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Are you looking to buy a car? Are you getting confused by all of the shorthand vocabulary being thrown around, and all the fine print? You aren’t alone.
I often answer questions about many of these tricky details so I thought maybe it was a good time to spell things out.
Let’s start with prices. There are three main terms to know when understanding what a car cost: MSRP, retail value, and invoice. MSRP stands for Manufacturer’s Suggested Retail Price. This is associated with new cars and is basically the same as the list price. It’s also generally the same as retail value, for new cars. For used cars, however, it’s a tad trickier. Retail value on a used car can either be the average value determined by automotive value guides, or the selling price from that particular dealer or shop. This can be quite confusing, so make sure to do your homework. The invoice on the other hand, is the cost of the car to the dealer, straight from the manufacturer.
If you are buying a new car, you also might hear about rebates which are discounts off the MSRP to the customer from the manufacturer.
On the other hand, if you’re looking to lease a car, cap cost, and cap cost reduction, are two notable terms to know. Cap cost is short-hand for capitalized cost, which is the amount of the car’s value that you are financing. This number is used to calculate the lease. Cap cost reduction is used to describe any method of reducing the cost of your lease. For example, are you putting money down or trading in a car with equity to reduce the monthly payment on the lease? If so, that is called a cap cost reduction. You may also hear of residual value. Residual value is the predetermined value that the vehicle is expected to be worth at the end of your lease.
There are two more terms I think you should keep in mind. Upside down is a common phrase in the car buying field. If you owe more on a vehicle than it’s actually worth, that is referred to as being “upside down.” Being upside down on a loan can be risky, as it poses a dilemma if your car happens to be totaled before you pay off the loan. This leads us to the term gap.
Gap is used to describe the difference between what a vehicle may be worth if it’s been totaled (ie. what the insurance company will pay), and how much money you may still owe your lender. Say for example, you take out a $22,000 loan on a sedan, but are in a car accident eight months later which totals the car. If the insurance company determines the car is only worth $14,500 but you still owe a total of $17,000 on your loan, then the gap would be $2,500. That “gap” is the amount of money that you would still need to pay the bank on your loan.
These are a few of the commonly used terms that I often help people understand when discussing auto financing and lease transactions. Let me know if there are any others you’d like cleared up!
And of course, good luck shopping!!!
SVP, Consumer Lending