Understanding Vehicle Financing
With prices averaging more than $20,000
for a new vehicle and $9,500 for a four-year-old vehicle,
most consumers need financing or leasing to acquire
a vehicle. In some cases, buyers use “direct lending:”
they obtain a loan directly from a finance company,
bank or credit union. In direct lending, a buyer agrees
to pay the amount financed, plus an agreed-upon finance
charge, over a period of time. Once a buyer and a vehicle
dealership enter into a contract and the buyer agrees
to a vehicle price, the buyer uses the loan proceeds
from the direct lender to pay the dealership for the
vehicle.
Consumers also may arrange for a vehicle
loan over the Internet.
The most common type of vehicle financing,
however, is “dealership financing.” In this
arrangement, a buyer and a dealership enter into a contract
where the buyer agrees to pay the amount financed, plus
an agreed-upon finance charge, over a period of time.
The dealership may retain the contract, but
usually sells it to an assignee (such as a bank, finance
company or credit union), which services the account
and collects the payments.
For the vehicle buyer, dealership
financing offers:
- Convenience – Dealers offer
buyers vehicles and financing in one place.
- Multiple financing relationships
– The dealership’s relationships with
a variety of banks and finance companies mean they
can offer buyers a range of financing options.
- Special programs – From time
to time, dealerships may offer manufacturer-sponsored,
low-rate programs to buyers.
This booklet explains dealership financing
and can serve as a guide as you evaluate your own financial
situation before you finance a new or used vehicle.
It will also help you understand vehicle leasing.
Before You Arrive at a Dealership
Do some research:
- Determine how much you can afford to finance and
spend on a monthly payment by using the “Monthly
Spending Plan” worksheet in this booklet.
- Get a copy of your credit report so you are aware
of what creditors will see. Errors or accurate negative
information can impact your ability to get credit
and/or your finance rate.
- Identify your transportation needs.
- 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. Compare
bank quotes and dealer quotes; there may be restrictions
on the most attractive rates or terms from any credit
source.
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; date of birth; current and previous addresses
and length of stay; current and previous employers and
length of employment; occupation; sources of income;
total gross monthly income; and financial information
on existing credit accounts.
The dealership will obtain 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). For each account,
the credit report shows your account number, the type
and terms of the account, the credit limit, the most
recent balance and the most recent payment. The comments
section describes the current status of your account,
including the creditor’s summary of past due information
and any legal steps that may have been taken to collect.
Dealers typically sell your contract
to an assignee, such as a bank, finance company or credit
union. The dealership submits your credit application
to one or more of these potential assignees to determine
their willingness to purchase your contract from the
dealer.
These finance companies or other potential
assignees will usually evaluate your credit application
using automated techniques such as credit scoring, where
a variety of factors, like your credit history,
length of employment, income and expenses may be weighted
and scored.
Since the bank, finance company or
credit union does not deal directly with the prospective
vehicle purchaser, it bases its evaluation upon what
appears on the individual’s 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 is willing to buy the contract, notifies
the dealership of its decision and, if applicable, 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. You may see these specials advertised
in your area. Make sure you ask your dealer if the model
you are interested in has any special financing offers
or rebates. Generally, these discounted rates are not
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. The
APR that you negotiate with the dealer is usually higher
than the wholesale rate described earlier. This negotiation
can occur before or after the dealership accepts and
processes your credit application.
What Influences Your APR
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. For
this reason, you should exercise caution if asked to
co-sign for someone else. Since many co-signers are
eventually asked to repay the obligation, be sure you
can afford to do so before agreeing to be someone’s
co-signer.
Should I Lease a Vehicle?
If you are considering leasing, there
are several things to keep in mind. The monthly payments
on a lease are usually lower than monthly finance payments
on the same vehicle because you are paying for the vehicle’s
expected depreciation during the lease term, plus a
rent charge, taxes, and fees. But at the end of a lease,
you must return the vehicle unless the lease lets you
buy it and you agree to the purchase costs and terms.
To be sure the lease terms fit your situation: Consider
the beginning, middle and end of lease costs. Compare
different lease offers and terms, including mileage
limits, and also consider how long you may want to keep
the vehicle.
When you lease a vehicle, you have
the right to use it for an agreed number of months and
miles. At lease end, you may return the vehicle, pay
any end-of-lease fees and charges, and “walk away.”
You may buy the vehicle for the additional agreed-upon
price if you have a purchase option, which is a typical
provision in retail lease contracts. Keep in mind that
in most cases, you will be responsible for an early
termination charge if you end the lease early. That
charge could be substantial.
Another important consideration is
the mileage limit – most standard leases are calculated
based on a specified number of miles you can drive,
typically 15,000 or fewer per year. You can negotiate
a higher mileage limit, but you will normally have an
increased monthly payment since the vehicle’s
depreciation will be greater during your lease term.
If you exceed the mileage limit set in the lease agreement,
you’ll probably have to pay additional charges
when you return the vehicle.
When you lease, you are also responsible
for excess wear and damage, and missing equipment. You
must also service the vehicle in accordance with the
manufacturer’s recommendations. Finally, you will
have to maintain insurance that meets the leasing company’s
standards. Be sure to find out the cost of this insurance.
“Keys
to Vehicle Leasing,” a publication of the Federal
Reserve Board, contains more information about leasing.
You can request a copy from:
Publications Services
Board of Governors of the Federal
Reserve System
Mail Stop 127
Washington, DC 20551
Determining How Much You Can Afford
Before financing or leasing a vehicle,
make sure you have enough income to cover your current
monthly living expenses. Then, finance new purchases
only when you can afford to take on a new monthly payment.
The “Monthly Spending Plan” is a tool to
help determine an affordable payment for you.
The only time to consider taking on
additional debt is when you’re spending less each
month than you take home. The additional debt load should
not cut into the amount you’ve committed to saving
for emergencies and other top priorities or life goals.
Saving money for a down payment or trading in a vehicle
can reduce the amount you need to finance. In some cases,
your trade-in vehicle will take care of the down payment
on your vehicle.
Vehicle
Financing Worksheet [PDF only 409k]
Know the Terms of Financing Before
You Sign
Negotiated Price of the Vehicle
– The purchase price of the vehicle agreed upon
by the buyer and the dealer.
Down Payment –
An initial amount paid to reduce the amount financed.
Extended Service Contract
– Optional protection on specified mechanical
and electrical components of the vehicle available for
purchase to supplement the warranty coverage provided
with the new or used vehicle.
Credit Insurance
– Optional insurance that pays the scheduled unpaid
balance if you die or scheduled monthly payments if
you become disabled. As with most contract terms, the
cost of optional credit insurance must be disclosed
in writing, and, if you want it, you must agree to it
and sign for it.
Guaranteed Auto Protection
(GAP) – Optional protection that pays
the difference between the amount you owe on your vehicle
and the amount you receive from your insurance company
if the vehicle is stolen or destroyed before you have
satisfied your credit obligation.
Amount Financed –
The dollar amount of the credit that is provided to
you.
Annual Percentage Rate or
“APR” – The cost of credit
for one year expressed as a percentage.
Finance Charge –
The total dollar amount you pay to use credit.
Fixed Rate Financing –
The finance rate remains the same over the life of the
contract.
Variable Rate Financing
– The finance rate varies and the amount you must
pay changes over the life of the contract.
Monthly Payment Amount –
The dollar amount due each month to repay the credit
agreement.
Assignee –
The bank, finance company or credit union that purchases
the contract from the dealer.
Getting a Copy of Your Credit Report
To obtain a copy of your credit report,
contact one of the three major credit bureaus:
Equifax Credit Information
Services
P. O. Box 740241
Atlanta, GA 30374-0241
Phone: (800) 685-1111
Web site: www.equifax.com
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Experian
P. O. Box 2104
Allen, TX 75013
Phone: (888) 397-3742
Web site: www.experian.com
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TransUnion Corporation
P. O. Box 1000
Chester, PA 19022
Phone: (800) 916-8800
Web site:
www.transunion.com |
Remember... Before Visiting the
Dealership:
- Evaluate your financial situation and determine
how much you can afford to pay each month. A longer-term
finance contract may mean smaller monthly payments
than a shorter-term finance contract (if all other
terms are the same) – but will result in more
money paid over time on your contract.
- Determine the price range of the vehicle you’re
thinking of buying. Check newspaper ads, the Internet,
and other publications.
- Understand the value and cost of optional credit
insurance if you agree to purchase.
- Know the difference between buying and leasing a
vehicle.
- Be aware that your credit history may affect the
finance rate you are able to negotiate. Generally,
you’ll be able to get a lower rate if you’ve
paid your monthly credit obligations on time.
- Compare annual percentage rates and financing terms
from multiple finance sources such as a bank, finance
company and credit union. This information may also
be available from the finance sources’ and vehicle
manufacturers’ Web sites.
When Visiting the Dealership:
- Stay within the price range that you can afford.
- Negotiate your finance or lease 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.
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.
If You Encounter Financial Difficulty:
- Talk to your creditors if you experience difficulties
making your monthly payments. Explain your
situation and the reason your payment will be late.
Work out a repayment schedule with your creditors
and, if necessary, seek the services of a non-profit
credit counseling agency.
- Know your obligations. A creditor or assignee may
take the vehicle in full satisfaction of the credit
agreement or may sell the vehicle and apply the proceeds
from the sale to the outstanding balance on the credit
agreement. This second option is more common. If the
vehicle is sold for less than what is owed, you may
be responsible for the difference.
- Be aware that repossession can occur if you fail
to make timely payments. It does not relieve you of
your obligation to pay for the vehicle. The law in
some states allows the creditor or assignee to repossess
your vehicle without going to court.
Federal Laws
Familiarize yourself with laws that
authorize and regulate vehicle dealership financing
and leasing.
Truth in Lending Act –
requires that, before you sign the 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.
Federal Consumer Leasing Act
(FCLA) – requires the leasing company
(dealership, for example) to disclose certain information
before a lease is signed, including: the total amount
of the initial payment; the number and amounts of monthly
payments; all fees charged, including license fees and
taxes; and the charges for default or late payments.
For an automobile lease, the lessor must additionally
disclose the annual mileage allowance and charges for
excessive mileage; whether the lease can be terminated
early; whether the leased automobile can be purchased
at the end of the lease; the price to buy at the end
of the lease; and any extra payments that may be required
at the end of the lease.
Credit Practices Rule
– requires creditors to provide a written notice
to potential co-signers about their liability if the
other person fails to pay; prohibits late charges in
some situations; and prohibits creditors from using
certain contract provisions that the government found
to be unfair to consumers.
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.
For more information on federal credit
regulations and consumer rights, contact:
Federal Trade Commission
Washington, DC 20580
Phone: (877) FTC-HELP (382-4357)
Web site:
www.ftc.gov |
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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 (Web site: www.naag.org).
Prepared in cooperation with:
To order additional brochures call:
(888) 400-2233.
This brochure is provided solely for educational and
informational purposes and does not constitute legal
advice.
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