Auto financing glossary
The terms that decide subprime car deals, defined in plain language. Most of these are words you will first hear at a dealership desk, in the middle of a transaction, with no one explaining them.
- Dealer Participation (Rate Markup) — Dealer participation is the spread between the lender's buy rate and the rate on your contract. Two points on a $20,000 loan over 72 months costs $23 a month and $1,667 over the term — and it is negotiable.
- Deficiency Balance — The deficiency balance is what you still owe after a repossessed car is sold — the loan payoff plus repossession costs, minus the auction price.
- FICO Auto Score — FICO Auto Score is the industry-specific score auto lenders use. It runs 250 to 900 instead of 300 to 850 and weighs past auto history more heavily, which is why the dealer's number differs from your app.
- GAP Insurance — GAP insurance pays the difference between your insurer's settlement and your loan payoff if the car is totalled. Most contracts exclude negative equity rolled in from a previous loan — the one thing buyers assume it covers.
- Loan-to-Value (LTV) — LTV is the amount financed divided by the vehicle's book value. Subprime lenders cap it per program, and a down payment is the fastest way to move it.
- Negative Equity — Negative equity means you owe more on your car than it is worth. Around 30% of trade-ins carry it, averaging about $7,100 — and rolling it into the next loan is how subprime borrowers get stuck.
- Payment-to-Income Ratio (PTI) — PTI is the share of your gross monthly income that goes to the car payment. Subprime lenders typically cap it around 15% to 20%, and it is one of the most common reasons a deal is cut down.
- Right to Cure — A right to cure is a state-law right to bring a defaulted car loan current by paying the past-due amount rather than the whole balance. It does not exist in every state and the terms vary.
- Spot Delivery — Spot delivery is when a dealer lets you take the car the same day, before the loan is funded. It is legal and routine — and it is what makes a yo-yo sale possible.
- Stips (Stipulations) — Stips are the documents a lender requires before it funds an approved car loan — typically proof of income, residence, insurance, and 5 to 8 references. Until they clear, the approval is conditional.
- Voluntary Surrender — A voluntary surrender is returning the car to the lender yourself. It still reports as a repossession and you still owe the deficiency. What it saves is the recovery fee and the surprise.
- Yo-Yo Financing — Yo-yo financing is when a dealer lets you drive off before the loan is funded, then calls you back to re-sign at worse terms. It targets subprime buyers and no federal law bans it.