Car Financing

Financing options

You have two financing options: a direct loan or dealer financing.

Direct Loan

If you choose a direct loan, you get a loan directly from a bank, finance company or credit union. In this case, you agree to pay the amount financed, plus the agreed-upon finance charge, over a period of time.

When you make a vehicle purchase contract with a dealer, you use the loan from the direct lender to pay the dealer for the vehicle.

A direct loan can be offered to you:

  • The opportunity to compare. You have the ability to search, compare and find out directly the credit terms from various lenders before you commit to buying a specific vehicle.
  • The ability to know the credit terms in advance. If you get financing before you buy the vehicle, you will know the interest rate and terms when you go out to buy the vehicle.

Dealer financing

If you choose dealer financing – another common type of vehicle financing – you get the financing through the dealer.

In this case, you and a dealer enter into a contract stating that you purchase a vehicle and agree to pay the amount financed, plus the agreed-upon finance charge, over a period of time.

The dealership may retain the contract, but usually sells it to a bank, finance company or credit union – called an assignee – which manages the account and collects payments.

Dealer financing can offer you:

  • Convenience. Dealers offer vehicles and financing in one place, and may have longer hours, for example, late nights and weekends.
  • Multiple financing options. Because the dealership may have relationships with several banks and finance companies, if you finance your purchase through the dealership you can access a wide variety of options.
  • Special programs. Dealers may sometimes offer some manufacturer-sponsored programs or programs with low interest rates or incentives for buyers. These programs may be limited to certain vehicles or have special requirements, such as a higher down payment or a shorter contract (36 or 48 months). You may be required to have a high credit score to participate in these programs; find out if you meet this requirement.

Remember: Shop and compare before you decide to buy or lease. Consider offers from different dealers and various sources of financing, including banks, credit unions, and finance companies.

The best way to find the vehicle and financing or leasing terms that best suit your needs is to shop around before you buy.

Before you buy a vehicle or lease

Consider federal and state laws

Review the federal and state laws that affect the process of financing and leasing a vehicle. These laws provide you with important information that may be helpful in negotiating a better deal or understanding the process. They also give you certain rights.

Determine how much you can afford

Before financing or leasing a vehicle, analyze your financial situation to make sure you have enough income to cover your monthly expenses.

Then, if you want to finance the purchase of a vehicle, know that the amount you will pay in total will depend on several factors, including the price you negotiate for the vehicle, the annual percentage rate or APR, which may also be negotiable, and the length of the credit contract.

Make the decision to finance or lease a vehicle when you know you can afford to take on a new obligation. Review the overall cost of the purchase or lease contract.

When negotiating financing or leasing, consider the amount of the monthly payment or installment. If you wish, you can use the “monthly spending plan” worksheet as a guide.

The only appropriate time to consider taking on additional debt is when you spend less than you earn. The extra debt burden you decide to take on should not affect the amount you intended to save for emergencies or other major priorities or life goals.

By saving money for a down payment or giving up a vehicle as part of a payment you can reduce the amount of money you need to finance and lower your financing costs. In some cases, the value of your trade-in vehicle can be used to cover the down payment on your new vehicle.

If you owe more than the market value of your vehicle, you have negative equity. This is something to consider if you plan to use your trade-in vehicle.

The longer your new credit contract is, the longer it will take to reach a positive net worth on the new vehicle – that is, until it is worth more than you owe. If you have negative equity, you will have to make a higher down payment.

Another option would be for the dealer to offer to include the negative equity in your new finance contract by increasing the value of the amount financed to include the amount you still owe on your current vehicle.

This will increase the amount of your monthly payments or fees on the new contract in two ways: what you owe adds to the amount financed and increases the finance charge.

If you have a negative equity in your vehicle – that is, if you owe more than it’s worth – consider paying off the debt before you buy another vehicle. And if you use the vehicle as part of your payment, ask what effect your negative equity will have on your new credit obligation.

Monthly spending plan

When financing or leasing, consider all the costs involved, don’t just think about the monthly payment or fee. Knowing how much you spend monthly and taking into consideration your savings purposes and habits will help you make a more realistic budget.

Subtract the amount of money you need to cover all your savings goals and your monthly expenses, including monthly credit payments and what you pay every month to cover your housing and utility expenses.

The remaining balance is the maximum amount you can afford to pay as a monthly car payment and all new related expenses, such as car insurance.

The remaining balance in Column 2 will tell you if you can afford to pay for a new vehicle and change your expenses.

When applying for funding

Most dealerships have a Finance and Insurance (F&I) Department where you will be provided with information on available financing options.

The manager of the Finance and Insurance Department will ask you to complete a credit application that may include the following information:

  • Your name.
  • Your Social Security number.
  • Your date of birth.
  • Your current and previous address(es) and the amount of time you lived at each location.
  • The name of your current and previous employer(s) and the amount of time you spent at each job.
  • Your occupation.
  • Your sources of income.
  • Your total gross monthly income.
  • Your financial information on your credit accounts, including your debt obligations.

Most dealers will request a copy of your credit report that contains information about your current and previous credit obligations, your payment record, and public record information (for example, a bankruptcy filing in court records).

The credit report indicates the number, type and terms of each of your accounts, and the credit limit, last balance and most recent payment on those accounts. The comments section describes the current status of your account, including a summary by the creditor of information on unpaid debts that are past due and any legal actions you have taken to collect those obligations.

Typically, the licensee submits its application for credit to one or more potential assignees or transferees, such as a bank, finance company, or credit union, to determine whether they are willing to purchase your contract from the licensee.

These finance companies or other potential assignees evaluate your application for credit using automated techniques, such as the credit scoring system, which serves to evaluate and score a variety of factors such as your credit history, length of employment, income and expenses.

When you arrange financing through a dealer, the potential borrower will not deal directly with you. Their evaluation is based on data in your credit report and score, data entered on the credit application and the terms of the sale, such as the amount of the down payment.

Each potential assignee or transferee decides if they are willing to buy the contract, notifies the dealer of their decision, and in appropriate cases, offers the dealer the wholesale rate that will be applied to the purchase of the contract, often called the “purchase rate.

Your dealer may offer you some incentive provided by the vehicle manufacturer, such as reduced finance rates or cash back on certain models. You may see these special offers in advertisements in your area and on the Internet.

Be sure to ask your dealership if there are any special financing offers available for the car model you are interested in purchasing. Generally, these discounted rates are not negotiable, may have limitations based on a consumer’s credit history, and/or may be available only for certain makes, models or year of manufacture of the vehicles.