New Car Loans: Understanding Terminology

If you have ever dealt with new car loans, you know that the paperwork involved can require a degree in accounting to understand. Sometimes, it does not even seem the salesperson understands the technical aspects of the financing. Other times, the financial office representative at the dealership understands completely, but does not seem to be equipped to explain the information in a straightforward manner for the non-accounting guru. Make sure you understand what is going on with your new vehicle loan by taking the time to educate yourself on the terminology involved.

Co-Buyer Verses Co-Signer

Many new car loans require a co-signer, especially if the buyer has no credit history or has poor credit history. A co-signer is required in cases where lenders feel the buyer is too big a risk. They want a backup plan in the form of someone who agrees to foot the bill if the buyer does not make good on the car loan. The buyer must still meet minimum income requirements for the car loan, and the co-signer’s income is not involved.

In contrast, a co-buyer is actually a buyer too. Most often, co-buyers are spouses. They could also be closely related individuals who reside at the same residence or even business partners. Co-buyers can combine their income in order to qualify for the car loan, and they are both responsible for monthly payments.

Debt Ratio

Many people do not realize that debt ratio is an important factor in whether or not new car loans will be approved. If you already owe more than your income indicates you can pay, a bank is less willing to take a risk on you. You can calculate your debt ratio by adding up all your monthly bills. Divide this amount by your monthly pay. For example, if you need $1,500 per month to pay your debt and you make $3,000, you have a debt ratio of 1/2, or 50 percent.

GAP Insurance

This insurance covers any amount you still owe on new car loans that is not paid off by the insurance company in the event you total the car. For example, if the car is worth $8,000 and you still owe $10,000, the insurance will only pay what it is worth. Assuming you have a $500 deductible, GAP insurance means you pay $500 instead of $2,500. Some GAP policies even cover the deductible. It is important to note that GAP insurance comes from a third party vendor, not the dealership or the bank.

Loan to Value

The LTV is the ratio of how much you are borrowing to the actual value of the vehicle. Obviously, you would not want to pay more for a car than it is worth. With new car loans, however, there are fees, taxes and other items that may cause the total financed to be above the value. You could also affect the LTV by trading in a car with negative equity. The lower an LTV, the better chances are that you can find a lender.

By understanding some terminology about new car loans, you are in a better position to read and understand your loan paperwork. This means you can spot issues and ask the right questions to promote savings.