Terms to know when buying a car

Next to a home, a car might be the most expensive item many consumers ever purchase. In fact, according to Cox Automotive, the average transaction price of a new vehicle in the United States in early 2023 was just over $48,000. A lot of money changes hands at car dealerships every day, so buyers can undoubtedly benefit from learning or relearning the lingo that surrounds such transactions.

Annual percentage rate (APR): The Consumer Financial Protection Bureau notes that APR is the cost consumers pay each year to borrow money. This includes fees and buyers should know that APR is different from the interest rate.

Balloon payment: The balloon payment is a large sum that is due at the end of some auto loans. Many drivers will pay a predetermined amount each month during the terms of the loan. Once that loan reaches maturity, they then own the car outright. With a balloon loan, buyers still make monthly payments, but when the loan reaches maturity they must make a balloon payment in order to take full ownership of the vehicle.

Capitalized cost reduction: The online financial resource Investopedia notes that a capitalized cost reduction is any upfront payment that reduces the cost of financing. This can include a cash down payment and a trade-in vehicle.

Closed-end lease: Car and Driver notes that a closed-end lease is one that gives the driver leasing the vehicle the option to buy it at a set price at the end of the term or walk away without any financial liability (damage or modifications to the vehicle upon returning it may result in charges).

Dealer preparation fees: These fees might cover the cost of washing the vehicle and additional services before buyers take it off the lot. These fees average between $100 and $500, and buyers should know that they are negotiable.

Extended warranty: Car and Driver warns that most extended warranties offered by dealerships cover very little, so buyers should read the terms carefully before purchasing an extended warranty. Extended warranties offered by manufacturers tend to be more useful to buyers.

MSRP: This familiar acronym stands for “Manufacturer’s Suggested Retail Price.” The MSRP is the total of the base price plus all of the options listed on the window sticker of the vehicle.

Prepayment penalties: Prepayment penalties penalize drivers for paying off a loan before it reaches maturity. Though the vast majority of drivers who finance the purchase of a vehicle will not have prepayment penalties in their agreements, buyers with lower credit scores might. Anyone with such a penalty in the terms of their agreement should try to negotiate it out of the deal.

Term: The term refers to the length of the purchase or lease agreement. Many leases feature terms between 12 and 36 months, while purchase agreements can feature terms as long as 72 months (six years).

Knowing the lingo before buying a new car can increase the chances drivers get a good deal on their next vehicle.