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Car Refinance Dictionary: The Terms You Should Know

Finance | 01/26/2023 15:42

Refinancing can feel overwhelming for many reasons. And a major part of that overwhelming feeling is that it sounds overwhelming. If you don’t know the lingo, that is. But let’s break down all of these terms and demystify the refinancing process.

Here are all of the car loan refinance terms you should know before you start the refinance process.


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 stands for Annual Percentage Rate. This figure, expressed as a percentage, is your interest rate plus any additional fees you are responsible for. It is important to consider the 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 cosigner.


This is the asset that secures the loan. 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.


A co-signer is a person who agrees to back the loan if you default on it, but they do not share joint responsibility of the loan as a co-borrower does.

Credit Report

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.

Credit Score

A three digit number that is calculated based on your 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).

Current Balance

The amount that you currently owe as listed on your monthly statement.


The loss of value that occurs as your car ages and wears. 

Down Payment

The amount of cash you pay up front for your car. 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

Another term for the APR of your car loan.

FICO Credit Score

There are different programs that will calculate a credit score, but FICO is the most popular of the providers.

GAP Insurance

Stands for Guaranteed Asset Protection. This is optional coverage that will cover 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.

Hard Inquiry

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.

Interest Rate

This is the cost of borrowing money. Expressed as a percentage, the interest rate you are offered will be based on the market rates, your credit score and financial history, your income, and other factors.

Kelley Blue Book Value

Kelley Blue Book is viewed as a reputable and reliable place to check your car’s value. When you are trying to determine the market value of your car, Kelly Blue Book is a great place to do so. 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”).


The legal right to your car. The lender has a lien on your car, so if you do not pay your debt to them the car will belong to them.

Loan Modification

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.

Loan Term

Also known as a repayment period, this is the amount of time you have to pay back your car loan. 

Non-Sufficient Funds Fee (NSF)

If one of your payments does not clear or there are not enough funds in your account to cover the check, you may be charged an NSF fee. The amount will be listed in your contract.

Original Loan Amount

This is the amount of money you originally took out to pay for your car. It is typically the cost of the car plus taxes and fees minus the down payment you made.

Payoff Amount

The amount you will need to pay to get rid of your loan entirely. It is separate from your current balance, which may not reflect the interest and fees that you will be responsible for to pay off your loan entirely.

Prepayment Penalty

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.


This is the same as your original loan amount. It is the amount of money you originally borrowed to purchase your car. 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.

Proof of Employment

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.

Proof of Insurance

To show that you have insurance coverage the lender will usually require a copy of your insurance policy that states the amount of coverage.

Proof 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 if they need to seize it because you have defaulted on your loan.


This 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 allows you to add a cosigner or co borrower, change your interest rate, and change your repayment period.

Secured Loan

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.

Soft Inquiry

This 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 this.


When you owe more on your loan than your car is worth. 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 your payments. It is common for this to happen if you do not make a down payment (or make too small of a down payment). 

Unsecured Loan

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

This is the same as being underwater. It is when you owe more on your car than your car is worth.

Usury Law

Defines the maximum amount of interest in your state that a company can charge you. 

Those are all the terms you should know before you refinance your car loan.

At Auto Approve we take the mystery out of refinancing. After all, refinance is our specialty. So don’t wait to get in touch and find out just how much money you could be saving.


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*APR and Fees Disclosure: Auto Approve works to find you the best Annual Percentage Rate (APR), which is based on factors like your credit history, vehicle and desired payment terms. Fees to complete your loan refinance vary by state and lender; they generally include admin fees, doc fees, DMV and title. Advertised 6.24% APR based on: 2019 model year or newer vehicle, 730 minimum FICO credit score, and loan term up to 72 months. All loans subject to credit and lender approval.
Auto Approve has an A+ rating with the BBB and is located at 2860 Vicksburg Lane North Plymouth, MN 55447. Auto Approve works to find its customers the best terms and APR, which are based on factors like credit history, vehicle, and desired payment terms. Loan amounts, costs, and fees vary by state and lender; they generally include admin fees, doc fees, DMV, and title fees, depending on the lender and period of repayment. There is no fee to obtain a quote and all refinancing-related costs are included in the amount financed so there are no out-of-pocket costs! For more information, please go to AutoApprove.com.