Auto refinance can be confusing when you don’t recognize the terminology. Learn key vehicle refinancing words, terms, phrases, acronyms, and definitions with this in-depth refinance dictionary and demystify the car loan refinance process.
Amortization
APR
Co-borrower
Collateral
Co-signer
Credit Report
Credit Score
Current Balance
Depreciation
Down Payment
Finance Rate
FICO Credit Score
GAP Insurance
Hard Inquiry
Interest Rate
Kelley Blue Book Value
Lien
Loan Modification
Loan Term
Non-Sufficient Funds Fee (NSF)
Original Loan Amount
Payoff Amount
Prepayment Penalty
Principal
Proof Of Employment
Proof Of Insurance
Proof Of Residence
Refinance
Secured Loan
Soft Inquiry
Underwater
Unsecured Loan
Upside Down
Usury Law
Familiarize yourself with these terms before you dive into the refinance process. This glossary is organized alphabetically so you can bookmark it and return to it when a word or phrase trips you up as you refinance your vehicle.
How your loan payments are scheduled and divided up to pay the interest and the principal.
An amortization table can show you how your payments will be allocated throughout your repayment period.
This figure, expressed as a percentage, is your interest rate plus any additional fees you are responsible for.
It is important to consider a loan’s Annual Percentage Rate, or APR, as it gives a much more accurate idea of how much you will be spending on your car loan.
A co-borrower is a person who will share joint responsibility of the loan with you.
This is different from a co-signer because a co-borrower is always considered jointly responsible for a loan, while a co-signer is only responsible for payment when the primary borrower defaults.
Collateral is an asset that secures a loan.
For example, if you were to stop making your car payments and default on the loan, the bank would be able to take your car as payment. The car is the collateral on a car loan.
A co-signer is a person who agrees to back a loan if the primary borrower defaults on it.
They do not share joint responsibility for the loan like a co-borrower does.
Your credit report is your personal financial history: it tracks what accounts you have open, your payment history with each account, and the balance you have on each account.
These reports are created by the three major credit bureaus: TransUnion, Equifax,and Experian. You should routinely check your credit report to ensure there are no errors. Lenders will request a copy of your credit report to determine if you are a good candidate for a loan.
A credit score is a three digit number that is calculated based on a person’s financial history to indicate your creditworthiness.
The numbers range from 300 to 850, and the higher your score is the more creditworthy you are considered. Your credit score is one of the biggest determiners of the car loan interest rate you are offered (the biggest factor that you can control at least).
The amount that you currently owe on your vehicle loan.
You can typically find this amount listed on your monthly statement.
The loss of value that occurs as an asset ages and wears.
Vehicles typically depreciate from the moment they leave the new car lot, with rare exceptions for vintage cars and unusual market conditions.
The down payment is the cash paid up front for a vehicle (or any purchase) when procuring a loan.
This amount is not financed. You should aim to put down at least 20% of the car’s total cost. This will help you to stay ahead of the depreciation that occurs.
Finance rate is another term for APR.
Your loan’s finance rate is your interest rate plus any additional fees you are responsible for.
A person’s credit score as calculated by Fair Isaac Corporation (FICO).
There are other data analytics companies that will calculate a credit score, but FICO is the most popular and widely used.
GAP stands for Guaranteed Asset Protection. This is optional coverage that covers the difference between your vehicle’s value (which is what insurance will pay) and the amount that you owe on your car in the event of an accident.
Let’s say your car is totalled and your insurance pays you the value of your car, which is $15,000. But you still owe $17,000 on your loan. GAP insurance will cover this difference so you are not paying out of pocket.
A formal request of your credit history from a lender.
When a lender considers approving a loan for you, they will request a copy of your credit report to review. This request will actually show up on your credit report and will cause a temporary ding on your credit score. Hard inquiries cannot be made without your permission.
The interest rate is the cost of borrowing money, expressed as a percentage of the amount borrowed.
The interest rate you are offered will be based on the market rates, your credit score and financial history, your income, and other factors.
The value of a vehicle according to American vehicle valuation and automotive research company Kelley Blue Book.
Kelley Blue Book is viewed as a reputable and reliable place to check your car’s value. The value will be based not only on the make, model, and year of your car, but also on the mileage and condition of the car. It’s a good idea to keep an eye on the value of your car throughout the loan period to ensure that depreciation is not outpacing your loan payments (see “Underwater” and “Upside Down”).
A lien is a lender or creditor’s legal claim to an asset if you fail to repay a debt.
When you get a car loan, the lender has a lien on your car, so if you do not pay your debt to them, the car will belong to them.
A change to your loan, as reported to the credit bureaus by your lender.
If you refinance your loan with the same lender, they may report it to credit bureaus as a loan modification rather than a new loan. This will not affect your credit score as a new loan would.
The loan term is the amount of time you have to pay back your car loan and typically ranges from 24 to 84 months.
The loan term is also known as the repayment period. Changing your loan term can lower your monthly payments or the amount you pay in interest.
If one of your payments does not clear or there are not enough funds in your account to cover a payment, you may be charged a Non-Sufficient Funds, or NSF, fee.
This type of fee may be charged by your lender, your bank or credit union, or both. On the lender side, the amount should be listed in your contract.
The original loan amount is the amount of money originally borrowed from a lender to pay for a vehicle.
It is typically the cost of the car plus taxes and fees, minus the down payment made.
The payoff amount is the amount you will need to pay to get rid of your loan entirely.
This is separate from your current balance, which may not reflect the interest and fees that you would be responsible for if you want to pay off your loan entirely/early.
A fee for paying off your car loan early.
These penalties may be listed in your original car loan contract. These penalties are designed to offset the losses in profit that occur when you pay off your loan early. Prepayment penalties will at times offset any savings that refinancing can provide, so it’s important to know what these penalties are before you commit to refinancing your car loan.
Principal is another name for the original loan amount. It is the amount of money initially borrowed to purchase a vehicle.
When you make your monthly payments, your money is first applied to taxes and fees, then applied to interest that is due, and the remainder goes to paying down your principal.
A statement or document that shows you are employed.
This proof may be a paystub, a letter from your employer, or a W2. This shows the lender that you have means to repay your loan.
A statement or document that demonstrates you have coverage and the amount of that coverage.
To show that you have insurance coverage, the lender will usually require a copy of your insurance policy that states the amount of coverage.
A statement or document that confirms your place of residence.
You will need to show where you actually live as part of the refinancing process. This cannot be a PO box. Lenders want to know where the car will physically be parked in case they need to seize it should you default on your loan.
A refinance is when you pay off your current loan with a new loan.
Your new loan will ideally have a better interest rate and/or better terms. Refinancing your car allows you to add a cosigner or co borrower, change your interest rate, and change your repayment period.
A loan that is backed by collateral, such as a car loan.
If a person defaults on their loan, the collateral is taken as payment. In the case of a car loan, the car is the collateral.
A soft inquiry is a kind of credit check that allows lenders to review your credit score and part of your credit report without it counting as a hard inquiry.
Also known as a soft pull, this is common when getting preapproved for a loan. Soft inquiries do not affect your credit score and your approval is not required for a soft inquiry.
A vehicle loan is considered “underwater” when the amount owed on the loan is greater than the worth of the vehicle.
For example, if the market value of your car is $15,000 but you owe $17,000 on your car, it is considered underwater. This happens when depreciation outpaces payments. It is common for this to happen if you do not make a down payment (or make too small of a down payment).
A loan that is not backed by an asset for collateral.
These loans tend to have higher interest rates because they are higher risk for the lender.
Upside down is the same as being underwater, in loan terminology. It is when you owe more on your car than your car is worth.
The law that defines the maximum amount of interest a company can charge in your state.
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