Used Car and Truck Financing Options

Financing Options

You have two financing options: direct lending or dealership 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.

This article can be found at https://www.consumer.ftc.gov/articles/0056-understanding-vehicle-financing#federal

Applying for a Car Loan

 The Finance Department Manger will ask you to complete a credit application, which may include the following. 

  • 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;
  • Proof of Income (Most recent pay stub)
  • Proof of Residence (Utility or phone bill dated within 30 days)
  • Occupation;
  • Sources of income;
  • Total gross monthly income; and
  • 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 assignee's, 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 assignee's 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.

To view this entire article visit https://www.consumer.ftc.gov/articles/0056-understanding-vehicle-financing#federal

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. A co-signer may increase the chances of obtaining an approval for a used car loan if you have little credit history, or past credit delinquency. 

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.

Trade In or Down Payment

Saving for a down payment or trading in a vehicle can reduce the amount you need to finance and reduce your financing costs. In some cases, your trade-in vehicle will take care of the down payment on your new vehicle.

If you owe more on your vehicle than its market value, you have negative equity in your vehicle. This is a consideration if you plan to use your vehicle as a trade-in. The longer your new credit contract, the longer it will be before you have positive equity in the new vehicle — that is, before it is worth more than you owe. If you have negative equity, you may need to make a bigger down payment. Or the dealer may offer to include the negative equity in your new finance contract by increasing the amount financed to include the amount you still owe on your current vehicle. This will increase your monthly payments on the new contract in two ways: it adds to the amount financed and increases the finance charge. If you have negative equity in your vehicle, consider paying down the debt before you buy another vehicle. If you use the vehicle for a trade-in, ask how the negative equity affects your new credit obligation.

See this article at https://www.consumer.ftc.gov/articles/0056-understanding-vehicle-financing#federal

Common Financing Terms

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.

Assignee — 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.

Repossession — 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.

Find this article at https://www.consumer.ftc.gov/articles/0056-understanding-vehicle-financing#federal

Obtain a copy of your Credit Report


It is a good idea to check your credit report before you make any major purchase. You can get a free copy of your report from each of the three nationwide reporting agencies every 12 months. To order, visit www.annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request form and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

If you are denied credit or you experience another adverse action based on information in your credit report, you may be able to get additional copies of your report for free. Usually, you will get your credit score as part of a credit score disclosure notice after you apply for financing.

If you want a copy of your credit report, but have already received your free copy, you can buy your report for a small fee. Contact any of the three nationwide credit reporting agencies:

For more information about credit reports, see:


Your Credit Score

When it comes to how much interest is charged on a car loan, some people get charged more interest, and some get charged less. Obviously, you want to be the one who gets charged less. The interest rate lenders charge is based on a number of factors, one of which is your credit score. Your credit score is sometimes called a FICO score, though FICO is only one of a number of credit scoring methods used by lenders.

A credit score is a number that credit bureaus assign to you based on how much debt you have, the number of accounts that you have open, how much credit you have been offered, how good you've been about paying bills on time, and how long you’ve been using credit. Your lender will use information from your application and credit report to determine your debt-to-income ratio (the amount of debt you have compared with how much money you earn).

Lenders use the score to predict your ability and likelihood to pay them back. If your score is low, lenders will assume that you’re at high risk for not paying the loan back, and they will charge you a higher interest rate to cover the higher risk. Lenders may also require a larger down payment from buyers with lower credit scores, or only extend a loan offer for a shorter term.

The last place you want to find out that your credit score is low is a dealership’s finance office. You should know what your credit score is before you apply for a car loan and do your best to make sure it's as high as it can be. Generally speaking, credit scores of 720 and above get the best loan rates.

Though you are entitled to free credit reports from the major credit bureaus each year, you’ll often have to pay a few dollars extra to get your actual credit score. If your score is not as high as you'd like, paying off old bills (like credit card debt) and paying all bills on time for six to nine months should bring your score up and help you get a better interest rate. If you don’t have any credit card debt, closing unused cards can help raise the score. If you do have card balances, closing cards can actually hurt your credit by raising your percentage of credit utilized.

You’ll also want to take a look at your full credit report to ensure its accuracy. If someone stole your identity and opened a credit card in your name and you aren’t aware of it, it could affect your ability to get a car loan, or the terms of any loan that you are offered. You need to report the fraudulent activity right away to the credit bureaus so any errors can be fixed before you apply for auto financing. Dealing with the credit bureaus takes time, so getting out ahead of issues is critical.

View this article at https://cars.usnews.com/cars-trucks/how-to-finance-a-car

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