Pop Quiz: What’s the “Money Factor?”
(A) One of the three pillars of capitalism
(B) The reason why your diet for the past week has consisted of ramen noodles and hot sauce
(C) A personal, financial attribute; as in, “He has the wow factor, but not the money factor.”
If you answered any of the above, then you may need to brush up on your car-buying and -leasing terminology. But don’t fret. We’ve put together the ultimate crib notes to help you before you head to the dealership.
Leasing: It’s the hottest option out there today, and it’s a great way to get behind the wheel of a brand-new car. The leasing world, however, has a language all its own. Here are some handy phrases and their translations.
Residual Value: The guaranteed value of the vehicle at lease end that is used to calculate the monthly payment of a lease. When buying or leasing a new vehicle, choose a make/model with a high residual value to help lower the lease payment.
Realized Value: The actual, fair-market value of a leased vehicle at the time of the scheduled termination of a lease. The realized value may be either the wholesale or retail value of the vehicle, as specified in the lease contract.
Money Factor: Also known as a lease factor, the money factor is the interest rate of a lease contract, expressed as a multiplier to calculate monthly payments. To convert a money factor to a percentage, multiply it by 2,400.
Security Deposit: Some leases may require a security deposit up front. This fee, usually in the amount of the monthly payment, is refunded at lease end, less any excess wear-and-tear or mileage charges or lease-end fees.
Amortized Amounts: Taxes, fees, charges for service contracts, payments for insurance, and any prior credit or lease balance that are included in the monthly base payment of a lease or purchase contract.
Acquisition Fee: A fee included in most lease contracts that is either paid up front or is included in the monthly base payment. Also called a bank fee, administrative fee, or assignment fee, it covers the administrative costs of processing lease documentation.
Disposition Fee: A fee due at lease end to compensate the lease company for selling or disposing of the vehicle. This fee can cost hundreds of dollars.
Purchase-Option Fee: An administrative fee added to the lease-end, purchase option price of a leased vehicle.
Excessive Wear-and-Tear Charges: Charges due at lease end to cover damages to the interior and exterior of a vehicle that are beyond what is considered normal.
Excessive Mileage Charges: Charges assessed at lease end if the total vehicle mileage exceeds the limitations specified in the lease contract. Excessive mileage charges can vary anywhere from $.10 per mile to $.40 per mile.
Early Termination Charge: The amount owed if a lease is terminated, whether voluntarily or involuntarily, before its stated termination date. The earlier a lease is terminated, the greater this charge is likely to be.
Closed-End Lease: In some cases, the actual value (realized value) of a vehicle at the scheduled end of a lease is less than the residual value. With a closed-end lease or walk-away lease, the lessee is not responsible for the difference. With an open-end lease, the lessee is charged the difference. Open-end lease agreements are not common in consumer contracts.
Balloon Contract: With this type of contract, monthly payments are relatively low and comparable to a traditional lease, but the driver’s name is put on the title of the vehicle, becoming an asset for the driver. At the end of the contract, the driver has the option of buying the vehicle with one lump-sum (balloon) payment.
With all of the different models, options, and accessories available today, buying a new or certified used car can be tons of fun. Knowing the contract lingo will take the guesswork out of closing the deal.
FICO Score: A credit score used by lenders (including auto financing institutions) to determine the likelihood that a credit user, or borrower, will pay debts in a timely manner. A FICO score reflects a person’s credit history, including late payments, the length of established credit, the amount of used credit versus the amount of available credit, and bankruptcies. ï?
Lien: A legal hold on the property of a person or entity as security for a debt or charge. For example, when a car is financed, the lender places a lien on the vehicle until the borrower pays off the entire loan in full.
APR: Annual Percentage Rate is the total cost the borrower will pay on a loan, expressed as an annual percentage of the amount financed. An APR includes the interest rate and other charges the borrower is required to pay. With Fixed-Rate Financing, the APR does not change over the course of the contract. Variable-Rate Financing, often used with special “introductory offers,” has an APR that changes (usually increases) after a certain period of time.
Down Payment: A cash payment made up front in an auto sales contract that reduces the total amount financed.
Terms: A period of time and interest rate agreed upon between the lender and the borrower to repay a loan or credit obligation. Monthly Payment Amount: Principal Amount + Finance Charge
Principal Amount: The amount financed or the outstanding balance of a loan, excluding interest and other fees and charges.
Taxes and Licenses, Title, and Registration Fees: Standard expenses associated with purchasing or leasing a vehicle.
Documentation Fee: Most dealerships charge a documentation fee to cover the cost of preparing and filing documents.
Extended Service Contracts: An optional, extended warranty or service contract that can be purchased; this coverage usually extends past the expiration of the manufacturer’s warranty.
GAP: Guaranteed Asset Protection is an optional coverage that can be purchased. In the event that a vehicle is stolen or deemed a total loss after an accident, GAP pays the difference between what is owed on the vehicle loan and what the insurance covers. ï?
Finance Charge: The amount of interest charged for the loan or the amount charged for the use of credit services.