Buying a Car

A Few Car Buying Terms You Should Know

The excitement of buying a new car can be greatly tempered by the confusing array of jargon and terms thrown around as dealerships pile it on in order to slide in extra margins. Here's what you should know.

Buying a new car is one of the highlights of our financial lives, that point when we finally drive home in a brand new ride after weeks of shopping and financial planning. The actual process itself, however, can be very confusing. Americans consistently rank the car sales process as one of their least favorite things. Often even lawyers get a better rap than do car salesmen.

A big part of that are the phrases that dealership personnel like to use to describe things that seem mysterious (and aren't) in order to sneak extra fees onto the purchase. For most dealerships, these fees may be the largest portion of their profit. Because most consumers don't see these fees up-front, but have them added to payments over time with the rest of their purchase loan or lease, dealerships usually get away with them.

Acquisition Fee - sometimes this is called a "lease fee" or "lease term processing fee." It always means your'e paying money to the dealership in exchange for leasing instead of buying. This fee is almost all profit for the dealer. Leasing has a whole host of terms that can be used to basically mean “we’re charging you more.”

Bump - Also the Buy-Sell Bump or Sell Rate - This is the difference between what the dealership pays to secure financing on a loan for the consumer and what the consumer pays for that financing. This is what the dealership profits for finding you a loan, basically, and often amounts to one percent or more on the interest rate. The harder your loan was to secure, the higher this bump will be. For many dealerships, this is the primary long-term money making tool they have. You can save those hundreds, even thousands of dollars over the life of the loan by pre-approving with your own lender before going to the dealership to buy.

Dealer Prep Fees - these are the most negotiable item on your new car purchase. These are fees that the dealership adds to cover incidentals like car washing, interior cleaning, pulling off tags and labels from shipping, and so forth. In most cases, just asking to have them waived will result in the dealership doing so in order to close the deal.

Destination Charges - it's not likely that you can get out of paying the delivery and processing fee listed on the car's window sticker as part of the manufacturer's suggested retail price (MSRP), but if the fee listed on your car is higher than that listed on the manufacturer's website, the dealer is likely padding the number to increase profits. Call them on it and you'll usually get those fees reduced.

Documentation Fee or Title Transfer Fee - these are the documentation fees charged by dealerships to cover the cost of transferring the title to the new owner (you). This fee is small and so it's easy to get the dealer to waive it, especially if you're putting down enough down payment to cover other dealer fees so that your loan is easier to secure.

Extended Warranty - these are usually offered by the dealership as an add-on to the car's purchase to cover unexpected problems beyond the manufacturer's warranty. Most manufacturers warranty their vehicles for 3 years or 75,000 miles, at minimum. Find out the details of the extended warranty being offered. It's not likely worth the money.

There are other terms that are worth knowing too, but that are not necessarily going to save you money. Before making a down payment, for example, you should know what portion of that cost (called the Up-front Cost) is going towards dealer fees and how much is actually paying towards the car to reduce the loan amount. Typically, on a new car, if you are making a down payment of $3,000 or less, you are likely putting very little towards the car's purchase price.

It's also helpful to know the private sale value of your trade-in before you take it to the dealership. Most of the time, you can make more money selling your car on your own than you can trading it in, so decide how much that dealer trade-in convenience is worth to you before you commit to a trade-in as part of your new car purchase.

Hopefully knowing these terms starts you down the road towards a better buying experience. Most of these terms apply to used car purchases as well.

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