The terms used with car finance and bad credit car loans can be confusing, so here are some of these and an explanation of what they mean. After reading this, terms such as balloons, auto equity and debt to income ratio will never confuse you again. Learn their language so you can speak to them on equal terms.
The Annual Percentage Rate, or the true interest rate charged for a loan over a year – whether regular car finance or a bad credit loan.
Auto Equity Loan
When you purchase a car you normally get the papers or title to the vehicle. However, with many bad credit car loans, the lender gets the title in return for the cash to enable you to pay for it. You get the title once you have repaid the loan. This way, if you default on your payments, the lender keeps the car and can sell it to use the equity on the car to repay the loan. If there is any cash left after the sale, then you might be given this.
If you believe that you will have more money available close to the end of the loan period, you can arrange a balloon payment. Your monthly repayments will be less, and you make the final lump sum payment when it is due. Balloon payments are useful when you have an insurance maturing at the end of the period, or expect to have been able to save up a lump sum to make the final payment.
Debt to Income Ratio (DTI)
This is the ratio of a borrower’s total debt as a percentage of their total income. Some lenders set a maximum DTI above which you cannot borrow any more money – 36% is an average figure. Include all other debts you have, not just your car loan.
The depreciation is the amount by which your vehicle loses value with age, wear and tear. The same term applies to the value of money, and while the value of your car depreciates, the value of your dollar can also depreciate. Fundamentally, the resale value of your car will depreciate every calendar year, most depreciation taking place between being completely new and having been used.
Equal Credit Opportunity Act (ECOA)
This is a federal act by which all creditors must make credit equally available to all buyers irrespective of race, color, religion, national origin, gender or age. However, lenders are not obliged to offer credit if they believe it may not be repaid, so not everybody is entitled to bad credit car loans – or even to car finance of any kind if the lender has valid reasons not to offer it.
Equity is the difference between the resale value of a property (e.g. your car) and what you still owe on it. So if your car has a resale value of $5,000 and you still owe $3,000 to the lender, your equity is $2,000. This is known as positive equity. Negative equity is as this example but you still owe $5,001!
Gross Monthly Income
Your total monthly income before any deductions. Deductions include tax, child support, insurance, etc. Net monthly income is your income left after such deductions.
An alternative to buying a vehicle. If you lease a car, you fundamentally rent it, while the owner retains title to it. A lease is generally taken over a much longer period than a rental – many leases run for years.
Also known as LTV, this ratio is the percentage of difference between a loan amount and a vehicles value. If your car finance is for $5,000 and the value of the car is $10,000, then the LTV is 50%. The loan is 50% of the value of the vehicle.
This is a price sticker required on all new vehicles by federal law. The sticker lists all the options connected with the car together with the manufacturer’s suggested retail price (MRSP.) The MRSP can change if options are different between models or offers.
Payment to Income Ratio
The PTI is a figure stated by a lender that defines the maximum car loan the lender is prepared to offer based on the applicant’s income. This helps to avoid borrowers overextending themselves and being unable to make the monthly repayments. Current averages range from 10% to 15%.
The Pink Slip is the title for the vehicle, and should be provided to each buyer of that vehicle down the line – just like the title deed for real estate property.
This is the period of the loan from beginning to end, from the time the loan has been granted until it is due to be paid off in full.
Like the Auto Equity Loan, the car is the security for the loan, and the lender keeps the title for the vehicle until the loan has been repaid. This is a common arrangement for bad credit car loans.
This is a federal law that requires every lender to state the correct annual percentage rate (APR) to borrowers when purchasing a vehicle, whether this is a regular or bad credit car loan.
There are others, although these are the more important of the common terms you will come across when seeking car finance – whether regular car finance or bad credit car loans.