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:
1. Convenience - Dealers offer buyers vehicles and financing in one place.
2. 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.
3. Special programs - From time to time, dealerships may offer manufacturer-sponsored,
low-rate programs to buyers.
BEFORE YOU ARRIVE AT A DEALERSHIP
Do some research:
- 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
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
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.