As if picking out the make and model of car you want wasn’t complicated enough, auto dealers and their advertisements use the tricky language of “auto speak.” We have translated the 15 most common terms to help you negotiate the best deal.
Add-on interest — Interest that is computed at the beginning of the loan, 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 options. This price includes standard equipment and the manufacturer’s warranty and is printed on the Monroney sticker.
Blue Book — Formally, it refers to the Kelley Blue Book, an industry guide dealers use to estimate wholesale and retail vehicle pricing. In common parlance, “the blue book price” can actually refer to a price looked up in one of the many guides to pricing. The books now come in a variety of hues, are issued by many organizations, and are commonly available online or in the reference sections of public libraries.
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.
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.
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.
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 contract — A contract that covers certain car repairs or problems after the manufacturer’s or dealer’s warranty expires. Extended warranties are sold by car manufacturers, dealers and independent companies. With a new car, the extended warranty usually must be purchased by the end of the first year of ownership.
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). This label is required by federal law and it is only removed when the car is sold by the purchaser. Named after A.S. “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 Rule of 78s, a lender typically collects three-quarters of a loan’s interest in the first half of a loan term. The Rule of 78s can only be applied to pre-computed loans that are paid ahead of schedule. The formula cannot be applied to simple interest loans.
Title — A legal document containing specific information about the vehicle. The title is the official proof of ownership and is used to transfer ownership from one person to another.
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.
For a complete list of auto terms, check out our glossary.