We understand how tricky terminology can get in the auto finance industry. To help, Auto Finance Excellence has compiled the following list of common terminology used across the industry to serve as a resource, especially for those who are new to auto finance. This is an ever-expanding list, which is based on public information, so if there is a term you think belongs in this glossary, let us know by emailing firstname.lastname@example.org.
ABS or Asset-Backed Securities: Bonds or notes backed by financial assets, such as auto loans.
Amount Financed: The aggregate amount advanced toward the purchase price of the financed vehicle, including accessories, insurance premiums, service and warranty contracts and other items customarily financed as part of retail automobile installment contracts.
Ancillary Products: Anything that is acquired as an add-on purchase when buying a product. Guaranteed asset protection and extended warranties are the most popular ancillary products.
Annual Percentage Rate (APR): The yearly rate charged for borrowing money from a financial institution expressed as a percentage of the actual annual cost of funds over the term of a loan.
Artificial Intelligence (AI): a branch of computer science dealing with the simulation of intelligent behavior in computers that have the capability to imitate intelligent human behavior.
Autodialer: A device that dials telephone numbers automatically from a list and may also leave recorded messages or request information. Autodialers are heavily regulated, see TCPA.
Bureau of Consumer Financial Protection (BCFP): The government agency that regulates the offering and provision of consumer financial products or services under the federal consumer financial laws, namely the Dodd-Frank Act. From its founding in 2010 to 2017, the agency was called the Consumer Financial Protection Bureau (CFPB).
Captive: A finance company that is typically a subsidiary of a car manufacturer. The captive’s purpose is to provide financing to consumers of the parent company’s products. For example, Ford Motor Credit Co. is the captive arm of Ford Motor Co.
Carshare: A type of mobility service that allows for short-term rentals — often by the hour — from corporate fleets, dealerships, or private-party channels. Carshare programs are attractive to consumers who need vehicles sporadically or who like occasional access to vehicles different than their own.
Charge-Off: A debt that is considered unlikely to be collected by the creditor because the borrower has been delinquent for a period of time. At this point in the collection period, the lender will attempt to repossess the vehicle and recoup losses.
Collateral Protection Insurance: An insurance policy that protects auto lenders from financial losses resulting from having to pay claims when a customer lacks auto insurance. Lenders can do this by contractually requiring borrowers to purchase comprehensive and collision auto insurance or else the lender can force-place those policies and add the premiums to the monthly payment.
Credit Rating Agency: A company that scores a consumer’s ability to repay debt.
Credit Risk: Measured risk based on the uncertainty that a borrower will be able to meet his financial obligations, such as repaying an auto loan.
Credit Union: A member-owned financial cooperative in which members can borrow from pooled deposits at low interest rates and can access other financial services.
Dealer Reserve/Dealer Markup: A commission or payment that dealers receive for generating a loan. A dealership is permitted to raise — or mark up — the interest rate on a loan above what the lender approved. The dealer’s profit from the deal is determined, in part, by the difference between what was approved and how much the dealer marked it up.
Debt-to-Income Ratio (DTI): Indicates a borrower’s amount of debt as compared with his amount of income. Lenders typically use DTI to determine whether borrowers qualify for loans.
Deep Subprime: The lowest subsection of the credit spectrum typically defined as borrowers with FICO scores lower than 550.
Default: The eventual consequence of a consumer’s missing several payments in a given period, typically a period of at least 90 days.
Delinquency: A situation in which a borrower misses the due date for a single scheduled loan payment.
Discount Rate: The interest rate charged to depository financial institutions for loans received from the U.S. Federal Reserve.
Disparate Impact: An adverse effect of a practice or standard that is neutral and non-discriminatory in its intention but, nonetheless, disproportionately affects individuals having a disability or belonging to a particular group based on their age, ethnicity, race, or sex.
Diversity and Inclusion: A company’s mission, strategies, and practices to support a diverse workplace and leverage the effects of diversity to achieve a competitive business advantage.
Equal Credit Opportunity Act (ECOA): A regulation created to give all individuals an equal opportunity to apply for loans from financial institutions.
e-Signature: A digitally executed acknowledgment that the consumer understands the document that has been presented. Most often, e-signatures are done in written form, but they can include sounds, symbols, or processes permitted by law. Some states require certain auto loan documentation to have “wet signatures,” which must be made in person with pen and paper.
Fair Debt Collection Practices Act (FDCPA): A federal law that limits the behavior and actions of third-party debt collectors who are attempting to collect debts on behalf of another person or entity.
Federal Trade Commission: An independent agency of the U.S. government that administers antitrust and consumer protection legislation in pursuit of free and fair competition in the marketplace.
Fintech: Also known as financial technology, it refers to any technological innovation in the financial sector. Online direct lending is one example.
Flats or Flat Fees: An alternative to Dealer Reserve, in which dealers receive a fixed commission for originating loans.
Guaranteed Asset Protection (GAP): Products that protect consumers who owe more on their car than the car is worth — a state known as “negative equity” or being “underwater” — in the event of an accident.
Lease: A method of obtaining a new or used car that involves paying for a portion of the car’s actual cost as opposed to paying for the car in its entirety. At the end of the predetermined lease term, the customer can either buy the car outright, refinance the residual value, or return the vehicle to the lessor.
Liquidity Risk: A risk of loss arising from an inability to sell assets at or near their carrying value.
Loan-to-Value Ratio (LTV): A risk assessment ratio that lenders examine before approving a loan. Typically, applications with high LTVs are seen as higher risk and, therefore, these loans would entail higher interest rates.
Long-Term Note: An agreement into which a company enters with another party that includes a formal written promise to pay predetermined amounts on specific dates. Long-term notes are due in more than a year.
Machine Learning: A method of data analysis that automates analytical model building. It’s a branch of artificial intelligence based on the idea that systems can learn from data and identify patterns to make decisions without human intervention.
Marketplace: Online stores that allow for inventory to be sold and multiple sellers and lenders compete for consumers’ business.
Military Lending Act: A federal regulation that restricts the terms on certain consumer loans made to military personnel, their spouses, and dependents.
Neo Dealership: A dealership model that allows consumers to conduct most of the vehicle purchase process online, without going to a physical dealership.
Nonprime: A classification of borrowers that fall into a lower-quality category of the lending spectrum than prime. Nonprime loans — which include near-prime, subprime, and deep-subprime — typically carry more credit risk and thus have a higher interest rate than prime loans.
Office of the Comptroller of the Currency (OCC): An independent bureau within the U.S. Department of the Treasury that was established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks, thrift institutions, the federal branches, and agencies of foreign banks in the United States.
Origination: The process by which a borrower applies for a new loan, and a lender processes that application. Origination may be expressed in number of contracts made or the dollar value of the pooled loans.
Outstandings: The balance of a group of unpaid interest-bearing loans.
Prepayment: The settlement of a debt before its official due date.
Prime: A classification of borrowers, rates, or holdings as high-quality or with a high credit score, typically above a 700 Fico score.
Principal Balance: The original amount borrowed before interest is taken into consideration.
Revolving Period: A specified time within a securitization during which principal payments received from the underlying loan collateral are reinvested in new loan receivables. Some revolving periods are capped at three years from date of ABS issuance.
Rideshare: An arrangement in which a passenger travels in a private vehicle driven by its owner, for free or for a fee, especially as arranged by means of a website or app.
Secured Loan: A loan in which a borrower pledges some asset (i.e., car or property) as collateral.
Securities Act: Generally refers to the Securities Act of 1933, which was created to ensure transparency in financial statements so investors can make informed decisions about investments. The Securities Act also establishes laws against misrepresentation and fraudulent activities in the securities markets.
Securitization: A process of turning assets into securities, that is, financial instruments that can be readily bought and sold in financial markets.
Service Contract: An agreement between a contractor and customer covering the maintenance and servicing of equipment over a specified period.
Servicing: Maintaining records, processing payments, and managing all the other administrative aspects over the life of a loan.
Short-Term Note: A note with a fixed maturity date not more than one year from the issue date of that note.
Subprime: Term used to classify borrowers that fall into the lower end of the credit spectrum and are at greater risk of becoming delinquent or defaulting on a loan. Subprime borrowers typically have credit scores that fall between 620 and 550. Consumers may also fall into this category for lack of financial history or due to life events that put them in a temporarily distressed situation.
Subscription Service: Allows consumers to rent a car for an all-inclusive monthly fee. The fee typically covers insurance, roadside assistance, and maintenance. A key feature in some car subscription programs is the ability to “flip” in and out of different cars with just a few days’ notice, often with a concierge delivering the vehicle to the consumer. For example, a consumer could drive a sedan during the week and switch to a sports car or an SUV for a weekend trip.
Subvention: Commonly referred to as incentives, subvention is a process by which an automaker subsidizes a vehicle’s price in an effort to sell cars. Subvention may come in the form of lower-than-normal interest rates or cash-back rebates.
Super Prime: A credit score at the highest end of a credit bureau score range. Consumers in this category have excellent credit and pose the least risk to lenders. As such, they typically qualify for the lowest interest rates and, thus, deliver the lowest yield to lenders.
Synthetic Fraud: A type of fraud in which a criminal combines real (usually stolen) and fake information to create a new identity, which is used to open fraudulent accounts and make fraudulent purchases.
Telephone Consumer Protection Act (TCPA): Sets guidelines for telemarketing practices — placing greater restrictions on the use of automated telephone equipment and requiring that entities making telephone solicitations maintain do-not-call lists. Signed into law in 1991, the TCPA was a response to complaints directed at the Federal Communications Commission (FCC) regarding the use of telephones for solicitation of business.
Unfair, Deceptive, or Abusive Acts or Practices (UDAAP): Provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that regulate the consumer finance market.
Unsecured Loan: A loan approved without the need for collateral. Instead of pledging assets, borrowers qualify based on credit history and income.
Warehouse Facility: A short-term revolving credit line offered by a bank to a retail lender that is backed by the loans being originated. Lenders use this form of financing to raise funds until they can bring the loans to the secondary market.
Wholesale: The process by which dealers or lenders sell trade-ins or repossessed vehicles at auction.