Auto Loan Glossary

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These are optional services and financial products that can be added to your auto loan. These could include GAP coverage, VIN etching on car windows or an extended warranty. It’s important to review your loan contract to make sure that you are only paying for the add-ons that you want.

Adverse action:

In car lending, an adverse action is when a creditor turns down your loan application — or comes back with a counteroffer of a lesser amount or a higher interest rate — because your credit score doesn’t meet the lender’s standards. If a lender takes adverse action on your loan, federal and, in some cases, state law requires your lender to provide you with an adverse action notice.

Adverse Action Notice:

If a lender takes adverse action against your loan application based on your credit score or history, that lender must provide you with an adverse action notice that describes the information on the report that affected the decision. In addition, you must be provided with a copy of the credit report used to make the decision.

Alternative data:

Credit scores are traditionally based on an applicant’s history of managing and repaying debt. If a borrower has a limited or non-existent credit history, some lenders take alternative data into consideration, such as the applicant’s educational background or history of paying rent and utilities on time.


APR stands for “annual percentage rate,” which is the annual cost of borrowing money each year, including all loan fees. Your APR is determined by multiple factors, including your credit score.


In auto lending, a co-borrower (or co-applicant) applies for a car loan with someone else to purchase a car that both parties plan to use. Lenders use financial information from both parties to make a determination about whether to issue the loan and, if approved, the loan’s terms.


Collateral is property of value that a creditor can take if a borrower doesn’t repay a loan. In auto lending, the vehicle itself is collateral and a lender has a right to repossess a car if you don’t make your payments as agreed.


A cosigner is someone who guarantees the repayment of another person’s debt. Unlike co-borrowers, cosigners don’t plan to use or benefit from a vehicle purchase. However, the cosigner can face collection action if the primary borrower defaults on the loan.


There are some cases in which a lender may not be able to approve you for the loan amount or terms that you desire. However, the lender may still be willing to work with you. In such cases, you may be presented with a counteroffer for a lower financing amount or a higher interest rate.

Credit bureaus:

Credit bureaus are a type of consumer reporting agency that compiles credit reports from information provided to them by creditors. The three major credit bureaus in the United States are Experian, Equifax and TransUnion.

Credit report:

A credit report documents your history of applying for and managing debt. It includes information about your accounts with lenders, including dates opened and closed, balances and limits and whether you make your payments on time.

Credit score:

A credit score is a three-digit number that indicates to lenders the probability of you paying a loan as agreed. There are several businesses that compute and issue credit scores using information from your credit report and, in some cases, alternative data such as utility bill payments.

Current balance:

Your current balance is the money you still owe — right now — on your car loan. Current balances are different from payoff amounts, as your payoff amount may also require you to pay interest charges through the date of your payment, as well as additional fees.

Debt-to-income ratio:

During the underwriting process, your lender will verify your income while also checking your debt levels. Your ratio of debt-to-income helps the underwriter determine your likelihood of being able to make your loan payments.


In accounting, depreciation is the decrease in an asset’s value. Vehicles, for example, tend to depreciate in value over time. When applying to refinance a car loan, your lender will take into account the depreciation of your car’s value.

Fair Credit Reporting Act (FCRA):

This is a federal law that requires credit bureaus to report accurate information on your credit reports. The FCRA also gives you the right to review your reports and challenge inaccurate information. Credit bureaus must investigate legitimate challenges and remove any information on your report that cannot be verified. In addition, when a lender takes adverse action against an applicant and that adverse action was based on consumer or credit reporting, the lender must inform the applicant that the denial or counteroffer is due to information on the credit report.

FICO® score:

FICO® is a credit score brand. Keep in mind that your lender may use FICO® or another credit score when making decisions about your loan application.

Finance rate:

See “interest rate.”


Interest rate

The interest rate on your loan is the percentage of the loan that you pay your lender as the cost of borrowing. Interest rates fluctuate depending on the economy and your loan terms.

Hard inquiry:

Applications for a new loan or a credit card are reported to credit bureaus and this information is noted on your credit reports. Also known as a “hard pull,” a hard inquiry can, for a period of time, lower your credit score.

Interest rate:

The interest rate on your loan is the percentage of the loan that you pay your lender as the cost of borrowing. Interest rates fluctuate depending on the economy and your loan terms.

Kelley Blue Book value:

The Kelley Blue Book is the industry standard for valuing vehicles on the basis of make, year, model and condition. Lenders use the “Blue Book” to determine the value of your vehicle during the refinancing process.

Lemon law:

Some states have “lemon laws,” consumer protection statutes that give you the right to seek compensation if your car malfunctions and the problem cannot be fixed. In most cases, lemon laws only apply to the purchase of new cars.


A lien is a legal declaration that a creditor has a claim on a debtor’s property. In the case of auto loans, your lender has a lien on your vehicle until you have paid off the loan. This lien is what gives your lender the right to repossess your car if you default on payments.

Loan modification:

A loan modification makes changes to the terms of your loan. Unlike a refinance, a loan modification does not require applying for a new loan. Both lender and borrower must agree to the modification.

Loan term:

Loan term is the fixed period of time over which you’ll be paying your loan. For example, if you’ll be making payments over three years, you have a three-year loan term.

Mandatory coverage:

Lenders typically require borrowers to have full insurance coverage on their vehicles, which includes comprehensive, collision and liability coverage.

Motor Vehicle Report (MVR):

Also known as a “motor vehicle record,” an MVR is a record of your driving history. These are issued by state driver’s license agencies. Your MVR may be required as part of your application to refinance your auto loan.

Non-prime borrowers:

The term “non-prime” is used to describe anyone who isn’t considered to be a prime borrower. The fact that someone is considered a non-prime borrower doesn’t mean that they have a bad credit history. It may mean that the individual simply doesn’t have a long credit history. Non-prime borrowers can secure new and refinanced auto loans but may have to pay additional fees or a higher interest rate.

Original loan amount:

The original loan amount is the total amount financed as per the promissory note. It does not include interest.

Payoff amount:

Your payoff amount is the amount of money you would need to pay to completely satisfy your debt. This could include your current balance, interest through the day of the actual payment and any fees that you have not already paid.


Pre-qualification for an auto loan typically means that a lender has reviewed your financial information, including your credit report, income and job information, to give you an idea of what kind of loan that you can qualify for. Final approval of the loan may require additional processing.


Your car insurance premium is what you pay to your insurer for coverage.

Prepayment penalty:

A prepayment penalty is a fee that you will have to pay your lender if you pay your loan in full before the end of its term. Lenders charge these penalties to make up for the interest they would have collected had you taken longer to pay.

Prime borrowers:

Prime borrowers have strong credit scores (660 and above) and are considered to be excellent credit risks. A prime borrower has a stronger chance of loan approval and is often eligible for favorable loan terms, such as lower interest rates.


Your auto loan principal is your original loan amount.


When you refinance a loan, you replace your current loan agreement with a new one. Money from your new loan pays off the old note, and you enter into repayment on your new, refinanced auto loan. People typically refinance their car loans because they can get a lower interest rate or monthly payment by doing so.


If a borrower defaults on loan payments, the lender has a right to take (repossess) the vehicle. Each state has different laws on vehicle repossession, so be sure to read your loan contract to understand when your loan is considered to be in default.

Soft inquiry:

Also known as a “soft pull,” a soft inquiry describes a review of your credit history by yourself (such as by checking your credit reports) or lenders who wish to prescreen you before making you a credit offer. These inquiries are not included in your credit reports and do not affect your credit score.

Truth-in-Lending Act:

The Truth-in-Lending Act, also known as Regulation Z, is a federal regulation that requires lenders to provide clear documentation of loan terms before borrowers obligate themselves to pay the loan. Before you sign for a loan, your lender is required to provide you with the loan’s annual percentage rate, finance charge, the amount of the loan itself and the number of payments that you will make during the entire term of the loan.


Underwriting is the process of determining whether a loan applicant should receive a loan and, if approved, the terms of that loan. The underwriting process involves things like checking a borrower’s credit history and verifying assets, employment and income.

Upside down:

Being upside down on a car loan means that your car is worth less than the payoff amount on your loan. It should be noted that this isn’t necessarily a problem, but it can be an issue if your car is ruled a total loss in an accident or due to vandalism. It can also be an issue if you want to trade in your car for another vehicle.

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