Glossary
Plain-language definitions of auto financing terms, tagged by who they matter most to.
ABS (Asset-Backed Security)
A bond backed by a pool of loans — in this case, auto loans — where investors are paid from the cash flow those loans generate.
Add-Ons
Optional products sold alongside a vehicle or loan — GAP, warranties, maintenance plans, and similar F&I products.
All-In Cost
The total cost of acquiring and preparing a vehicle for resale — purchase price plus buy fee, transport, recon, floorplan carrying cost, and selling costs — used to determine true margin on a flip.
Amortization
The process of paying off a loan through scheduled payments, where each payment covers a mix of interest and principal that shifts over time — more interest early on, more principal later.
APR (Annual Percentage Rate)
The yearly cost of a loan expressed as a percentage, including interest and certain fees — the standard way loan offers are compared.
Arbitrage (Auction Arbitrage)
Buying a vehicle at auction below its expected retail value and reselling it for a profit after accounting for all acquisition and carrying costs.
Back-End Gross
The profit made on financing and F&I products on a deal — dealer reserve, GAP, warranties, and similar add-ons — separate from the profit on the vehicle itself.
Balloon Payment
A large final payment due at the end of certain loan or lease structures, after smaller regular payments throughout the term.
Buy Fee (Auction Fee)
A fee charged by the auction house for purchasing a vehicle through them, typically a percentage of the purchase price or a flat amount.
Buy Rate
The interest rate a lender offers a dealership to fund a specific deal, before any markup. This is the wholesale rate the dealer reserve calculation is built from.
Cap Cost (Capitalized Cost)
The negotiated price of a vehicle in a lease, similar to the purchase price in a loan — the starting point the lease payment is calculated from.
Cap Cost Reduction
A down payment or trade-in equity applied to reduce the cap cost in a lease, lowering the monthly payment.
Charge-Off Rate
The percentage of loan balances written off as a loss because they're considered uncollectible, usually after a loan is severely delinquent.
Code 70 / 75 / 80 / 85
Difference Method dealer reserve calculations at a 70%, 75%, 80%, or 85% dealer share of the finance charge difference between contract rate and buy rate. Lenders vary in which one they use.
Code 75R
A Ratio Method variant of Code 75 dealer reserve, used by some lenders in place of the standard Difference Method calculation.
Contract Rate (Sell Rate)
The interest rate actually written into the customer's loan contract, which may be marked up from the buy rate. The difference between the two is where dealer reserve comes from.
Credit Tiers (Prime, Near-Prime, Subprime, Deep Subprime)
Categories lenders use to group borrowers by credit risk, which drive the interest rate offered. These same tiers are also how securitized loan pools are typically labeled for investors.
Curtailment
A required partial paydown of a floorplan loan on a specific vehicle after it's been in inventory a set number of days (often 30/60/90), regardless of whether it's sold.
Days to First Payment (DTFP)
The number of days between a loan's funding date and the customer's first scheduled payment. Anything beyond the standard 30 days adds extra per-diem interest to the finance charge, which can affect dealer reserve.
Dealer Reserve (Dealer Participation)
The portion of finance income a dealership earns for arranging financing at a contract rate above the lender's buy rate, calculated using one of several standard methods (see Code 70/75/75R/80/85).
Delinquency Rate
The percentage of loans in a pool or portfolio that are behind on payments, tracked as a key indicator of how a book of loans — or a securitized pool — is performing.
Depreciation Fee
The portion of a lease payment that covers the vehicle's expected loss in value over the lease term.
Difference Method
A way of calculating dealer reserve based on the actual dollar difference in total finance charge between the buy rate and the contract rate, multiplied by a set percentage (see Code 70/75/80/85).
F&I (Finance & Insurance)
The department and role at a dealership responsible for arranging financing and selling related products like GAP, warranties, and maintenance plans.
Finance Charge
The total dollar cost of borrowing over the life of a loan — all the interest paid, added together.
Floorplan Financing
A line of credit dealerships use to purchase inventory, with interest accruing daily until each vehicle is sold and the loan on that unit is paid off.
Front-End Gross
The profit made on the vehicle sale itself — the difference between what the dealer paid for the car and what the customer paid for it, before financing and F&I products.
GAP Insurance
Coverage that pays the difference between what's owed on a loan and what the vehicle is actually worth if it's totaled or stolen, since a vehicle often depreciates faster than the loan balance drops.
Loan Term
The length of time, usually in months, over which a loan is scheduled to be repaid.
LTV (Loan-to-Value)
The loan amount expressed as a percentage of the vehicle's value. A higher LTV means less equity and more risk for the lender.
Money Factor
The lease equivalent of an interest rate, expressed as a small decimal. Multiply it by 2400 to get the roughly equivalent APR.
Negative Equity (Upside Down)
Owing more on a loan than the vehicle is currently worth — common with long loan terms, low down payments, or fast-depreciating vehicles.
Principal
The amount actually borrowed (or still owed), not counting interest.
PVR (Per Vehicle Retail)
The average gross profit earned per vehicle sold, usually tracked across front-end and back-end gross combined, and used as a key performance metric for sales and F&I teams.
Ratio Method
A way of calculating dealer reserve (used in Code 75R) that scales the contract-rate finance charge by the ratio of the rate markup to the contract rate, rather than comparing two separately calculated finance charges.
Recon (Reconditioning)
The cost of repairs, detailing, and mechanical work needed to bring an auction-purchased vehicle up to retail-ready condition.
Rent Charge
The portion of a lease payment that functions like interest — the leasing company's charge for the use of its money, based on the money factor.
Residual Value
The vehicle's projected value at the end of a lease term, set by the leasing company in advance — it's what the customer would pay to buy the car at lease-end.
Securitization
The process of bundling a large pool of auto loans together and selling them to investors as bonds (ABS), which lets lenders free up capital to make more loans.
Simple Interest vs. Precomputed Interest
Two ways a loan's interest can be calculated. Simple interest accrues daily on the remaining balance, so paying early saves money. Precomputed interest is calculated upfront for the full term and baked into the payment schedule, so early payoff saves less.
Spot Delivery
Letting a customer take a vehicle home the same day, before financing is fully finalized — the origin point of yo-yo financing when the deal doesn't hold up.
Spread
The difference between two rates or yields. On a single deal, it's the gap between buy rate and contract rate that determines dealer reserve; on securitized pools, it's the yield spread investors demand over a benchmark rate for taking on the credit risk.
Tranche
A slice of a securitized loan pool with its own risk and payout priority — senior tranches get paid first and carry less risk, junior tranches absorb losses first but pay a higher yield.
VSC / Extended Warranty
A vehicle service contract that covers specific repair costs after the manufacturer's warranty expires, sold at the dealership as an F&I product.
Yield
The return an investor earns on a bond or securitized pool, expressed as a percentage — what an investor gets paid for taking on the risk of the underlying loans.
Yo-Yo Financing
A practice where a customer drives home in a vehicle before financing is fully approved, then is called back days later to sign new — often less favorable — loan terms because the original deal fell through.