Today, a new car can cost more than a small home did just a few decades ago. Even a used car often costs more than most buyers can afford to pay in cash. For this reason, most buyers choose to finance the purchase of a car, either through the car dealer or through a lender. Understanding how car loans work can help you obtain favorable terms and prevent unpleasant surprises.
Shop Around for Favorable Terms
Your financing terms will depend on a number of factors, including your credit rating, the size of your down payment, and the price of the car. A high interest rate can result in unanticipated problems down the road. If you decide to sell your car before you pay off your loan, for example, the proceeds may be less than the unpaid balance of your loan. If you default on your loan and your car is repossessed, your lender may sell it for less than the unpaid amount of the loan and sue you for the remainder.
Lenders Are Required to Disclose
The U.S. Truth in Lending Act requires that your lender provide you with certain information before you sign a loan agreement. Usually, this information will be included in your loan contract. Required information includes the car purchase price, the principal of the loan, the dollar amount you're paying for credit, and the percentage of the loan you'll pay in interest every year, known as the annual percentage rate (APR). It also includes the total number of payments, the amount of each payment, and the total purchase price - the price of the car plus the cost of the loan.
Beware of Scams
"Yo-yo financing" is one of the most common auto dealer scams involving car loans. The dealer may encourage you to take the car home after you pay a down payment, but before financing is approved. The dealer will then call you a few days later to inform you that your financing was not approved, and demand that you renegotiate financing on less favorable terms. In some states you can simply return the car and demand return of your down payment. In other states, you are obligated to pay the entire purchase price, with or without financing.
Bankruptcy Is an Option
If you can't keep up with your auto loan payments, your lender is entitled to repossess your car. One way to avoid repossession is to file for Chapter 13 bankruptcy. Of course, bankruptcy will involve other creditors in addition to your car lender. If you qualify for Chapter 13, however, the judge will issue an automatic stay, which prevents your lender from repossessing your car. The terms of your bankruptcy will allow you three to five years to pay off your loan. These terms might include a lower interest rate. In most cases, your lender does not have to approve your repayment plan.
A Consumer Lawyer Can Help
The law surrounding taking out a loan to buy a car is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a consumer lawyer.