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How Car Financing Works


APR: Annual Percentage Rate

Backend: Another dealer profit center that includes financing, insurance, warranties, VIN etching, and those other things they try to add to the deal when you're setting up financing

Backdoor money: Additional rebates the dealers get from manufacturers for selling their cars

Factory invoice: The invoice from the manufacturer to the dealer that is supposed to be their purchase price - It's not their actual cost because of holdbacks, advertising fees, gasoline charges, dealer discounts, rebates, and other dealer incentives.

Front-loaded loans: Loans that require payback of mostly interest in the beginning so that the lender gets paid first

Holdback: Money the dealer gets from the manufacturer if he sells a car within a specified time (usually three months)

M.S.R.P.: The total Manufacturer's Suggested Retail Price. This may not include items the dealer has added such as security systems, VIN etching, etc. The total Base M.S.R.P. is the suggested retail price with no options. The total Base M.S.R.P. plus Options price includes all options. Both the Base M.S.R.P. and the Base M.S.R.P. plus Options may still not include additional items that have been added at the dealership (as mentioned above).

Prepayment Penalty: A fee that some loans charge if you pay off the loan before the end of the term.

Simple Interest Loans: Also known as "flat rate interest," simple interest is calculated only on the initial amount of the loan by multiplying the principal balance by the rate of interest by the term of the loan. This number is then divided by the number of months of the loan for the amount of interest paid each month.

Term: The length of the loan in months

Trade-in allowance: The amount of money taken off the purchase price of the new car for the trade-in of your old car

Upside-down Loan: When you owe more on your car than it is worth

For lots more information on car financing and related topics, check out the links on the next page.