Key Terms to Understand When You Buy a Car

The average American purchases 9.4 cars in their lifetime. That’s down significantly from the 13 before the Great Recession, but it’s still a lot.

Americans are keeping cars they purchase longer today than they have in recent times. Even still, they find themselves searching for a vehicle to purchase roughly once a decade.

Purchasing a car can be an exciting experience, but it can be a daunting one, too. Not only is a vehicle expensive, it’s a necessity in today’s life. So, not only do you need to find one that’s reliable and enjoyable, you have to find one that will keep you safe as well.

If you’re in the market to purchase a car, you should be prepared before venturing out to the dealership. Here are some of the key terms you should understand when you buy a car.

Car Buying Terms to Understand

1. Annual Percentage Rate (APR)

This is sometimes referred to as a finance rate. It’s a fancy way to say the interest you will pay on your car loan. It will be displayed as a percentage, and it’s calculated over a full 12 months.

2. Blue Book value

This term refers to Kelly Blue Book (KBB), which is a company that has published a car-pricing guide for almost 100 years. Dealerships use the information that’s contained in KBB for trade-in values of a car that you already have.

3. Dealer Incentive

Dealerships get incentives from car manufacturers that they can then pass onto the customer to entice them to make a purchase. Incentives like this are often done during holidays or in times when car sales are low. Dealerships may also use these incentives to try to move models that aren’t selling as fast as they’d like.

4. Destination Fee

This fee is charged by the dealer to transport your vehicle from the manufacturer to their dealership. Even if the car you’re buying is already on their lot, you’ll likely still be charged this fee.

5. Down Payment

This is a lump-sum payment that you’ll make at the time of signing. Most dealers will require at least some down payment amount, most typically to cover taxes, tags and registration. You can make larger down payments to reduce your monthly payment. Some dealers may offer a no-down-payment incentive program, too.

6. Extended Warranty

All new cars come with a basic warranty, known as the factory warranty. They will cover any repairs or service that is needed within a certain number of years and/or mileage, depending on the issue. Dealers offer extended warranties that you can purchase at the time of signing that will make these last for longer. They are often very expensive to purchase, and very profitable to the dealership.

7. Gap Insurance

Dealerships will offer to sell you gap insurance directly through them. This insurance would cover the “gap” between what your vehicle is worth and what you owe on the vehicle if your vehicle were to be totaled in an accident. If your vehicle isn’t worth what you owe, you’d normally have to cover that difference out of your own pocket. The dealership’s gap insurance will typically be much more expensive than what you could get from your auto insurance company.

8. Invoice Price

This is the price that the dealership pays the manufacturer for the car. They will then charge above this price so that they can make a profit. Dealerships will sometimes tell you they’ll sell you a car at invoice price, to make you think you’re getting a deal. However, be careful, as some dealerships can actually acquire vehicles below invoice price.

9. Manufacturer’s Suggested Retail Price

This is more commonly called MSRP. It’s the price at which the manufacturer recommends that the car be sold by the dealer. This is the price you’ll often see in advertisements. The dealer has the leeway to charge more or less than this, though. MSRP is also usually significantly higher than the dealer pays for the vehicle.

10. Residual Value

If you’re leasing rather than purchasing a vehicle, this term will come into play. It represents the value of the vehicle that remains after a certain period of time — in this case the term of your lease. Dealerships use this residual value to determine how much to charge you for a lease.

11. Term

This is the length of the contract on your loan. It is expressed in number of months. For new cars, the most common terms are 60 months (five years) or 72 months (six years). Not many finance companies will allow you to stretch a loan on a new car longer than that, though you could go for a shorter term.

12. Title

This is a piece of paper that proves who owns the vehicle. The Department of Motor Vehicles in your state will issue it. If you are still paying off the loan on your vehicle, the finance company, the lender will hold the title (also known as the pink slip) until you pay the loan off. The lessor will hold the title if you are leasing a vehicle.

13. Trim Level

This is a generic term to describe the equipment and features that will come in your vehicle. Each vehicle has a variety of trim levels. As you go higher in trim level, you gain more features, but it’s also more expensive.

Protect Your Purchase with Good Insurance

Now that you’re familiar with some of the key terms of buying a car, you’ll be prepared to make one of the most important purchases in your life. Now you can do your research and enter the dealership armed with information and knowledge to help you get the best deal.

Your purchase of a new car isn’t complete when you sign paperwork at the dealership, though. You need to protect your investment, and the people who will be riding in it, with car insurance.

Much like dealerships, there are a lot of car insurance companies out there, some of which are just trying to make money off you. Here at Signature Insurance, we’re different. We treat all of our customers as family. We want to make sure you have car insurance that protects you and your family, and is the right fit for your needs and budget.

Contact us today for a free quote.