Finance Terms Explained | Gainesville FL
Finance Terms Explained in Gainesville, FL
The process of financing a car can be tricky. It doesn’t help that some of the terms related to financing can be confusing. To help make sure that you don’t get lost in the confusing web of finance, our team here at Parks Lincoln of Gainesville put together a helpful list of definitions to help you navigate the process of buying a new Lincoln model. Keep reading to learn more!
Financing
Financing refers to the act of taking out a loan to fund a purchase. Whether this is through a lender, a bank, or our very own finance department, you’ll borrow a lump sum of money with the understanding that you will pay it back over a period of time, plus interest. Financing a large-scale purchase helps build your credit, and gives you the opportunity to drive the vehicle while you pay it off.
Leasing
Leasing (think of it as long-term renting), gives you the option of flexibility without burdening you with a massive financial commitment. All you have to do is make a down payment, followed by regular monthly payments up until the end of your lease. Once your lease expires, you can then return the vehicle to the dealership or buy it outright – whichever you prefer. The main perk of leasing is that you get to enjoy the features of a new Lincoln model while it’s still under warranty. Then, you can easily exchange it for an even newer model.
Term
The term of your loan is how long you have agreed to repay the amount borrowed. Ranging anywhere from 36 months to about 60, your loan term is what decides how much you pay each month. Make sure that your loan term matches your budget.
Principal
Principal is the initial amount that you’ll have to pay off. For example, if you purchase a vehicle that costs $50,000 and make a $5,000 down payment, you’ll have $45,000 to repay as the principal. Your loan’s interest rate is charged to the principal amount.
Money Down
If you put more money down up front, paying off your loan will be much easier. This is known as your down payment, or the initial amount that you place as the loan’s collateral. To return to our previous example, if you purchase a car listed at $50,000 and place $5,000 down, your down payment of $5,000 won’t be charged interest, while your principal of $45,000 will. A larger down payment of $10,000 would knock your principal down to $40,000, giving the lender more confidence in your ability to repay, and likely shrinking your interest rate as well.
Interest Rate
When borrowing money, your lender will apply an interest rate to the principal amount as a way to protect their investment in you as the borrower. As with any investment, the lender doesn’t have a guarantee that they’ll get their money back. This is why they charge interest. Your interest will show up as a monthly fee in the payment schedule. Your loan’s annual percentage rate (APR) will be calculated according to your credit score and history, the age of your vehicle, the loan term and other relevant factors.
APR
The APR, or annual percentage rate, is the more comprehensive cost of borrowing money. It includes interest plus any other fees you pay to your lender. This amount is determined by a few different factors, including your credit score, the term length and how old the vehicle is.
Cash Back
Cash back is a convenient incentive that can reduce the ticket price of a certain vehicle by as much as several thousand dollars. Buyers also have the option of asking the dealer to write them a check equivalent to the amount of cash back advertised. For example, a dealership advertising a $50,000 model with $1,000 cash back gives you two options – first, you could use that $1,000 as a portion of your down payment, knocking the ticket price down to $49,000. Alternatively, you could pay the full price and drive back with a $1,000 check in your pocket.
Rebate
Rebates work similarly to cash back, in that they offer a purchasing incentive in the form of a cash amount or check. However, they differ in that, with rebates, the purchase must be completed first, and they usually take a bit longer to arrive. They also most likely won’t apply to the car’s original selling price.
Trade-In
A trade-in takes place when you trade your current vehicle in to the dealership for cash or credit towards the purchase of another vehicle. Depending on your car’s value, it can save you up to thousands of dollars on your purchase of a new or used model.
Depreciation
Depreciation refers to the steady decline in your car’s value. It doesn’t depend on factors like your car’s condition, instead reflecting its “newness,” as this metric automatically changes with each year. A new vehicle often loses around 10-20% of its value as soon as it’s driven off the lot. This means that in five years, that shiny new Lincoln priced at $50,000 will decrease in value by about 50%, equating to a loss of $25,000.
Equity
Your car’s equity is calculated by subtracting the total due on your loan from what the vehicle is currently worth. For example, if your car was $50,000 in 2020, but the principal amount is still $30,000, then you would have $20,000 in equity. Always try to stay ahead of depreciation by keeping this ratio balanced.
Upside Down
A vehicle with negative equity, or an “upside down” car, means that you currently owe more on your loan than the actual value of your car. This can cause difficulties, since you are paying in excess of your car’s value. Here at Parks Lincoln of Gainesville, our helpful finance experts can help keep you informed and provide guidance so that you don’t end up in this scenario.
If you're ready to start the financial process of owning or leasing your favorite model, contact us today or stop by Parks Lincoln of Gainesville at 3333 North Main Street, Gainesville, FL 32609 . We look forward to serving our customers near Alachua, Starke, Ocala and Lake City.