Getting Your First Auto Loan? Know The Following Terms

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Are you ready to buy your first car that requires financing? If so, there are going to be a lot of terms thrown at you that you are likely unfamiliar with. Here are a few key terms that you should know about.


Your monthly loan payment will be made up of both interest and principal in a single payment. However, those two amounts are not always equal. The start of the loan will have payments that are mostly interest, while the latter payments are mostly principal. It is important to know how much you are paying towards the principal by looking at the amortization schedule. This will help everything make more sense when you see that the principal owed is not going down as fast as you thought at first. 


If you do not have good credit and cannot get an auto loan on your own, you'll need to have a co-signer to help get the loan for you. A co-signer takes on the responsibility of the loan, which means they will feel the negative credit implications if you do not make regular payments. If you need to find a co-signer, make sure it is something that trusts you to make these payments and not hurt their credit score. 

Direct and Indirect Financing

You may hear the terms direct and indirect financing, but not sure what those mean exactly. If you are getting your loan directly through the auto dealer, it is known as indirect financing. The loan that the dealership initiates will be given to a lending company, so your transaction with the lender is indirect. If you secure financing directly with a lender, that is known as direct financing. While the end result is the same, they have two similar names that can be confusing.


The underwriting process is the counterintuitive name for essentially verifying all the information you've provided to get an auto loan. If you are told that your loan is in underwriting or being reviewed by underwriters, it means that they are in the process of making a decision about if you will be approved for a loan or not.

Usury Rates

There is a limit to how much interest can be charged on auto loans, which is decided on at the state level. This is known as the usury rate. Know that no matter how bad your credit is, you cannot be approved for an interest rate any higher than what the usury laws allow.