Presenting the Used Car Buying Dictionary

February 28th, 2024 by

The used car buying experience can sometimes feel like it’s operating with its own language. Gap insurance, loan to value, negative equity… understanding all the terminology thrown at you can be intimidating.

Here at HoneyCar, our goal is to make the car buying process as simple as possible. For that reason, we’ve assembled this convenient dictionary to break down some of the auto jargon you’ll encounter on your car buying adventure.

Down Payment: 

A down payment is a lump sum of money you give to the dealer upfront before purchasing the car. At virtually all buy here pay here (BHPH) dealerships, a down payment is required to get approved for a loan. If you’re able to put down an amount larger than the minimum required, it means lower monthly payments moving forward.  

A down payment at a BHPH is typically around 20% of the car’s selling price. Since BHPH dealers rarely run credit checks, this amount may be higher than at other dealerships, to help mitigate the sellers’ risk. Fortunately, a higher down payment means lower interest rates for the duration of your loan. 

Gap Insurance: 

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 pay the gap between the depreciated value of your car and what you still owe on it. 

Because the average used vehicle depreciates quickly – 20% after driving it off the lot and 10% in the first month of ownership is the general barometer – it’s not unusual to owe more on a loan than your vehicle is worth, making gap insurance a crucial investment. 

Interest Rates: 

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 average loans landing between 70-80 months. 

Loan-to-Value Ratio: 

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 $25,000 loan to buy a $30,000 car, your LTV would be 83%.  

LTV changes over time, as you pay off your loan. That can be largely attributed to the vehicle depreciating as it ages and racks up miles. LTV also naturally declines as you continue to pay off the loan, lowering the loan portion of the ratio. 

Monthly Payments: 

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 paying more than you can afford. The average monthly payment for used cars 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: 

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. 

For more info on how to bridge this divide, see “Gap Insurance.” 

Experience Great Deals, Redefined 

Here at HoneyCar, transparency is of the utmost importance. We’ll work with you through every step of the financing process, breaking down each component and defining each term. After all, used car buying should be a pain-free experience. Schedule your test drive at HoneyCar today, and drive into tomorrow with a well-defined path forward.

Posted in HoneyCar Tips