The used car buying experience can occasionally feel like it’s operating in its own language. Gap insurance, loan-to-value, negative equity... processing all the terminology thrown at you can be disorienting.
Here at Northside Auto Sales, we aim to make car buying as simple as possible. For that reason, we’ve put together this convenient compendium to break down some of the auto jargon you’ll encounter on your car buying adventure.
A down payment is a lump sum of money you give the dealer upfront before buying the car. At virtually all buy here pay here (BHPH) dealerships, a down payment is required before you're approved for a loan. If you’re able to put down an amount larger than the required mimimum, you'll pay lower monthly payments moving forward.
While the numbers vary, a down payment at a BHPH is typically around 20% of the car’s selling price. Because BHPH dealers rarely run credit checks, this higher amount is necessary to help alleviate the sellers’ risk. Fortunately, a higher down payment means you'll pay lower interest rates for the duration of your loan.
Gap insurance – also known as loan gap coverage – is an optional car insurance coverage. In the event that your car is damaged or stolen and you owe more than the car’s depreciated value, gap insurance is there to help cover the difference. It's called gap insurance because it helps bridge the financial gap between the depreciated value of your car and what you still owe on it.
The average used vehicle depreciates quickly; it will generally lose 20% of its value upon leaving the lot and another 10% in the first month of ownership. It's therefore common to owe more on a loan than your vehicle is worth, making gap insurance a wise investment.
Interest rates – or simply loan rates – are what you’re charged every month as part of your loan agreement. A percentage of the total loan, interest rates represent what you pay monthly in addition to the base amount. Many buyers choose to finance with longer-term loans in order to reduce interest rates, with the average loan landing somewhere between 70-80 months.
A loan-to-value ratio (or LTV) is the total dollar value of your loan divided by the actual cash value of your vehicle. For example: if you take out a $20,000 loan to buy a $24,000 car, your LTV would be 83%.
Your LTV will change over time as you pay off your loan. That's largely thanks to the vehicle depreciating as it ages and accumulates miles. LTV also naturally declines as you continue to pay off the loan, lowering the loan portion of the ratio.
Perhaps the most straight-forward term here, monthly payments are simply the amount you’re paying towards your loan every month. What’s important here are the guidelines you should follow to make sure you’re not getting in over your head. The average monthly payment for a used car is approximately $533. In general, no more than 10-15% of your monthly take-home income should be spent on your monthly payments.
Negative equity is when you owe more on your car than it’s worth. For example, if your loan amount was $30,000 and you still owe $15,000 – but your car is only valued at $10,000 - $5,000 is your negative equity amount. Many factors can cause negative equity, including low down payments or putting excessive mileage on your vehicle.
To learn how you can avoid accruing negative equity, see “Gap Insurance.”
Transparency is of the utmost importance to us at Northside. Our team of automotive experts will work through every step of the financing process with you, making sure every term and phrase is clearly defined. After all, used car buying should be an exciting adventure– not a convoluted chore. Pay us a visit at Northside today, and drive into tomorrow with a clearer path forward.