by Lauren Fix, The Car Coach®
Do
you ever feel that the car dealers are speaking Greek or some foreign
language? Do you need a translator? The auto dealers are not trying
to trick you; language is just something you will need to learn, sort
of like talking to a doctor or a chef. I have translated the 15 most
common terms to help you understand the terms so that you can negotiate
the best deal.
Add-on interest: Interest that
is computed at the beginning of the loan, and then added to the
principal, so that all must be repaid, even if the loan is paid off
early.
Base price:
The cost of a car without any options. This price includes standard
equipment and the manufacturer's warranty and is printed on the
Monroney sticker (window sticker).
Blue Book or Book Price: Where
do most dealers get the average going prices of vehicles, the Kelley
Blue Book, an industry guide dealers use to estimate wholesale and
retail vehicle pricing. This usually referred to as "the blue book
price" it can actually refer to a price looked up in one of the many
guides to pricing. You can find out these prices before you go to the
dealer by going to a few web sites that offer ongoing updates. I
prefer www.edmunds.com because their prices are based on your zip
code. A four-wheel drive will have more value in snowy climates than
in warm climates, so the values may change.
Dealer holdback:
An allowance, usually between 2 percent and 3 percent of manufacturer's
suggested retail price that manufacturers provide to dealers. A
holdback allowance may allow the dealer to pay the manufacturer less
than the invoice price. A buyer could obtain a car below invoice price
and the dealer would still make a profit. However, most dealers will
not dig into their holdback, because that’s what coverage their costs.
Dealer incentives:
Programs offered by manufacturers to increase the sales of slow-selling
models or to reduce excess inventories. Dealers may elect to pass on
the savings to the buyer. You can sometimes stack these incentives and
there are also incentives for new drivers, college graduates and
newlyweds so make sure to ask what’s available.
Dealer preparation, or dealer prep or preparation charges:
An additional charge that dealers try to impose on buyers. It
represents pure profit for the dealers, who have already been paid by
the manufacturer for the cost of preparing the car for sale. Dealer
prep is removing all the plastic, adding knobs and details to make the
vehicle ready for delivery.
Destination charge:
The fee charged for transporting the vehicle to the dealer from the
manufacturer or port of entry. This charge is to be passed on to the
buyer without any markup.
Extended warranty or Service contracts:
A contract that covers certain car repairs or problems after the
manufacturers or dealer's warranty expires. Car manufacturers, dealers
and independent companies sell extended warranties. With a new car, the
extended warranty usually must be purchased by the end of the first
year of ownership. If you are keeping a vehicle more than 3 years this
is a consideration, all vehicles are covered for 3 years of 36,000
miles some even cover 10 years or 100,000 miles – so think before you
buy there are a lot of details to read. If you purchase an extended
warranty make sure the dealer is doing the repairs and what the
deductible may be.
Invoice price:
The manufacturer's initial charge to the dealer. The price may not be
the dealer's final cost because dealers receive rebates and other
incentives from the manufacturer. The invoice price always includes
freight, also known as the destination charge.
Monroney sticker or Dealer sticker price:
The sticker on the car window that shows the base price, the
manufacturer's installed options with the manufacturer's suggested
retail price, the manufacturer's destination charge, and the car's fuel
economy (mileage). Federal law requires this label and it is only
removed when the purchaser sells the car. Named after "Mike" Monroney,
a longtime Oklahoma congressman who wrote the Automobile Information
Disclosure Act.
Prepayment penalty: A lender's charge to the borrower for paying off the loan before the end of the term.
Rebate: A
manufacturer's reduction on the price of the car as an incentive to
buyers. Rebates appeal to people with no credit or less-than-perfect
credit who cannot qualify for the lowest-rate loan. A rebate may also
appeal to first-time buyers who don't have a lot of cash for a down
payment or another car to trade in.
Rule of 78s:
A mathematical formula that was devised in the days before modern
calculators. The formula was a quick way for lenders in the 1920s and
1930s to estimate payoff amounts when a customer paid ahead on an
installment loan. Some auto lenders still use the "Rule of 78s" formula
to calculate a rebate of finance charges when a customer pays off a
pre-computed loan early.
For a borrower looking to end an auto loan early, there isn't a worse
way a lender could calculate your payoff amount. The Rule of 78s
formula packs extra interest charges into the early months of a loan.
Using this rule, a lender typically collects three-quarters of a loan's
interest in the first half of a loan term. This can only be applied to
pre-computed loans that are paid ahead of schedule. The formula can’t
be applied to simple interest loans.
Title: A
legal document containing specific information about the vehicle and
stating who owns it. If you borrow money to get a car, the lender will
hold the title until the vehicle is paid off. In some states you will
have the title mailed to you with a lien holder listed at the bottom.
This is the ownership of the vehicle and MUST be stored in a safe
place. If you lose this document it will take a lot of work and effort
on your part so that you can sell of trade-in your vehicle.
Trade-in value:
The amount that the dealership will credit you for the vehicle you
provide as partial or full payment for another vehicle. Amount credited
is frequently about 5 percent below the wholesale value of the
vehicle. Remember if you want a wholesale price on a car, you won’t
get a retail price on your trade-in.
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