Posted: 1/12/2018


Purchasing a vehicle is one of the largest obligations a person can take on. Paying for a vehicle can be costly and, in many instances, a long-term commitment. Obtaining a loan to purchase a new or used vehicle is a decision that should never be entered lightly.

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Purchasing a vehicle is one of the largest obligations a person can take on. Paying for a vehicle can be costly and, in many instances, a long-term commitment. Obtaining a loan to purchase a new or used vehicle is a decision that should never be entered lightly. Before you enter into any loan agreement, it’s important to consider not only how much the monthly payments will be, but also the term of the loan, additional fees, what is included, plus comparison shopping. Consider the total amount you will pay for the loan, which includes the negotiated price of the vehicle, the length of the contract, and the annual percentage rate (APR).

Direct Lending vs. Dealer Financing

You can finance an auto loan either directly, which means you locate a lender on your own, or indirectly, which is typically dealer financing. Direct lending can come from a bank, credit union, or other lender. The consumer typically obtains pre-approval for a loan before going to purchase a vehicle. With dealer financing, the consumer and dealership enter a contract where the consumer agrees to buy the car and pay back the amount financed over time, along with finance charges.

When dealing directly with a lender, make sure you agree with the terms of the agreement. The pre-approval for financing should include the amount financed, APR, the maximum amount of the loan, and all terms and conditions. You may be able to negotiate the rate and terms of the loan. It is wise to get more than one quote to compare.

With dealer arranged financing, the dealer forwards the consumer’s information to potential lenders, who consider whether or not to finance the loan. The lender provides a buy rate to the dealer to offer the consumer. The dealer may include their compensation for brokering the deal in the interest rate, which could possibly make the rate higher. Prior to going to the dealership, shop around for quotes so that you have an idea of the available financing options and allow yourself room to negotiate terms.

Some dealerships offer what they refer to as “in-house” financing. These offers are commonly made to borrowers with no credit or poor credit and often come with higher interest rates. Credit challenged borrowers do well to check the rates and terms of a bank, credit union, or non-bank lender before accepting a high cost loan from the dealer.

Taking the time to explore a variety of available options will help in making an informed decision.

What You Should Know About Your Loan

Many loans have a 60-month repayment plan. More recently, lenders are offering longer-term financing that come with lower monthly payments but stretch out the loan for 72 or 84 months. While it may be appealing to pay lower monthly payments, oftentimes the rates are higher. In addition, you may be paying more on the car than it is worth if you accept the longer loan term.

Some loans come with add-ons that can drive up the cost of the loan. These features can include service contracts, GAP insurance, credit insurance, and extended warranties. These costs, along with the fees for maintenance, insurance, and incidentals should be considered when budgeting to purchase a vehicle.

Negotiating things like the price of the vehicle, the value of any trade-in, down payment, and interest rates can pay off in getting you an affordable loan. Ask about manufacturer incentives, rebates, discounts, and any special pricing available. Note that dealers are required to clearly disclose what is required to qualify for any incentives.

Make sure all terms, conditions, and agreements are in writing and take your time reviewing and understanding the contract before signing anything.

Most loans are based on your credit. Get to know your credit worthiness before shopping for a loan. Clear up any inaccuracies and errors beforehand to get the best terms available to you. In addition, reviewing your credit report may allow you to locate areas that can be improved. Additionally, depending on your credit, you may want to consider a co-signer, someone that agrees to take equal responsibility of the loan if you are not able to qualify on your own.

Other Considerations

Here are a few additional tips to consider when accepting an auto loan:

  • Do not leave without a copy of the credit contract.
  • Understand that the creditor holds a lien on the vehicle’s title until it is paid off.
  • Make your payments on time to avoid consequences such as late fees, repossession, and adverse impact on your credit.

If Financing Falls Through

In some instances, the dealership may contact you to return if financing is not final. Read through any changes and discuss anything you do not agree with or items you do not understand. If you do not agree with the new deal, you do not have to continue with financing. You have the right to unwind the deal and cancel the contract. Request your down payment back and any trade-in. If you do agree to a new deal, make sure you get a copy of all revised documents.

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Business Consumer Alliance (BCA) is a non-profit company that started in 1928. The broad purpose of BCA is to promote business self-regulation. BCA's mission is achieved by assisting consumers in resolving complaints with businesses and using that complaint information, along with other relevant information such as customer reviews, to forecast business reliability. With community support, BCA can identify trustworthy and ethical businesses and warn the public to avoid unscrupulous businesses whose purpose is to defraud the marketplace. BCA also helps businesses promote themselves by providing services and tools to protect their business and reach out to their customers. BCA obtains its funding from member businesses who support the mission and purpose of the organization and who agree to abide by high standards of ethical business practices.

Tags: new car dealers, contract, auto loans

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