the Federal Trade Commission
Some vehicle buyers use what's called "direct lending," getting a loan directly from a finance company, bank or credit union. Once you and a vehicle dealership enter into a contract and you agree to a vehicle price, you use the loan proceeds from the direct lender to pay the dealership for the vehicle.
The most common type of vehicle financing, however, is "dealership financing." You and a dealership enter into a contract where you agree to pay the amount financed, plus an agreed-upon finance charge, over a period of time. The dealership usually sells the contract to an assignee (such as a bank, finance company or credit union), which services the account and collects the payments.
Before You Arrive at a Dealership
Do some research:
- Determine how much you can afford to finance and spend on a monthly payment
- Get a copy of your credit report so you are aware of what creditors will see
- Check auto buying guides, the Internet and other sources to find out the price range and other information for the vehicle you want to buy
- Compare current finance rates being offered by contacting various banks, credit unions or other lenders
When Visiting the Dealership:
- Stay within the price range you can afford
- Negotiate your finance arrangements and terms
- Consider carefully whether the transaction is best for your budget and transportation needs
- Understand the value and cost of optional products such as an extended service contract, credit insurance or guaranteed auto protection, if you agree to purchase. If you don't want these products, don't sign for them.
- Read the contract carefully before you sign. You are obligated once you have signed a contract.
What Happens When You Apply for Financing
Most dealerships have a Finance and Insurance ("F&I") Department, which provides one-stop shopping for financing. The F&I Department manager will ask you to complete a credit application. Information on this application may include:
- Your name, Social Security number and date of birth
- Current and previous addresses and length of stay
- Current and previous employers and length of employment
- Sources of income
- Total gross monthly income
- Financial information on existing credit accounts
The dealership will get a copy of your credit report, which contains information about current and past credit obligations, your payment record and data from public records (for example, a bankruptcy filing obtained from court documents).
Dealers typically sell your contract to a bank, finance company or credit union. The dealership submits your credit application to one or more of these potential lenders to determine their willingness to purchase your contract from the dealer.
Since the bank, finance company or credit union doesn't deal directly with you, it bases its evaluation upon what appears on your credit report and score, the completed credit application, and the terms of the sale, such as the amount of the down payment. Each finance company or other potential assignee decides whether it's willing to buy the contract, notifies the dealership of its decision and, if necessary, offers the dealership a wholesale rate at which the assignee will buy the contract, often called the "buy rate."
Your dealer may be able to offer manufacturer incentives, such as reduced finance rates or cash back on certain models. Make sure you ask your dealer if the model you are interested in has any special financing offers or rebates. Generally, these discounted rates aren't negotiable, may be limited by a consumer's credit history, and are available only for certain models, makes or model-year vehicles.
When there are no special financing offers available, you can negotiate the annual percentage rate ("APR") and the terms for payment with the dealership, just as you negotiate the price of the vehicle. This negotiation can occur before or after the dealership accepts and processes your credit application.
Your credit history, current finance rates, competition, market conditions and special offers are among the factors that influence your APR.
What About a Co-Signer?
You may be allowed by the creditor to have a co-signer sign the finance contract with you in order to make up for any deficiencies in your credit history. A co-signer assumes equal responsibility for the contract, and the account history will be reflected on the co-signer's credit history as well.
After Completing the Vehicle Purchase or Lease:
- Be aware that if you financed the vehicle, the assignee (bank, finance company or credit union that purchases the contract) holds a lien on the vehicle's title (and in some cases the actual title) until you have paid the contract in full
- Make your payments on time. Late or missed payments incur late fees, appear on your credit report and impact your ability to get credit in the future.
Federal Laws
The Truth in Lending Act requires that, before you sign a financing agreement, creditors give you written disclosure of important terms of the credit agreement such as APR, total finance charges, monthly payment amount, payment due dates, total amount being financed, length of the credit agreement and any charges for late payment.
The Equal Credit Opportunity Act prohibits discrimination related to credit because of your gender, race, color, marital status, religion, national origin or age. It also prohibits discrimination related to credit based on the fact that you are receiving public assistance or that you have exercised your rights under the federal Consumer Credit Protection Act.
State Laws
Some state laws may provide you with additional rights. For information on these laws, contact your state's consumer protection agency or Attorney General's Office .
Vehicle financing is complicated, so it's important to take your time and be sure you understand everything before you make a decision.