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The Auto Financing Process: 10 Terms to Know

Walking into a dealership to lease or finance a new vehicle can sometimes feel a little overwhelming. Whether you’re a first-time shopper or ready to trade in your old vehicle, boost your confidence by brushing up on these 10 terms that you might hear throughout the auto financing process.

  1. Acquisition fee
    An administrative fee charged at the start of your lease.
  2. Annual percentage rate (APR)
    Annual percentage rate is the total cost of credit – including the interest rate and other charges – expressed as a yearly rate.
  3. Disposition fee
    Outlined in the lease agreement, the disposition fee is a flat-rate fee charged to lessees after returning their vehicle. It covers the cost of preparing the vehicle for resale. However, if you buy or lease a new GM vehicle, or choose to buy your leased vehicle, it may be waived.
  4. Extended warranty
    An optional service contract that goes beyond the standard manufacturer warranty to cover certain repairs and services. Sometimes called a “vehicle service contract,” this contract can be purchased at any time.
  5. Guaranteed Asset Protection (GAP)
    GAP can provide added financial protection if your vehicle is declared a total loss. In that event, GAP can help by waiving some or all of the difference between the amount you owe on your retail installment contract and the amount your insurance pays, including your deductible.
  6. Lienholder
    In auto finance, a lienholder generally refers to the source that provides financing to help you purchase a vehicle. If you don’t make payments, the lienholder may take possession of your vehicle and sell it to help pay your debt.
  7. Manufacturer’s Suggested Retail Price (MSRP)
    The MSRP is the price that a manufacturer recommends a vehicle be sold for. Think of it as a starting point. Actual sale prices can be lower or higher, as the MSRP is only a suggestion.
  8. Residual value
    The estimated end-of-term value of your vehicle that’s established at the beginning of the lease and used to calculate the monthly lease payment.
  9. Retail installment contract
    A retail installment contract, commonly called a purchase agreement, is a contract for the sale of a vehicle according to the payment terms and other requirements set in the agreement.
  10. Simple interest
    GM Financial uses the simple interest method to calculate interest charges on your loan. On a simple interest contract, interest accrues daily on the unpaid principal. Your monthly payment is applied first to the amount of interest accrued and unpaid, then to the principal.

Curious about other popular auto finance terms? You're not alone. Our Financial Glossary was created to cover common terms you may hear at the dealership or during any other part of your auto financing journey. And when you finally find the right vehicle for you, make sure you understand the terms of your retail or lease agreement before signing on the dotted line.

 
Brooke Howell
By Brooke Howell, GM Financial

Brooke Howell is a storyteller who loves digging up ways to improve money management and help others make smart financial decisions. She has three American Staffordshire terriers, one curmudgeonly Chihuahua and doesn’t do anything by halves (except marathons).

 

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