15 Must-Know Automotive Terms
by Lauren Fix, The Car Coach®
Do you ever feel that the car dealers are speaking Greek or some foreign language? Do you need a translator? The auto dealers are not trying to trick you; language is just something you will need to learn, sort of like talking to a doctor or a chef. I have translated the 15 most common terms to help you understand the terms so that you can negotiate the best deal.
Add-on interest: Interest that is computed at the beginning of the loan, and then added to the principal, so that all must be repaid, even if the loan is paid off early.
Base price: The cost of a car without any options. This price includes standard equipment and the manufacturer's warranty and is printed on the Monroney sticker (window sticker).
Blue Book or Book Price: Where do most dealers get the average going prices of vehicles, the Kelley Blue Book, an industry guide dealers use to estimate wholesale and retail vehicle pricing. This usually referred to as "the blue book price" it can actually refer to a price looked up in one of the many guides to pricing. You can find out these prices before you go to the dealer by going to a few web sites that offer ongoing updates. I prefer www.edmunds.com because their prices are based on your zip code. A four-wheel drive will have more value in snowy climates than in warm climates, so the values may change.
Dealer holdback: An allowance, usually between 2 percent and 3 percent of manufacturer's suggested retail price that manufacturers provide to dealers. A holdback allowance may allow the dealer to pay the manufacturer less than the invoice price. A buyer could obtain a car below invoice price and the dealer would still make a profit. However, most dealers will not dig into their holdback, because that’s what coverage their costs.
Dealer incentives: Programs offered by manufacturers to increase the sales of slow-selling models or to reduce excess inventories. Dealers may elect to pass on the savings to the buyer. You can sometimes stack these incentives and there are also incentives for new drivers, college graduates and newlyweds so make sure to ask what’s available.
Dealer preparation, or dealer prep or preparation charges: An additional charge that dealers try to impose on buyers. It represents pure profit for the dealers, who have already been paid by the manufacturer for the cost of preparing the car for sale. Dealer prep is removing all the plastic, adding knobs and details to make the vehicle ready for delivery.
Destination charge: The fee charged for transporting the vehicle to the dealer from the manufacturer or port of entry. This charge is to be passed on to the buyer without any markup.
Extended warranty or Service contracts:
A contract that covers certain car repairs or problems after the
manufacturers or dealer's warranty expires. Car manufacturers, dealers
and independent companies sell extended warranties. With a new car, the
extended warranty usually must be purchased by the end of the first
year of ownership. If you are keeping a vehicle more than 3 years this
is a consideration, all vehicles are covered for 3 years of 36,000
miles some even cover 10 years or 100,000 miles – so think before you
buy there are a lot of details to read. If you purchase an extended
warranty make sure the dealer is doing the repairs and what the
deductible may be.
Invoice price: The manufacturer's initial charge to the dealer. The price may not be the dealer's final cost because dealers receive rebates and other incentives from the manufacturer. The invoice price always includes freight, also known as the destination charge.
Monroney sticker or Dealer sticker price: The sticker on the car window that shows the base price, the manufacturer's installed options with the manufacturer's suggested retail price, the manufacturer's destination charge, and the car's fuel economy (mileage). Federal law requires this label and it is only removed when the purchaser sells the car. Named after "Mike" Monroney, a longtime Oklahoma congressman who wrote the Automobile Information Disclosure Act.
Prepayment penalty: A lender's charge to the borrower for paying off the loan before the end of the term.
Rebate: A manufacturer's reduction on the price of the car as an incentive to buyers. Rebates appeal to people with no credit or less-than-perfect credit who cannot qualify for the lowest-rate loan. A rebate may also appeal to first-time buyers who don't have a lot of cash for a down payment or another car to trade in.
Rule of 78s: A mathematical formula that was devised in the days before modern calculators. The formula was a quick way for lenders in the 1920s and 1930s to estimate payoff amounts when a customer paid ahead on an installment loan. Some auto lenders still use the "Rule of 78s" formula to calculate a rebate of finance charges when a customer pays off a pre-computed loan early.
For a borrower looking to end an auto loan early, there isn't a worse way a lender could calculate your payoff amount. The Rule of 78s formula packs extra interest charges into the early months of a loan. Using this rule, a lender typically collects three-quarters of a loan's interest in the first half of a loan term. This can only be applied to pre-computed loans that are paid ahead of schedule. The formula can’t be applied to simple interest loans.
Title: A legal document containing specific information about the vehicle and stating who owns it. If you borrow money to get a car, the lender will hold the title until the vehicle is paid off. In some states you will have the title mailed to you with a lien holder listed at the bottom. This is the ownership of the vehicle and MUST be stored in a safe place. If you lose this document it will take a lot of work and effort on your part so that you can sell of trade-in your vehicle.
Trade-in value: The amount that the dealership will credit you for the vehicle you provide as partial or full payment for another vehicle. Amount credited is frequently about 5 percent below the wholesale value of the vehicle. Remember if you want a wholesale price on a car, you won’t get a retail price on your trade-in.