Finance Terms to Know Before Loaning or Leasing a Car
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Car shopping is an exciting experience, but it can also be a confusing one if you’re unfamiliar with different finance terms. Whether you’re interested in loaning or leasing a car, you will probably encounter some financial jargon that you will not know. It’s important to have a good grasp and understanding of this jargon so that you can make the most educated decision when it comes to loaning or leasing a car. Here is a quick breakdown of some important finance terms you may come across at the dealership.
Lease
A lease is basically a long-term rental where you can borrow a car from the dealer for either a specified mileage or period of time that is agreed upon beforehand. When the lease period is up, you can either return the car to the dealer or buy it.
Lessor
The lessor is the finance company that owns the leased vehicle. The lessee, the person leasing the vehicle, makes monthly payments to the lessor.
Closed-End Lease
Most car companies and financial institutions offer a closed-end lease, which gives the lessee two options at the end of the car lease. One option is to buy the car for a set price and become the owner. The other is to walk away from the lease without being liable for any depreciation in the car’s value unless it’s caused by modifications or damage. Because of this second option, this type of lease is also called a walk-away lease.
Open-End Lease
Financial institutions usually only offer this type of lease if you have a fleet or company. In an open-end lease, you must pay the difference between the residual and fair market value of a vehicle once the lease period is over.
MSRP
MSRP stands for the manufacturer’s suggested retail price. This is the base price for vehicles.
Down Payment
When you decide to lease or loan a car, the down payment is the cash that you pay up-front. The amount of the down payment helps reduce the amount you must pay in a lease or a loan. The larger the down payment is, the smaller the monthly payments will be.
Interest Rate
When you borrow money for a loan, you will need to pay an interest rate. This is a percentage charged on the loan that the lending institution is charging you because you’re borrowing money. It is often an annual rate, but it can sometimes be assessed twice a year.
APR
APR stands for annual percentage rate, otherwise known as a finance rate. This amount represents the annual rate you must pay on a loan and may not be the same as the interest rate.
Term
The term is the length that a loan or lease lasts.
Residual Value
The residual value is the estimated value of a vehicle when you return it at the end of a lease. In a closed-end lease, this is the value used to determine your monthly payments and the price you can pay to buy the car once your lease is up.
Trade-In Value
If you are looking to get rid of your old car before loaning a new one, you can trade it in at the dealership. The trade-in value is the amount that a dealer will pay you for your old car. If your car has positive equity, the dealer can apply the trade-in value to your new car, reducing the amount it will cost.
Ready to loan or lease your next Chevy, Buick, or GMC vehicle? Visit Steve Austin’s Auto Group in Bellefontaine, Ohio, and our staff will be sure to make the car shopping process as simple and easy as possible.