Consumer Law

Financing a Vehicle

Buying a car, whether new or used, is a major purchase, with average prices commonly running from $15,000 for a used car to $30,000 for new models. Most buyers need to finance a good part of purchase price and all the extras, such as a service contract or other add-ons. Make sure you know your options before you go shopping. It's your money!

Your Loan and Payment Amount

As you begin lining up financing for your vehicle purchase, start with research and learning. The Federal Trade Commission, and other consumer and trade organizations have resources to help. This article will cover several key areas.

First, you should have an idea of the total loan amount and monthly payment you can afford and are comfortable with. The FTC web site has budgeting worksheets, so you can see the impact of a new loan payment on your budget. You may be surprised at the amount, and a payment in the $300-500 range, or more, isn't uncommon.

There are many loan calculators and spreadsheets available online to help you run the numbers. Find these tools on automotive or banking web sites. Shop around online for the range of rates available. If you've recently checked your credit report, you may have opted to pay a fee to see your credit score. You may be able to get a better idea of the loan interest rate if you know whether your score is high, average or low.

Look at the big picture before deciding on your budget. An auto loan can have a major impact on your total credit picture. Think ahead about your credit and finances; if you're planning major purchases, such as a new home and mortgage, a high car payment with a long loan term could impact your access to other credit types.

Loan Sources: The Dealer or a Direct Lender?

Two main sources for a vehicle loan are the car dealership's finance office or a direct lender, such as your bank, an online lender or your local credit union.

If you obtain financing from a direct lender, the loan proceeds are used to pay the dealer for your car. Some advantages of using a direct lender are you won't have to deal with the dealer's finance office as part of your shopping trip, and you may find a good deal on a loan, especially from lenders with which you have current accounts, such as your credit union.

Dealership financing offices can give you one-stop shopping and loan offers you won't find elsewhere. Once you complete a credit application, the finance manager can search sources for the right loan product. Car manufacturers have finance companies, and offer promotional loan products and rebates, such as low or zero percent financing or cash back on a deal.

Dealerships also sell your car loan to lenders and finance companies. You set the loan up with the dealer, and your loan contract is assigned or sold to that lending source. The finance manager shops your profile around to the lending sources, and will likely have several lending options for you to choose from.

With either loan source, your credit score, credit history and finances matter. Most of the loan underwriting process is automated, with sophisticated computer programs doing the work. Your credit data goes in, and the proposed loan terms are returned.

If your credit reports and scores aren't correct, you may not see the best terms on the loan you're offered. If you know there's an issue, such as items related to identity theft on your credit report, or there's an unusual situation with your income and finances, the lending officer can look at alternate ways to review your loan application.

The Law and Your Loan Contract

Be prepared for problems as you navigate the loan process, and know how to react. A number of federal laws, such as the Truth in Lending Act, and the Fair Credit Reporting Act protect consumer rights in financial transactions. These laws require protections such as consumer disclosures for your loan so you know the loan rate, payment amounts and the total amount you'll pay in interest over the life of the loan and late payment fees. State laws often provide added consumer rights.

When you've decided on your loan, read through the loan contract. Look for all the key terms, such as the interest rate and payment information, and ask your loan officer questions if there's something you don't understand. Also ask when your first payment is due - you may be given a temporary coupon or bill before your loan coupon book or monthly loan statements arrive. Don't start with a late payment. Your lender will likely keep your car's title until the loan is paid in full.

Questions for Your Attorney

  • My car loan was sold to another lender, and I think some of my payments weren't properly credited to my account. How do I fix this problem?
  • Does a dealership finance office have any duty to find the best loan for my needs? How do I know I'm getting the best deal possible?
  • I have excellent credit, but didn't qualify for a car maker's special loan deal. Are low or no interest loan offers ever scams?
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