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15 Confusing Car Financing Terms, Explained



An APR (Annual Percentage Rate) is the amount you will pay to borrow money from an auto loan lender, expressed as a percentage. APR is often used interchangeably with the term “Interest Rate”, however it is important to know that your APR often includes other fees from your lender in addition to your interest rate.

Learn more about auto loans here.

When leasing a vehicle, the Capitalized Cost (or Cap Cost) refers to the amount of money being financed through the lease. This not only includes the price of the vehicle, but also any fees or taxes.

If you have a trade-in or downpayment, these will lower the overall price being financed through the lease and are called “Cap Cost Reductions”

The original Cap Cost minus the Cap Cost Reductions will be referred to as your Net Cap Cost. This is the final number that will determine your monthly payments. Learn more about leasing a car here.

People buying a vehicle may encounter a fee called a destination charge in the final price of their new car. This fee is not negotiable, and is created by the auto manufacturer to cover the transport expenses of getting the car from the factory to the dealership. The fee is typically not displayed as part of the MSRP listed on the manufacturer's website (instead it is typically listed as a disclaimer), but Proctor Honda shows this fee in the final MSRP online and in-person.

You may encounter the term “disposition fee” in your car lease contract. The disposition fee is a flat fee charged at the end of your lease so that the dealer can detail and complete necessary maintenance & repairs in order to make your leased vehicle ready for resale. This fee will not be charged if you decide to purchase your car at the end of your lease. And the fee can also sometimes be negotiable if you’re entering a new lease from the same dealership as soon as the old lease expires.
Learn more about what to expect when leasing a car here.

Many people who chose to buy a car instead of leasing, do so because they want to build “equity” in their vehicle.

So what exactly is equity? Equity is ownership of your car. With ownership comes the possibility of benefiting from the cash value of your vehicle.

If you bought a a vehicle with cash (no financing), you would have full equity in that vehicle. Though the vehicle’s value will depreciate over time, you could potentially sell it and gain cash for the full market value of the car.

Now if you finance your car with a loan, you could still eventually have positive equity in your vehicle.Let’s say your car is worth $24,000 and you have $14,000 left to pay on your auto loan, you would have $10,000 of equity in your vehicle.

Sometimes, it is possible to have “Negative Equity” in your vehicle. Negative equity (sometimes called being “upside down”) is when the amount you owe on your vehicle exceeds the actual value of your vehicle. Since a car depreciates in value most during it’s first year, sometimes it is possible to owe more on the car than it is worth. Let’s say your car was worth $30,000, and you had $24,000 left on your auto loan. But then your car is involved in a collision, which lessens the value of your car by $10,000. Now the vehicle is only worth $20,000, but you owe $24,000 on your car loan.

Though negative equity is never desirable, that’s where GAP insurance comes in. Read below to learn more about how GAP insurance protects against being upside down on your car loan or lease.

An “Extended Warranty” is another term for a Vehicle Service Contract. While every new vehicle comes with a manufacturer warranty (typically 36,000 miles or 3 years, an Extended Warranty is simply a protection plan that you can buy that extends the coverage period even longer. Extended warranties are available through the manufacturer, dealership, and even 3rd party companies. They cost on average, $1,500 and increase with more coverage. They can be included in your financing and added to monthly payments.

Learn more about Extended Warranties here.

GAP stands for Guaranteed Asset Protection. GAP insurance exists to protect the driver of the leased vehicle from paying out of pocket in the event that their leased vehicle is stolen or totaled.

The great news for people who choose to lease from Honda, is that GAP insurance is included as a part of the lease.

GAP insurance works alongside collision and comprehensive coverage insurance. Since vehicles depreciate most in the first year or two, there is a chance that if your leased vehicle is totaled, you may still owe more on the car than its true depreciated value at the time of the collision. GAP insurance will prevent the driver from having to pay out-of-pocket for the difference in what they owe and the depreciated value.

FICO is an acronym that stands for: Fair Isaac Corporation, the company that developed the FICO® credit scoring.

FICO® credit scores are the auto industry standard for determining a potential buyer’s creditworthiness. Using a variety of factors, the company will give you a three digit score ranging from 300 (lowest possible) to 850 (highest possible). Learn more about FICO credit scores here.

Incentives are attractive discounts on vehicles offered by the manufacturer or the dealer. The benefit to dealers is that it entices people to buy or lease a new car from them. The benefit to buyers is that they can save cash by taking advantage of the incentives.

Incentives can come in many forms: rebates, discounts, lease deals, or low APR / interest rates. View current specials & incentives at Proctor Honda here.

If you are considering leasing a car, you may have seen the term “money factor”. A money factor is extremely similar to an APR, but it is the amount of interest you will pay for the car during your lease term. Unlike an APR, which is expressed as a percentage, the money factor is often expressed as a decimal. Also, like an interest rate on an auto loan, your money factor for a leased vehicle will be determined by your credit score. The higher your credit score is, the lower your money factor will be.

If you’re shopping for a lease and need to determine the money factor, simply divide the advertised interest rate by 2400 to get the money factor. Similarly, you can multiply the money factor by 2400 to determine what the interest rate would be.

A vehicle’s MSRP refers to the manufacturers suggested retail price. You may also hear MSRP referred to as the “sticker price” of a vehicle.

The final selling prices of a vehicle is different from the MSRP because the MSRP does not reflect potential add-ons, any dealers fees, taxes, registration costs, or negotiations / incentives that the buyer took advantage of.

In regards to a car loan, the principal is the sum of money borrowed from a lender. Interest is charged on the principal balance. As time passes and the car loan is paid down, the principal balance will get lower.

If you are entering into a lease, the dealership will come up with the residual value at the beginning of your lease. Residual value is an estimated projection of how much your car will be worth at the end of your lease term. This is important to know, because in a lease, you don’t pay to own the car, you instead pay for how much the car will depreciate during your lease.

Depreciation is the loss of an asset’s value with time and use. New cars lose the most value in their first two years, so your residual value will be deter-mined by the amount of time you will drive your lease, the number of miles you will drive it, and with average wear & tear in mind.

The great part about leasing a car is that if for any reason (except mileage overages or excessive wear & tear) you car is worth less than the projected residual value at the end of your lease, the driver is not responsible for the difference.

Learn more about car leasing and residual value here.

A warranty is a type of protection that comes with the purchase of your new car from the manufacturer. A warranty prevents the person who owns or leases the car from paying out-of-pocket for expensive repairs stemming from defective original parts, manufacturer error, or poor workman-ship.

A warranty typically comes with both comprehensive coverage (covers things like electrical features, technological features, safety features, heat/AC, etc) and powertrain coverage (covers engine, axles, transmission, drive shafts, etc).

All new Honda vehicles are covered by a 3-Year/36,000-Mile Limited Warranty, plus a 5-Year/60,000-Mile Powertrain Limited Warranty.

Learn more about Vehicle Service Contracts (sometimes called Extended Warranties) here.