Understanding Vehicle Financing (Part 1) 

With common family sedans easily costing $25,000 and 4 year-old cars often selling for $10,000, most consumers need financing or leasing for their car. In some cases, buyers use “direct lending”, by obtaining a loan directly from a finance company, bank, or credit union. With 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. Increasingly, consumers are using the Internet to arrange a vehicle loan. 

The most common type of vehicle financing, however, is dealership financing. The buyer and 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 a bank, finance company, or credit union which services the account and collects the payments. 

Car buyers choose dealer financing for the following reasons:

• Convenience - vehicles and financing in one place.
• Multiple financing relationships - the dealership’s relationships with a variety of banks and finance companies provide buyers a range of financing options.
• Special programs - dealerships may be offering manufacturer-sponsored, low-rate programs to buyers

Before visiting the dealership, you’ll need to do some research:

• Determine exactly how much you can afford to 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 impact your access to credit and its cost.
• Check auto buying guides, the Internet, and other sources to find out the fair price for the vehicle you want, including options.
• Compare current finance rates being offered by various banks or other lenders. Compare bank quotes to dealer quotes and look for any restrictions on the most attractive rates or terms from any credit source.
• Read the contract carefully before you sign. You are obligated once you sign.

What Influences Your APR?

Your credit history, current finance rates, competition, market conditions, and special offers are among the factors that influence your loan’s annual percentage rate (APR).

In Part 2 of this article, we’ll discuss co-signers and what questions to ask when deciding whether to lease or buy.