Understand Vehicle Financing

With prices averaging more than $31,000 for a new vehicle and $17,000 for a used model from a dealership, financing or leasing your next vehicle are becoming the ideal choices by consumers.

Financing Options

You have two financing options: direct lending or dealers arrange financing

Direct Lending

In direct lending, you get a loan directly from a bank, finance company, or credit union. You agree to pay, over a period of time, the amount financed, plus a finance charge. Once you enter into a contract with a dealership to buy a vehicle, you use the loan from the direct lender to pay for the vehicle.

Direct lending may offer you:

Comparisons. You have the chance to shop around and ask several lenders directly about their credit terms before you agree to buy a specific vehicle.

Credit terms in advance. By getting financing before you buy the vehicle, you will know your rate and other terms when you are shopping.

Dealership Financing

In dealership financing — another common type of vehicle financing — you get financing through the dealership. You and a dealer enter into a contract where you buy a vehicle and agree to pay, over a period of time, the amount financed plus a finance charge. The dealer may retain the contract, but typically sells it to a bank, finance company or credit union — called an assignee — that services the account and collects your payments.

Dealership financing may offer you:

Convenience. Dealers offer vehicles and financing in one location and may have extended hours, like evenings and weekends.

Multiple financing options. The dealer’s relationships with a variety of banks and finance companies may mean it can offer you a range of financing choices.

Special programs. Dealers sometimes offer manufacturer-sponsored, low-rate or incentive programs to buyers. The programs may be limited to certain vehicles or may have special requirements, like a larger down payment or shorter contract length (36 or 48 months). These programs might require a strong credit rating; check to see if you qualify.

Remember: Shop around before you make a decision about buying or leasing. Consider offers from different dealers and several sources of financing, including banks, credit unions, and finance companies. Comparison-shopping is the best way to find both the vehicle and the finance or lease terms that best suit your needs.

When You Apply for Financing

Most dealerships have a Finance and Insurance (F & I) Department that will tell you about its available financing options. The F & I Department manager will ask you to complete a credit application.

which may include your:

  • name

  • Social Security number

  • date of birth

  • current and previous address(es) and length of stay

  • current and previous employer(s) and length of employment

  • occupation

  • sources of income

  • total gross monthly income

  • financial information on current credit accounts, including debt obligations.

Most dealerships will get a copy of your credit report, which has information about your current and past credit obligations, your payment record, and data from public records (for example, a bankruptcy filing from court documents). For each account, your 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 status of your account, including the creditor’s summary of past due information and legal steps that may have been taken to collect on those obligations. The dealership typically submits your credit application to one or more potential assignees, such as a bank, finance company or credit union, to determine their willingness to buy your contract from the dealer.

The finance companies or other potential assignees evaluate your credit application using automated techniques like credit scoring, where factors like your credit history, length of employment, income, and expenses may be weighted and scored.

The potential assignee will not deal directly with you when you finance through a dealer. It bases its evaluation on your credit report and credit score, the completed credit application, and the terms of the sale, such as the amount of the down payment. Each 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, often called the buy rate, at which the assignee will buy the contract.

Your dealer may offer manufacturer incentives, such as reduced finance rates or cash back on certain models. You may see these specials advertised in your area and online. Make sure you ask your dealer if the model you are interested in has any special financing offers. Generally, these discounted rates are not negotiable, may be limited by a consumer’s credit history, and/or are available only for certain makes, models, or model-year vehicles.

When no special financing offers are available, you usually can negotiate the APR and the terms for payment with the dealership, just as you would negotiate the price of the vehicle. The APR that you negotiate with the dealer usually is higher than the wholesale rate, because it includes an amount that compensates the dealer for handling the financing. Negotiation can take place before or after the dealership accepts and processes your credit application. Try to negotiate the lowest APR with the dealer, just as you would negotiate the best price for the vehicle.

Dealers who promote rebates, discounts or special prices must clearly explain what is required to qualify for these incentives. For example, these offers may involve being a recent college graduate or a member of the military, or they may involve reductions for only specific vehicles. Check to see if you qualify for any available rebates, discounts or offers as they can reduce your price and, therefore, the amount you finance or that is part of your lease. Most consumers who apply for credit will get a free credit score disclosure notice. This notice includes a credit score, the source of that score, and information about where your score falls with respect to other consumers.

Ask questions about the terms of the contract before you sign. For example, ask whether the terms of the contract are final and have been fully approved before you sign and leave the dealership with the vehicle. If the dealer says they are still working on the approval, be aware that the deal is not yet final. Consider waiting to sign the contract and keeping your current vehicle until the financing has been fully approved. Or check other financing sources before you sign and before you leave your car at the dealership.

What about a Co-signer?

A creditor may require that you have a co-signer on the finance contract to make up for any deficiencies in your credit history. As a co-signer, you assume equal responsibility for the contract. The account payment history will appear on both the borrower’s and co-signer’s credit reports. For this reason, use caution if you are asked to co-sign for someone. Co-signers are legally obligated to repay the contract, so make sure you know the terms of the contract and can afford to take on the payments before you agree to co-sign for someone.

Know the Terms

Before signing any documents, whether at a dealership, bank, finance company or credit union, understand the following terms because financing has a language of its own.

Additional Products or Services
Products or services that the dealer may offer in a sale, financing, or lease. Examples include extended service contracts, credit insurance, and guaranteed auto protection. These products and services are optional. Get the costs and terms of any additional products and services in your contract, and sign only for the specific products you want.
Amount Financed
The dollar amount of the credit provided to you.
Annual Percentage Rate (APR)
The cost of credit expressed as a yearly rate. You may be able to negotiate this figure. Factors that influence your APR: Your credit history, current finance rates, dealers’ compensation, competition, market conditions, and special offers are among the factors that affect your APR. Try to negotiate the lowest APR just as you negotiate the price of the vehicle.
The bank, finance company or credit union that buys the contract from the dealer.
Credit Insurance
Optional insurance that pays the scheduled unpaid balance if you die or the scheduled monthly payments if you become disabled. The cost of optional credit insurance must be disclosed in writing. If you decide you want it, you must agree to it and sign for it.
Credit Report
A document that includes information on where you live, how you pay your bills, and whether you have been sued, or have filed for bankruptcy. Nationwide consumer reporting agencies sell the information in your report to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment, or renting a home.
Credit Score
A number that reflects the credit risk you present based on information in your credit file. The better your history of credit, the higher your score. Your credit score may be used to help decide the rate and other terms you are offered.
Down Payment
The initial amount you pay to reduce the amount you finance.
Extended Service Contract
Optional protection on specified mechanical and electrical components of the vehicle that may be available for purchase. It supplements any warranty coverage provided with the vehicle.
Finance Charge
The cost of credit expressed as a dollar amount. You may be able to negotiate this figure.
Fixed Rate Financing
Financing where the finance rate stays the same over the life of the contract.
Guaranteed Auto Protection (GAP)
Optional protection that pays the difference between the amount you owe on your vehicle and the amount you would get from your insurance company if the vehicle is stolen or destroyed before you have paid off your credit obligation.
Monthly Payment Amount
The dollar amount due each month on the loan, finance contract, or lease agreement.
Negative Equity
The amount owed on a vehicle above its market value. For example, if your credit payoff is $18,000 and your vehicle’s market value is $15,000, you have negative equity of $3,000.
Negotiated Price of the Vehicle
The purchase price of the vehicle agreed on by the buyer and the seller. The price should reflect any rebates, discounts, or special offers that you can get at the dealership if you meet certain qualifications, which should be clearly disclosed.
If you do not make timely payments on a vehicle, your creditor may have the right to repossess it without going to court or warning you.
Total of Payments
As disclosed on a loan or finance contract, the total amount you will have paid after you have made all the payments as scheduled. For a lease, this is the amount you will have paid by the end of the lease.
Variable Rate Financing
Financing where the finance rate varies and the amount you must pay changes over the life of the contract. This is not typical in vehicle finance transactions.
Wholesale Rate (Buy Rate)
The finance rate at which an assignee buys a retail installment sale contract from a dealer.
Shop for the Best Deal when Financing a Vehicle
When you finance a vehicle, shop around, review, and compare the financing terms offered by more than one creditor. You are shopping for two products: the financing and the vehicle. Negotiate the terms and consider several offers. Take the time to know and understand the terms, conditions, and costs to finance a vehicle before you sign a contract. If you sign a contract, get a copy of the signed papers before you leave the dealer or other creditor. Make sure you understand whether the deal is final before you leave in your new vehicle.