Finance Terms Explained

Finance Terms Explained in Duluth, GA

When it comes to comprehending everything about a finance contract, we understand that it can be a bit overwhelming. There's a lot to understand and take in before signing your name on a contract, from having to pull together documents to reading all that fine print. But we here at Mercedes-Benz of Atlanta Northeast, formerly Atlanta Classic Cars want to help you understand. We've compiled a list of some of the most common finance terms you're sure to come across, and we want you to feel even a little more confident when signing a contract. Keep reading to find out more.

Most Common Finance Terms

Finance

In simple terms, financing just means you're borrowing money from one of our lenders, or a bank of your choice, so you can purchase your desired vehicle. Essentially, the lender purchases the vehicle for you, and you then repay the loan over an agreed term and interest rate. When financing, the lender gives you the service of borrowing its money, while you pay them back with interest.

Leasing

Leasing is essentially long-term renting of a vehicle. It's a great way to try out new cars that are still under warranty with the understanding that you'll return the vehicle at the end of the term. You'll usually make a down payment, although some specials offer zero down for a lease, followed by monthly payments. Typical lease terms run anywhere from 24 to 36 months, but it can last up to 60 months. Once your term is up, you can either return the car or buy it.

Term

Simply put, the term is the set amount of time for a loan or a lease. For example, the term on a 36-month loan is 36 months, or three years. Shorter terms generally mean higher payments but lower interest rates. When agreeing to a loan, ensure that the loan term matches your budget.

Principal

The principal just means the initial size of the loan, which is that big number you want to whittle away at. For example, if you finance a vehicle that costs $30,000 but put down $3,000 for your down payment, your principal you'd have to repay would be $27,000.

Money Down

The more you can put down, the better. Money down is how much money you place up front on a loan, sometimes also called a down payment. The more you can put down up front, the lower your monthly payments will be. Say you purchase a vehicle for $20,000, but you pay $5,000 for a down payment; you'd only have $15,000 left to repay. Money down isn't charged interest, and dealerships usually like a large down payment to secure a desirable interest rate.

Interest Rate

You're typically charged interest when taking out a loan. This is the fee added onto your monthly payments, as it protects lenders from risky customers who may not repay the loan. It's sometimes also called the APR, or annual percentage rate. APR is determined by a variety of factors, including your credit score, the term length and the age of the vehicle being financed.

Cash Back

Cash back is a great deal. It's an incentive from the manufacturer to encourage you to buy a car. It can shave off thousands of dollars on your vehicle purchase price. The dealer can also write a check for the amount advertised. Usually, you can use the cash back as the down payment and reduce the selling price, or you can walk away with a check in hand.

Rebate

This is a term you've probably heard already. A rebate is an incentive that's typically applied to a vehicle's selling price, but only after purchase. After all the paperwork has been completed, the dealer will write a check for the rebate amount or provide you with cash on hand. Cash back is instant, but you might have to wait on a rebate to arrive.

Trade-In

When trading in a vehicle, you're basically offering your old vehicle to the dealership for credit towards the new vehicle that you want to purchase. By doing so, you can take thousands of dollars off the asking price.

Depreciation

Depreciation is when a car loses value. Don't worry; it happens to every vehicle, regardless of its condition. It happens every year until the value is zero. A brand new car loses around 10-20% of its value just when you drive it off the lot. In five years, that new vehicle will lose about 60% of its original value, no matter how clean and pristine you've kept it.

Equity

Equity is the difference between how much your car is worth and what you still owe on it. Say the value of your car is $15,000, but you still owe $6,000 to the lender; you have $9,000 in equity. It's essential to keep this ratio balanced and not accrue negative equity; this means you owe more on the loan than what the car is worth.

Upside Down

This is what we refer to as negative equity, as previously mentioned. Owing more on the vehicle than what it's worth makes it difficult to sell, and negative equity can follow you into a new loan. If you finance with us here at Mercedes-Benz of Atlanta Northeast, we'll try to help keep you from making this error.