Finance and Insurance

Automobile Finance and

Insurance Definitions

AMOUNT FINANCED The amount to be financed includes principal, taxes, tags licenses, and any cancelable insurance.

APPROVAL Lender s okay of a credit application and willingness to extend credit to a customer for a vehicle purchase.

APPROVAL RATIO Ratio of the number of finance deals called-in to the number approved by the Lenders.

BALLOON PAYMENT An equal monthly payment contract of two or more installments with the final payment usually substantially greater than the proceeding installments.

BINDER Temporary insurance coverage provided to a customer on a new vehicle pending issuance of a policy of insurance.

BUSINESS MANAGER Individual who manages the Finance and insurance office, and handles all financial and insurance matters for the dealership.

BUY DOWN Process where the dealer will buy-down an interest rate  in order to advertise a super low interest rate on certain vehicles. For example, if the normal bank rate is 11% APR and the dealer offers a 4% rate to the customer, the dealer must pay the difference (7%) between the two rates to the bank, but gets to move a vehicle off his/her lot.

BUY HERE PAY HERE (BHPH) Also referred to as in-house financing or dealership financing. The car dealer acts as the lender and payments are made to the dealership, usually on a weekly or bi-weekly basis.

BUY RATE Rate charged by the lender to the dealer for money that will be loaned to customers. Also know as DISCOUNT RATE.

CALLED-IN When your application for credit is faxed or telephoned to the lender for review of your credit history.

CAPTIVE BUYER Name given to a prospective borrower who has to depend on dealer source financing in order to purchase a vehicle.

CAR INSURANCE COVERAGE There are six forms of coverage:
1) Collision Coverage. The coverage that pays only for repairing a vehicle damaged in an accident. Collision insurance costs are based on the value of the vehicle, location where driven, and the type of deductible selected.
2) Comprehensive (Physical Damage) Coverage. Includes fir, theft, damage from windstorm and other natural occurrences, vandalism, even road service and hail. Its cost varies according to where the vehicle is domiciled.
3) Bodily Injury Liability. Pays injury/death claims against the insured, and legal costs if the insured s vehicle injures or kills someone.
4) Property Damage Liability. Pays claims for property that the insured s vehicle damages in an accident.
5) Medical Payments. Covers injuries to the insured and occupants of the insured s vehicle.
6) Uninsured Motorist Protection. Covers injuries caused to the insured or occupants of the insured s vehicle by an uninsured or hit-and-run driver.

CASH ADVANCE Amount of money a lender will advance to finance a customer s vehicle purchase (excluding finance and insurance charges).

CANCELLATION The termination of an insurance policy before its expiration because of an early payoff by the customer.

CHARGEBACK That portion of the dealer s finance and/or insurance income that has not yet been earned due to prepayment or cancellation, and is charged back  to the dealer s account by the lender holding the installment sales contract.

CREDIT ACCIDENT AND HEALTH INSURANCE (A&H) Insurance coverage that pays for a disability resulting from an accident, illness or sickness that prevents the insured from engaging in his/her normal job duties. Benefits are payable once the insured from engaging in his/her normal job duties. Benefits are payable once the number of days specified in the waiting or elimination period have past, then 1/30th of the monthly payment will be paid for each day the insurer is unable to work. There are basically two types of policies:Elimination  where benefits are payable from the end of the waiting period going forward. The waiting period generally ranges from 14 days to 30 days; i.e., there are no benefits paid for the first 14 or 30 days.Retroactive  where benefits are payable from the first day of the disability, if the insured is disabled for more than the stated waiting period  7 days, 14 days or 30 days.

CREDIT DISABILITY INSURANCE A health insurance policy which makes payments to the lender if you become sick or disabled and are unable to work. There may be a limit on the number of payments or the total dollar amount the policy will pay. This form of insurance is normally more expensive than

CREDIT LIFE INSURANCE A very specific decreasing term insurance that covers the life of the insured for the amount of the outstanding balance for a given period of time. Credit life coverages are available as follows:
1) Single Decreasing is decreasing term life insurance on the primary debtor that pays off the gross contract amount, including the remaining interest.
2) Joint Decreasing is decreasing term life insurance on the lives of two joint and individually liable debtors. Benefits are paid on the death of the first of the joint debtor and insurance on the surviving debtor terminates automatically. In the event of simultaneous death, only one death claim is paid.
3) Net Pay is a form of decreasing term life insurance that, in the event of death, covers only the net principal balance of a loan. The amount of insurance reduces each month by the amount that the payment by the debtor reduces the principal. Both single and joint coverage can be written.
4) Level Term is credit insurance where the amount of insurance remains constant over the term of the coverage.

DEAL FOLDER A folder kept in the Finance and Insurance office that contains copies of documents pertaining the potential sale of a vehicle to a customer.

DEALER RESERVE Income a dealership earns from participating Lenders on the sale of finance contracts to those financial institutions.

DECREASING TERM This is the type of Credit Life sold most of the time to debtors on auto loans which are repayable in equal monthly installments over a specified period. The amount of insurance reduces monthly in equal installments.

DEDUCTIBLE Amount on a warranty or vehicle service contract that a customer must pay to remedy a mechanical breakdown.

DEFERRED PAYMENT PRICE Amount shown on the Retail Installment sales contract that is the sum of the cash price, all other back-end products (credit insurance, vehicle service contract, etc.) included in the amount to be financed, and the total amount of the finance charges.

DEPOSIT An amount of money asked by the dealer to hold a vehicle until the paperwork is complete  then the amount of the deposit is applied toward the down payment.

DIRECT LOAN A loan made on a direct basis between a borrower, and a financial institution that does not involve participation by the dealership s Finance and Insurance Department.

DISCOUNT RATE Finance rate at which a lending source will purchase a retail sales contract from a dealer. This rate will vary according to the customer s credit history.

DOCUMENTARY FEE (DOC FEE) This fee is charged to the customer to cover the cost of processing the paperwork and sales contract. In the event of a prepayment or repossession, the DOC Fee is deducted from the total contract charge before applying any rebate formulas.

DOWN PAYMENT Net trade-in allowance and/or cash in partial payment of a time purchase.

DUAL INTEREST Physical Damage insurance placed by the lienholder on the car loan which protects the interests of both the lienholder and the customer.

DUE DATE The date on which the customer is required to submit his/her monthly installment payment.

EARNED PREMIUM The part of the total premium which an insurance company has earned over an elapsed period of time.

ELIMINATION OR WAITING PERIOD The number of consecutive days insured must be disabled before the A&H coverage takes effect. (See CREDIT DISABILITY INSURANCE).

EXCLUSION Acts or illness which are not covered under credit life or credit H&H policies.

EXTENDED WARRANTY A misleading and erroneous term used by many to describe a VEHICLE SERVICE CONTRACT. The term warranty  must apply to a benefit program that is part of the price of the vehicle sold; e.g., a warranty is offered, while a service contract is sold.

EXTENSION An agreement between both the lending institution and the borrower to lengthen the term of the finance contract, normally when the borrower runs into temporary financial difficulty.

FINANCE CHARGE The amount charged to a customer by a dealer for the privilege of paying for a vehicle purchase over a period of time.

FINANCE CONTRACT The Retail Installment Sales Contract that is purchased by a lender on a contract submitted by a dealer.

FINANCE RESERVE Income dealer makes on a finance contact and is the amount between the discount rate and the finance charge to the customer.


FLAT CANCELLATION A finance contract or insurance policy canceled within thirty (3) days without charge to the customer.

GAP INSURANCE Insurance protection that closes the gap  between a vehicle s ACV or depreciated value, and the outstanding balance on the loan or lease in case of total collision loss or theft of the vehicle.

GROUP INSURANCE The basic credit insurance policies sold on the lives of credit customers is issued under a group policy, not an individual policy.

INDIRECT LOAN The type of loan done through the dealership that involves three parties: the dealership, the customer and the lender. Under the indirect method, the lender does not see the borrower and has contact only with the dealership s Business manager.

INSTALLMENT SALES CONTRACT A credit obligation that has a consistent monthly loan payment.

INSURANCE REFUND (Credit Insurance) There are three situations where a credit insurance refund takes place: when a customer pays off a loan; when a customer cancels the coverage (refund is made to the lender); and at time of trade-in when a refund may be applied to the down payment.

JOINT LIFE Credit Life insurance coverage on both the primary borrower and his/her spouse, or co-borrower.

LENDING SOURCES The institutions, captive finance companies (e.g. GMAC, Ford Motor Credit, etc &), banks, savings and loans, who purchase the dealership s finance contracts. Also called FINANCE SOURCES.

LIABILITY COVERAGE Coverage that protects the insured s assets and pays off people who bring claims in case of an accident that results in injury. There are two kinds of liability coverage: bodily injury and property damage. (See CAR INSURANCE COVERAGE).

MECHANICAL BREAKDOWN INSURANCE (MBI) Like a Vehicle Service Contract (VSC), MBI provides for the correction of defects and undertaking of repairs related to a vehicle s function and performance. The essential distinction between VSC and MBI is that MBI is regulated by a State s Insurance Department, and as such, coverage rates, etc. must be filed and adhered to in the sale and marketing of the product. (See VEHICLE SERVICE CONTRACT).

NON-CANCELABLE Credit life and credit accident and health insurance are guaranteed for the full term of the sales contract and are non-cancelable by the insurance company once coverage is in effect.

NON-CAPTIVE BUYER Customer who has stated his/her intentions to finance the vehicle purchase with an outside financial source. Individual at the lending institution who evaluates credit applications submitted by a dealer, in light of that institution s credit policies.

PAYMENT PROTECTION PLAN The Credit Insurance and Extended Warranty programs designed to protect the customer s investment in the vehicle and his/her savings.

PAY OFF The current indebtedness on the vehicle which the dealer is taking in trade from a potential customer, less the amount required for the lien-holder to release the title to the dealer.

PHYSICAL DAMAGE INSURANCE Vehicle insurance coverage required by the lien-holder to provide protection against collateral loss. The customer must sign a form before leaving the dealership with his/her new purchase that physical damage coverage is in-force. (See CAR INSURANCE COVERAGE).

PICK-UP PAYMENTS A method of increasing a borrower s equity by scheduling an additional payment prior to the first monthly payment coming due.

PRE-EXISTING CONDITION A clause in an A&H policy which states a disability is not covered if the disability resulted from an illness or accident which occurred within six months prior to the issuance of the policy and caused a disability within six months after the effective date of coverage.

PRINCIPAL BALANCE The unpaid cash balance plus insurance charges and registration fees, tax, title and licenses on a vehicle purchase.

PRO RATA Method of calculating refunds on Vehicle Service Contracts and some cancelable insurance policies (for example, Accident & Health).

RATE ADMINISTRATION The practice followed by the Finance Manager in establishing a range of retail customer finance rates that are consistent with sound business practices and customer good will.

RATE DIFFERENTIAL The difference between the finance rate charged to a customer by the dealer and the lender s buy rate to the dealer.

REBATE (Finance) Portion of the finance charge refunded to a customer when he/she prepays a loan.

REFERRAL Movement of the customer from the salesperson s office to the Finance and Insurance office.

REFINANCE The lien-holder reorganizes the outstanding balance on an existing loan usually for the purpose of making the monthly payment more compatible with the customer s current financial situation.

RULE OF 78 Universally accepted method of calculating finance charge or credit insurance premium refunds to you when you pay off a finance contract before its maturity date. Most of the lender s money is outstanding at the beginning of the contract than at the end, resulting in the lender earning most of the interest early in the contract. Similarly, the credit insurer s risk is greater at the beginning and as a method is also referred to as THE SUMS OF THE DIGITS because the addition of the numbers between 1 and 12 will equal 78.

SETTLEMENT An amount agreed upon by the insured and the insurance company as to the extent of liability in damage claims. For example, under collision coverage, the insurance company pays for agreed repairs, less any deductible.

SIMPLE INTEREST PAYMENT A payment plan where payments are made in equal monthly installments of principal plus interest on the unpaid principal remaining. As the principal decreases so does the monthly interest.

TIME PURCHASE Purchase made by the customer over a specified period of time through regular monthly installments.

USED CAR GUIDE BOOKS Black Book, NADA Guide, Kelly Blue Book, etc & are used by dealer appraisers to establish used car values. These guides show the appraisers a description of vehicles by make, model, year, and price depending on condition and mileage. This information gives them a fairly accurate picture of the going price for a specific vehicle in the dealer s geographical area.

VEHICLE SERVICE CONTRACT Under the Magnuson-Moss Act, service contract  means a written contract to perform, over a fixed period of time or for a specified duration, services relating to the maintenance or repair (or both) of a consumer product.