Saturday, July 12, 2014
Inquirer Daily News

Car Loan Basics

If you are considering buying a car for the first time, you might not know where to begin. Making such a major purchase is most likely the first step in your financial life, so it is very important to take it seriously. Chances are, if you're planning to buy a car or truck, you're one of the overwhelming majority of car buyers that do their homework in advance of ever taking a test drive. You learn about options, colors, prices, and ratings. But would you think to check your credit score and research financing options with the same intensity? You should.

Your dealership or an auto lender will work with you to help you determine a financing arrangement that makes sense for you. But its always a good idea to have a solid game plan on financing before you ever set foot in a dealership. NADAguides.com recommends following this three-step road trip to make the most informed financing decisions:

Your Financial Situation
Evaluate your financial situation and determine how much you can afford to pay. Do you have a budget? If you don't already have one, now is the time to create one. This will help you determine how much car you can actually afford (to estimate a monthly payment for the car itself, check out our payment calculator). Don't forget to factor in vehicle-related costs outside of the car payment, such as insurance costs. Insurance premiums for younger drivers can be significantly higher sometimes as much as the monthly car payment itself. Other costs to consider include gas, maintenance, and taxes, which can all be significant, especially if you forget to plan for them.

If you are jointly financing your automobile and one of you has excellent credit while the other is credit challenged, understand how the finance company determines your annual percentage rate (APR). For example, some finance companies will only judge a couples credit worthiness based on the better qualified applicant. With a good payment history, this could present a good opportunity to help the credit challenged spouse improve their credit history over time. Other finance companies, however, may determine your APR based on both applicants, in which case you may want to consider applying for credit only in the name of the more credit-worthy borrower to secure a lower APR.

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.

How Good is your Credit?
Have you pulled your credit report? Your credit history may affect the finance rate you are able to secure, so its a good idea to get a copy of your free credit report before heading to the dealer. This way, you'll know what creditors will see before they do. And it will give you a chance to try to correct any errors on your report.

How much should you pay?
Firstly, stay within the price range you can afford and research the pricing of your car to determine a realistic price range for the car you are thinking of buying. Have you shopped around? Do some homework before you decide which car to buy and where to buy it. Call your bank or credit union. Talk to multiple dealerships. Print out all quotes and keep them in a folder that you bring with you when you shop for the car. In the end, however, whether you finance through your dealer or elsewhere, there are typically no penalties to refinance if you're not satisfied.

Getting Financed
Do you know how finance rates are determined? Vehicle financiers use a number of factors to determine the finance rate they'll offer you. Typically, they review your credit score, which is based on an automated analysis of your credit history. Other factors that may affect the financing offer include: the price of the vehicle you would like to purchase, the availability of manufacturer incentives, the amount of your down payment, your debt repayment options, and the length of the finance contract. The rate you're offered may be negotiable. Always, compare annual percentage rates and financing terms from multiple sources such as banks, finance companies, and credit unions.

There are literally hundreds of thousands of sources of financing for automobile purchases, such as banks, credit unions, financing companies, savings banks, loans from stock brokerage firms, and home equity loans. This has created a highly competitive marketplace and lower rates for all consumers.

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:

1. Convenience Dealers Offer buyers vehicles and financing in one place.

2. Multiple financing relationships The dealerships relationships with a variety of banks and finance companies mean they can offer buyers a range of financing options.

3. Special programs From time to time, dealerships may offer manufacturer sponsored, low-rate programs to buyers.

How the process works
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 creditors 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 individuals 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.

Do I need a co-signer?
Is there someone you could ask to be a co-signer if needed? If you're under 18, are currently not employed, do not have a credit history, or your credit history is not good, you may need a responsible person to co-sign the finance contract for you.

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-signers 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 someones co-signer.

Sealing the deal
Negotiate your finance arrangements and terms just as you negotiate the price of the vehicle. Understand the value and cost of optional products such as extended service contracts, credit insurance, or guaranteed auto protection. If you don't want these products, don't sign for them. Always take the time to read the contract carefully before you sign it and ask questions about anything you don't understand.

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 consumers 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.

Do you really know everything there is to know? Do you know the difference between leasing and financing? Know what an APR is? Credit insurance? Guaranteed Auto Protection? You need to educate yourself on these terms, and understand the value and price of aftermarket products. If you don't want something, don't sign for it. See the NADAguides.com Auto Loan Glossary to define these terms.

After the purchase
Make your payments on time for late or missed payments incur late fees and appear on your credit report, which can impact your ability to get credit in the future. If you financed the vehicle, be aware that the bank, finance company or credit union that bought the financing contract from the dealership holds a lien on the auto title (and in some cases the actual title) until you have paid the contract in full. If you have difficulty making your monthly payments, talk to your creditors. Work out a repayment schedule and, if necessary, seek the services of a non-profit credit counseling agency. If you default, a creditor may take the auto in full satisfaction of the credit agreement or may sell the auto and apply the proceeds from the sale to the outstanding balance of the credit agreement. 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 auto. The law in some states allows the creditor to repossess the auto without going to court.

What about Leasing a car?
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 vehicles 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 vehicles 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 manufacturers 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.

It is crucial to be vigilant about understanding the vehicle financing process, especially if you are at the beginning of your financial life. If you make mistakes along the way, they can follow you for years. Get smart before you sign on the dotted line.