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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:
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-sponsored, low-rate programs
to buyers.
This booklet 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 by using the “Monthly
Spending Plan” worksheet in this booklet.
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 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 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 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. 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 priorities 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.
Know the Terms of Financing Before You Sign
Negotiated Price of the Vehicle – The purchase price
of the vehicle agreed upon by the buyer and the
dealer.
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
To obtain a copy of your credit report, contact one
of the three major credit bureaus:
Equifax Credit Information Services
P. O. Box 740241
Atlanta, GA 30374-0241
Phone: (800) 685-1111
Web site: www.equifax.com Experian
P. O. Box 2104
Allen, TX 75013
Phone: (888) 397-3742
Web site: www.experian.com TransUnion Corporation
P. O. Box 1000
Chester, PA 19022
Phone: (800) 916-8800
Web site: www.transunion.com
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 information
may also be available from the finance sources’ and
vehicle manufacturers’ Web sites.
When Visiting the Dealership:
Stay within the price range that you can afford.
Negotiate your finance or lease arrangements and
terms.
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
contract.
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 (and in some cases the actual 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 necessary, 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 financed, length of the credit
agreement 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 charges for default or late payments. For an
automobile lease, the lessor must additionally
disclose 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 fails to
pay; prohibits late charges 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 origin 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:
Federal Trade Commission
Washington, DC 20580
Phone: (877) FTC-HELP (382-4357)
Web site: www.ftc.gov Federal Reserve System
Washington, DC 20551
Phone: (202) 452-3693
Web site: www.federalreserve.gov
State Laws
Some state laws may provide you with additional
rights. For information on these laws, contact your
state’s consumer protection agency or Attorney
General’s office (Web site: www.naag.org).
Prepared in cooperation with:
www.afsaef.org www.ftc.gov www.nada.org
To order additional brochures call: (888) 400-2233.
This brochure is provided solely for educational and
informational purposes and does not constitute legal
advice.
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