20 Terms Everyone Should Know Before Buying a Car

salesman car keys customer
A salesperson hands car keys to a buyer in a stock photo. Ridofranz/Getty Images

When going to purchase a vehicle it is easy to get lost in the acronyms and the language of fast-talking salespeople. Reading the information on a manufacturer's website may not be much better for those with a cursory knowledge of the inner workings of their car, truck, minivan or SUV.

Learning some key terms before you head to the dealer lot may help you with your path to purchase. Here are 20 key terms to know before stepping on the lot.

Trim level

The vehicle's trim level, also called trim package or grade, refers to the version of the vehicle that comes with a set combination of features. Most cars offer several trim levels. The higher the trim, the more abundant the features and higher the starting price.

Blue Book value

For decades, dealerships and car sellers have utilized Kelley Blue Book, a used car guide that helps customers and dealerships determine the value of a vehicle. Today, dealerships also consider NADA, Edmunds and TrueCar data to determine value as well. However, many still refer to a car's worth as its Blue Book value.

Trade-in value

The trade-in value is the amount of money that a dealership will pay for your used car. It can often be used as a down payment on a new car. This value is typically below the vehicle's wholesale price.

Monroney (window sticker)

The sticker in the window of each car on the lot gives customers information about the vehicle such as miles per gallon, included packages and features, price, and expected cost of gas over a year. The sticker was named after a senator from Oklahoma who sponsored the Automobile Information Disclosure Act in 1958.

MSRP

The manufacturer's suggested retail price (MSRP) is the automaker-recommended sale price of the vehicle. It can be found on the vehicle's window sticker. The price does not usually include destination charges, optional equipment or taxes. In the U.S., this price is traditionally a starting point for a negotiated sale price of a vehicle.

Additional dealer profit

The additional dealer profit (ADP) is also known as the additional dealer markup (ADM). This is a dollar amount added to a vehicle's manufacturer's suggested retail price (MSRP) that the dealerships sees fit to charge for a vehicle, traditionally based on demand. You can find this amount listed on the window sticker. Like the MSRP, the amount of ADP/ADM is negotiable at U.S. dealerships.

Annual percentage rate

The annual percentage rate (APR) is the interest rate on a loan and is expressed as a percentage of the amount borrowed — also referred to as the finance rate.

Lease

A lease is a fixed, long-term contract which allows a lessee to use the car without owning it. It is not considered a long-term rental. A vehicle is leased for a set period of time, or agreed number of miles, with regular payments to the lender. At the conclusion of the lease lessees can either buy the car or return it to the dealer depending on the terms of the agreement.

Excess mileage charge

The term excess mileage charge refers to the fee a lessee must pay if they go over the agreed amount of miles. Typically leases are 10,000 to 15,000 miles per year. If the lessee goes over that then the driver will have to pay a per-mile fee for the number of miles over. Sometimes, dealerships are willing to forgive the charge if the lessee purchases the vehicle at the end of the lease.

Acquisition fee

Essentially an acquisition fee is just a processing fee that is typically put toward the cost of pulling credit reports, insurance verification, and other things needed to ensure that potential lessees are worthy of a lease's terms.

Destination fee

The destination fee is a shipping fee that manufacturers charge dealerships to transport the car from the factory to the dealer lot. This fee is typically over $850 and can be nearly $2,000. The fee is traditionally listed on a vehicle's window sticker and will be included in the vehicle invoice. This is a cost dealers pass directly onto consumers.

Grey market vehicle

A grey market vehicle is any car that is imported through an unauthorized dealer. A gray market vehicle may not meet U.S. standards for emissions, crash safety or other requirements. It may be difficult or expensive to insure.

Holdback

The dealer holdback is the amount that is paid to a dealer by the manufacturer for each new or used vehicle sold. A typical holdback is 2 percent of the total vehicle invoice.

Incentive rate

This is a special interest rate offered by manufacturers to people with great credit when they finance through the automaker's preferred lender. Traditionally, this lender is associated with the automaker as a subsidiary of the manufacturer's business.

Dealer Incentives

Dealer Incentives are offers that come from the manufacturers and is passed through to dealers to get sales going and encourage specific makes and models to sell. Make sure to ask if there are any dealer incentives available.

Rebate/factory Incentive

This is a manufacturer-to-customer bonus to help the carmaker sell off older (end of model year) or slow-selling models. It is also known as a commercial incentive. These come in the form of rebates, cash back or a lower interest rates offered by preferred lenders.

Dealer installed option

This is the optional equipment installed by the dealer, not the manufacturer. Dealer installed options could include: undercoating, fabric protection, appearance accessories and performance accessories. Dealer-installed parts may be covered by new or used vehicle warranties.

Extended warranty

An extended warranty is a warranty that gives a customer added coverage when their car's factory warranty expires. Many industry experts regard extended warranties as largely unnecessary.

Prepayment penalties

Pay off your auto loan or lease early may come with a surcharge. Lenders impose these fees to make up for lost income that would traditionally be generated via interest on the loan throughout its lifespan. Prepayment penalties vary by loan and lender.

Title

The title, or pink slip, is the vehicle's proof of ownership issued by a state's Department of Motor Vehicles.