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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.Table of ContentsAmortizationAPRCo-borrowerCollateralCo-signerCredit ReportCredit ScoreCurrent BalanceDepreciationDown PaymentFinance RateFICO Credit ScoreGAP InsuranceHard InquiryInterest RateKelley Blue Book ValueLienLoan ModificationLoan TermNon-Sufficient Funds Fee (NSF)Original Loan AmountPayoff AmountPrepayment PenaltyPrincipalProof Of EmploymentProof Of InsuranceProof Of ResidenceRefinanceSecured LoanSoft InquiryUnderwaterUnsecured LoanUpside DownUsury LawHow to use this guideFamiliarize 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.Essential Auto Loan Refinance Terms & DefinitionsAmortizationHow 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.Annual Percentage Rate (APR)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.Co-borrowerA 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.CollateralCollateral 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.Co-signerA 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.Credit ReportYour 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.Credit ScoreA 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).Current BalanceThe amount that you currently owe on your vehicle loan.You can typically find this amount listed on your monthly statement.DepreciationThe 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.Down PaymentThe 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 RateFinance rate is another term for APR.Your loan’s finance rate is your interest rate plus any additional fees you are responsible for. FICO Credit ScoreA 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 InsuranceGAP 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.Hard InquiryA 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 RateThe 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.Kelley Blue Book ValueThe 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”).LienA 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.Loan ModificationA 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.Loan TermThe 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.Non-Sufficient Funds Fee (NSF)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.Original Loan AmountThe 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.Payoff AmountThe 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.Prepayment PenaltyA 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.PrincipalPrincipal 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.Proof Of EmploymentA 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 InsuranceA 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. Proof Of ResidenceA 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.RefinanceA 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.Secured LoanA 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.Soft InquiryA 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.UnderwaterA 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). Unsecured LoanA 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 DownUpside down is the same as being underwater, in loan terminology. It is when you owe more on your car than your car is worth.Usury LawThe law that defines the maximum amount of interest a company can charge in your state. Learn These Terms To Make Refinancing Your Car Loan Less ConfusingAnd here’s one more helpful name to remember: Auto Approve.At Auto Approve, we take the mystery out of refinancing, helping you find the refinance that’s right for you and handling the paperwork – even the DMV! Find out just how much money you could save by sharing a few simple details, no commitment required.GET A QUOTE IN 60 SECONDS

How do interest rates work on car loans?Here’s the short version of everything you need to know:A car loan is when you borrow money from a bank or other lender to pay for the cost of a car. You then pay that lender back over time based on terms set at the time you get the loan.Interest is the cost of borrowing money from a lender. It’s what you pay to the lender on top of the cost of the car. There are different kinds of interest: simple, accrued, and compound. Most car loans use simple interest.The interest rate on a car loan is the formula used to determine how much you’ll pay your lender above the amount of money paid for the car. Your interest rate will be determined by factors like: your credit score and finances, your vehicle and loan-to-value, and broader market trends.Want to learn more? Keep reading for more in-depth explanations. The Complete Guide to Car Loan Interest Rates In this guide, we’ll cover:Car loan basicsInterest rate basicsInterest rates vs. APRHow car loan interest rates workFactors that affect the interest rate you’re offeredCar Loan BasicsWho needs a car loan?If you’re planning to buy a car, there’s a good chance you’ll need to finance at least part of the purchase. Most people do not buy a car in cash.Financing allows you to borrow some (or all) of the money for a large purchase and pay it back to the lender over a set period of time. Lenders will charge you interest, which is essentially the fee you pay for borrowing money. How do car loans work?Car loans are very simple in principle. When you want a car that you cannot afford to pay for in cash, a bank loans you the money to purchase the car. You get to take the car home and drive it as if it’s your own, but it is technically an asset of the bank. When you finish paying back the money that you owe your lender, plus interest, the bank signs the title over to you and you officially own the car.What is the difference between a car loan and a car refinance?They’re very similar:A car loan is the loan you get when you first purchase a vehicle. A car refinance is when you already have a car loan and decide to get a new loan that replaces the old one. Some people choose to refinance because it is a way to change the terms of a car loan, which are otherwise locked in for the duration of the loan.Considering a car refinance? Learn more about refinancing here.Interest Rate BasicsWhat is interest?Interest is the cost of borrowing money from a lender. There are three different types of interest rates which are all calculated in different ways:Simple interestAccrued interestComplex interestSimple interestSimple interest (also known as regular interest) is based on the outstanding principal and is paid as you go. For example: You borrow $1,000 with a 5% annual interest rate for three years.$1,000 x 0.05 x 3 = $150With simple interest, you would pay $50 per year ($150 total) in interest.Accrued interestAccrued interest accumulates and is unpaid until the end of the payment period.For example: You borrow $1,000 with a three year loan term and a 5% annual interest rate accrued every 30 days.$1,000 x 0.05 x (30 / 365) You would still owe $150 total, $50 per year, but it’d be paid as $4.11 every 30 days. Essentially, this is an accounting difference where you accrue 13.7 cents of interest per day and pay when you get to 30 days of interest accrued.Compound interestCompound interest is paid on the total of the principal and accrued interest. For example: You borrow $1,000 with a three year loan term and a 5% interest rate, compounding annually. That means that you pay interest on the interest, essentially.It’s calculated like this:Principal x ((1 + %interest)years of loan - 1) = total interest due over time$1,000 x ((1 + 0.05)3 - 1)$1,000 x (1.157625 - 1) = $157.27APR vs. Interest RateWhen it comes to car financing, the terms “APR” and “interest rate” are often used interchangeably. But this is not correct and they are not actually the same. The interest rate is the cost of borrowing the money, while the APR (or Annual Percentage Rate) is the interest rate plus any additional loan fees for which you are responsible. These fees, also referred to as “prepaid finance charges,” can vary widely from lender to lender. They typically cover costs associated with underwriting their loans and doing the necessary paperwork. It’s important to review the APR offered to you when looking at a loan, as it’ll give you a better picture of what you’ll actually be paying.How Do Car Loan Interest Rates Work?Car loan interest rates are almost always simple interest rates. A borrower is offered one fixed rate for the duration of their car loan. As the borrower pays down the principal, the amount of interest that they pay decreases until they have paid the loan back entirely. In some cases lenders may use precomputed interest. This means that at the start of your loan they determine how much you will pay in interest and your payments will be divided evenly. If you pay off your loan early, you will still be required to pay the predetermined interest, so you will be unable to save money as you would with a simple interest rate.What Factors Affect The Interest Rate You Will Be Offered?The car loan interest rate that is offered will be based on a number of different factors, including the market rates and the credit worthiness of the applicant. Here are some of the factors that affect the interest rate offered:Your credit scoreYour debt-to-income ratioMarket factorsYour vehicleYour down paymentThe loan termYour Credit ScoreYour credit score is the biggest factor that is within your control when it comes to what interest rate you will be offered. Your credit score is an indicator of how likely you are to make on-time, full payments every month. The better your score is, the better candidate you are for a car loan. The best interest rates will be offered to applicants with strong credit scores.Your Debt-To-Income RatioYour debt-to-income ratio is another huge indicator of how likely you are to repay your loan. If you have a lot of debt compared to how much money you make, you are considered less likely to repay your loan. The Market ConditionsThe credit score you are offered will also be based in part on the prevailing rates at the time. If interest rates are high in general you can expect to be offered a higher rate than at other times.The Vehicle You Are BuyingThe vehicle you are buying will also impact the interest rate you are offered. The most important factor is the age of the car. The older the car is, the higher the interest rate will be.Your Down PaymentThe size of your down payment will also have a large impact on your interest rate. The larger your down payment is, the less likely your loan is to become underwater (meaning you owe more money to your lender than the car is worth). Your loan-to-value makes a big difference for both securing a loan and refinancing.The Loan TermA longer loan term will generally mean a higher interest rate. It will also mean that you will pay more interest over the life of the loan because you will be paying interest for a longer time. Your monthly payments will be lower because they will be stretched out over a longer period of time, but you will (quite literally) pay for this in the long run.How Can I Get The Best Car Loan Interest Rate?To get the best car loan interest rate possible, prepare by doing the following:Work on improving your credit score.Request a copy of your credit report and review for any errors. Pay down debts where you can, focusing especially on loans with high credit utilization ratios.Save additional money so that you can make a more sizable down payment.Get preapproved before heading to the dealership.Apply with several lenders (3-5) so that you can compare the offers.Avoid selecting a long repayment period if you can. Be sure that the car you are purchasing will fit into your budget.Securing a low car loan interest rate will mean big savings in the long run, so it’s important to do your research and prepare as much as possible when buying a car. That’s How Interest Rates Work For Car LoansIf you are planning to buy a new car it is important to understand how car loan interest rates work and how you can get the best rate possible. If you already have a car loan and are unhappy with your current interest rate, get started with Auto Approve today to find out how much car loan refinancing can save you!Get a quote now.

If you’ve looked into your car loan refinancing options, you’ve probably heard about Auto Approve and wondered, is Auto Approve a legit company? The short answer is: Yes! Auto Approve is legit. As of 2025, Auto Approve has: An A+ from the Better Business BureauA 4.7 on TrustPilotA 4.5 on Consumer AffairsPositive reviews from NerdWallet and LendingTreeAuto Approve works with credible lending partners to offer competitive refinance rates with no mark-ups. Auto Approve does not sell, rent, or lease its customer lists to third parties. (For more details, please refer to our FAQ page and privacy policy!)But you probably have more questions, like, is Auto Approve a direct lender? And how does the process actually work? In this guide, you’ll learn all about Auto Approve, how the refinance process works, and how Auto Approve works to get you the best deal possible on your car loan refinance.Everything You Need To Know About Auto ApproveWhat does Auto Approve do?Auto Approve works with a group of top lending partners to find you the best refinance offer to fit your needs. Auto Approve is not a direct lender. When you refinance with Auto Approve, Auto Approve will gather offers for you from our network of lending partners, then an Auto Approve representative will work with you directly to find the right refinance for your unique financial situation. Auto Approve advocates for you as you navigate through the world of refinance, then handles the paperwork for you when you choose the refinance that’s right for you.  What products does Auto Approve offer?Vehicle refinancingAuto lease purchaseGAP insuranceVehicle protection plansRead on to learn more.Vehicle RefinancingRefinancing means paying off your existing vehicle loan with a new one, ideally with more favorable terms. People choose to refinance to:Save money by lowering their interest ratePay less each monthAdd or drop a co-borrowerOtherwise change the terms of their auto loanCar loan refinance is Auto Approve’s primary offering. If you are looking to refinance your loan, Auto Approve can help you to:Determine if the time is right to refinance your loanConnect you with the best lenders for your refinanceHelp you applyFinalize the paperwork (including DMV paperwork)We can help you refinance your car, truck, SUV, and even your motorcycle.Auto Lease PurchaseIf you have a leased car that you want to own, a lease buyout loan is a way to purchase your leased car. You can typically buy your leased car for the price of the residual value of the vehicle, plus any taxes and fees. Unless you have that money in cash, you will need to get an auto lease buyout loan to make the purchase. GAP InsuranceGAP insurance is optional insurance that kicks in when there is a gap between what insurance covers and what you owe on your car.For example, let’s say you still owe $10,000 on your car when you get into an accident. Your car insurance decides that they will only pay out $8,000 in damages. This means that you are still responsible for $2,000 to the lender. GAP insurance would cover this so that you do not have to pay this amount. Vehicle Protection PlansA vehicle protection plan offers additional coverage on your car for maintenance and repairs. Vehicle protection plans can be used with your manufacturer’s limited warranty or they can be used when the limited warranty expires. When you refinance with Auto Approve, you can also bundle a vehicle protection plan into your low monthly payments. Bundling a plan will give you additional protection should something go wrong with your car.Vehicle protection plans from Auto Approve come with added benefits, such as:24/7 roadside assistanceUp to $50 per day rental reimbursementCourtesy towingYour choice of certified-ASE mechanic Is Auto Approve legit?Auto Approve is a legitimate company. Auto Approve was on the Inc. 5000 list of fastest growing private companies in America in 2022, 2023, and 2024.Auto Approve has an A+ rating with the Better Business Bureau, a 96% would-recommend rating on LendingTree, and a 4.7 out of 5 star rating on TrustPilot, where you can read over 12,000 real customer reviews. Auto Approve customers know that we can find them the best deals on car loan refinance and love our customer service. We know that sometimes you need to talk to a real person to get real results, so our live agents are here to work with you and give you the personalized attention you need and deserve.How does a vehicle refinance work with Auto Approve?Here are the steps to refinancing:Determine whether now is a good time for you to refinanceShare basic details with Auto Approve to get a starting estimate and confirm eligibility (soft credit check only)Gather necessary documentsApply through Auto Approve to get offers from our lenders (hard credit check required)Work with your advisor to determine the best refinance for youFinalize the refinance (Auto Approve handles the paperwork!)Step 1. Determine if the time is right to refinance your car loan.The first step to refinancing your car is determining if you should refinance in the first place. It might be a good time to refinance your car loan if any of the following apply to you:Your credit score has improved since you initially financed your car.The market rates have decreased since you initially financed your car.You want to add or remove a cosigner.You need some extra breathing room every month and want to lengthen your repayment plan. Step 2. Contact Auto Approve.If now seems like a good time to refinance your car loan, the next step is to fill out some basics about your vehicle and current loan to get a quote from Auto Approve. From there, our team can help you determine if you will qualify for loan refinancing, and can even get you some preliminary offers in minutes.At this stage, only a soft credit check is required to confirm whether you’ll be eligible to refinance, but a hard credit check will be required to get confirmed offers later in the process. Step 3. Gather your documents.After you chat with an Auto Approve expert, they will help you determine where you should apply. You will need to gather the necessary documents, which will include:Current loan information. You will need the name of your current lender, your account number, and your payoff amount. It’s good to have the contract handy to compare specific terms as well. Personal information. You will need identification, proof of employment, proof of residence, and your contact information.Vehicle information. You will need your car’s VIN, make, model, year, and mileage. Step 4. Apply.Once you have all of your information collected, Auto Approve will help you apply to the lenders that will best suit your needs.  Step 5. Compare and sign.When the offers roll in, you will need to decide which loan is right for you (Auto Approve can help you with this too!). Once you decide which loan is right for you, you can simply sign on the dotted line. Auto Approve will make sure that your old loan is paid off and that your new loan is ready to go. It’s that simple! Auto Approve will even handle the DMV paperwork for you. Auto Approve is legit – and a great partner for your vehicle refinance!Now you know all about Auto Approve and how Auto Approve helps customers find the best refinance for their needs.If you think you’re ready to refinance your vehicle, Auto Approve can help connect you with the lender that’s right for you.GET A QUOTE IN 60 SECONDS