Understand how vehicle financing works

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 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 offer you:

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

Dealer financing:

If you choose dealer financing – another common type of vehicle financing – you get the financing from the dealer. In this case, you and a dealer enter into a contract that states that you purchase a vehicle and agree to pay the financed amount, plus the agreed 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 or assignee – that manages the account and collects payments.

Dealer financing can offer you:

Convenience. Dealers offer vehicles and financing in one place and may have more extended hours, such as evenings and weekends.
Multiple financing options. Because the dealership may have relationships with several banks and finance companies, if you finance the purchase through the dealership you can access a wide variety of options.

Special programs. Dealers may sometimes offer some vehicle 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: Search and compare before you decide to buy or lease. Consider offers from different dealerships and various sources of financing, including banks, credit unions, and finance companies. The best way to find the vehicle and the financing or leasing terms that best suit your needs is to search and compare before you buy.

Before you buy a vehicle or lease it
Consider federal and state laws
Review federal and state laws that affect the process of financing and leasing a vehicle. These laws give you important information that can help you negotiate a better deal or better understand the process. They also give you certain rights.

Determine how much you can afford to pay

Before financing or leasing a vehicle, review 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 agreement.

Decide to finance or lease a vehicle when you know you are ready 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 lease. 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 set out to save for emergencies or other major life priorities or goals.

By saving money for a down payment or delivering a vehicle as part of a payment you can reduce the amount of money you need to finance and reduce your financing costs. In some cases, the value of your vehicle delivered as part of payment may be used to cover the down payment on your new vehicle.

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