle, you wouldn’t be able to get what you already owe on it. For example, say you owe $10,000 on your auto loan and your vehicle is now worth $8,000. That means you have negative equity of $2,000. That negative equity will need to be paid off if you want to trade in your vehicle and take out an auto loan to purchase a new vehicle.

A “no credit check” or “buy here, pay here”auto loan is offered by dealerships that typically finance auto loans “in-house” to borrowers with no credit or poor credit.

Principal is the money that you originally agreed to pay back.

Generally, any payment made on an auto loan will be applied first to any fees that are due (for example, late fees). Next, remaining money from your payment will be applied to any interest due, including past due interest, if applicable. Then the rest of your payment will be applied to the principal balance of your loan.

Risk-based pricing occurs when lenders offer different consumers different interest rates or other loan terms, based on the estimated risk that the consumers will fail to pay back their loans.

This is how much you will pay to buy your vehicle, including the principal, interest, and any down payment or trade-in, over the life of the loan.

The federal Truth in Lending Act—or “TILA” for short—requires that borrowers receive written disclosures about important terms of credit before they are legally bound to pay the loan. Learn more about the information included in your TILA disclosure and when you should receive and review it.

Variable-rate financing is where the interest rate on your loan can change, based on the prime rate or another rate called an “index.” With a variable-rate loan, the interest rate on the loan changes as the index rate changes, meaning that it could go up or down. Because your interest rate can go up, your monthly payment can also go up. The longer the term of the loan, the more risky a variable rate loan can be for a borrower, because there is more time for rates to increase. Variable-rate financing is one type of financing. Another type is fixed-rate financing.

VSI insurance protects the lender, but not you, in the event that the vehicle is damaged or destroyed.