With prices averaging more then $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 leading": 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
dealership enter into a contract and the buyer agrees to a vehicle
price, the buy used 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". 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 it 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-sponsered, low-rate programs to buyers.
This page 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.
- 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
exisiting credit accounts. The dealership will obtain a copy of your
credit report, which contains information about current and past credit
obligations, you payment record and data from public records (for
example, a bankruptcy filing obtained from court documents). For each
account, the credit report shots 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 sue
information and any legal steps that may have been taken to collect.
Dealers typically sell your contract to 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 optential 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.
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 then 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. Buy 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
purchase option, which is a typical provision in retail lease
contracts. Keep in mind that in most cases, you will 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 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 priotiries 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
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
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
imformation may also be available from the finance sources' and vehicle
manufacturers' websites.
When Visiting the Dealership:
- Stay within the price range that you can afford.
- 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 contact.
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 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
nescessary, 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 dinanced, length
of the credit agreemtn 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 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 failts to pay; prohibits late chrages 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 orgin 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:
