Know the key car-buying terms before visiting a dealership


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Ask a Lender
December 15, 2017 | Updated December 15, 2017


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Key Points

Key terms to know with auto purchases and auto loans

  • Annual percentage rates (APRs) differ from interest rates and reflect the true costs of a loan.
  • Co-signers can help a subprime borrower qualify for an auto loan.
  • Save money by researching and understanding dealer incentives and manufacturer rebates.
  • Know the difference between invoice price, sticker price and MSRP to effectively negotiate.

Knowing the language of an auto dealer can help create a positive experience around your next auto purchase. And decoding the meaning of a few acronyms and phrases can help you speak a dealer’s language.

Here are eight terms to be aware of when purchasing a vehicle, particularly if you plan on financing with an auto loan.

APR

An annual percentage rate, or APR, is used with many types of credit and loans to represent the true cost of borrowing money. APRs are different from interest rates because they also include taxes, fees and services. An auto purchase may include adds-on like Guaranteed Asset Protection (GAP) insurance or a vehicle-service contract. There will likely be prepaid finance charges to process and service the loan, which are similar to closing costs on a home mortgage loan. The Truth in Lending Act (TILA) requires auto lenders to list all fees on loan documents.

Co-signer

A co-signer is a creditworthy individual — such as a parent, relative or close friend — who can help a subprime borrower qualify for an auto loan. They can also help a qualifying borrower obtain a better term or interest rate. But a co-signer is also responsible for monthly payments, or repayment of the full loan amount, if the borrower defaults. Borrowers with little or no credit history, such as a recent college graduate or a foreign national, may need a co-signer. A co-signer has no ownership rights, as opposed to a co-borrower, generally a spouse, who retains ownership rights to a vehicle.

Dealer incentive

Manufacturers may offer incentives to their dealers in a region to encourage sales of specific vehicle models. This can indirectly benefit a customer by lowering the purchase price. Dealers are not required to pass on incentives, but they often do as a way of boosting their bottom line. According to the National Automobile Dealers Association, gross profits on new vehicles fell from 4.4 percent of the sales price in 2010 to 3.3 percent in 2015, so it has become more difficult for dealers to make money on each sale. Research dealer incentives through different manufacturers before arriving at the car lot.

Dealer trade

If a dealership does not have a specific make or model on its lot — or even a vehicle with the exact color or options a customer wants — they may trade vehicles with another dealership. It’s a win-win: You get the vehicle you want and the dealer completes the sale. It’s possible, however, that another dealership might not agree to the same sales price, or they may not wish to trade if the model in question is in high demand.

Manufacturer rebates

Passed directly from the manufacturer to the consumer, rebates help lower the purchase price of the car, often between $500 and $2,000, but may only be available on specific models at specific times. A rebate may also take the form of a lower APR, such as zero-interest financing for one year. Some rebates may target certain consumers, such as members of the military or recent college graduates. Manufacturers may not allow rebates or discounts to be combined, so compare offers and select the one that’s most beneficial.

Invoice price

Also known as the dealer cost, this is what the dealership pays the manufacturer to purchase a vehicle. Invoice prices can be found online through sources like Kelley Blue Book or Edmunds. The invoice price can form the basis of negotiations as the customer knows what the dealer paid.

MSRP

Short for Manufacturers Suggested Retail Price, this is the suggested price for a vehicle at a dealership. The MSRP, by law, must be displayed on the vehicle. The difference between the MSRP and the invoice price represents the dealer’s potential profit, and it varies by model and manufacturer, from a few hundred dollars on an economy-class vehicle to several thousand dollars on high-end vehicles. MSRPs should remain constant across all dealerships that are selling a specific vehicle, otherwise it’s possible the dealership is inflating the price.

Sticker price

This is the listed sales price for the car and it includes additional fees, or markups, that add another 2 percent to 5 percent to the MSRP. The factors that go into the sticker price may include a destination fee, which is the cost of transporting the vehicle to the dealership; advertising fees to get potential buyers on the lot; or vehicle-history fees to report past problems with a used vehicle. Some of these fees are negotiable, but others are not.


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