As you are well aware, there are a number of financing and
leasing options available for acquiring a new or previously owned
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
For the vehicle buyer, dealership financing
Convenience - Dealers offer buyers vehicles and financing in
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 page explains dealership financing and leasing. We hope
you'll find it useful as you shop for your next vehicle.
Before you arrive at a dealership
You may want to conduct some research:
Obtain a copy of your credit report and review it
thoroughly--make certain there are no errors.
Identify your transportation needs.
Reference auto buying guides, the Internet, and other sources
to determine the price range and other information for the
vehicle you are considering.
Compare current finance rates being offered by contacting
various banks, credit unions, or other lenders. Compare bank
quotes and dealer quotes, as 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
department will ask you to complete a credit application. They
will also obtain a copy of your credit report, which contains
information about current and past credit obligations, your
payment record, and data from public records.
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, who will then evaluate your credit application using
automated techniques such as credit scoring. This method weighs a
variety of factors such as your credit history, length of
employment, and income and expenses to determine your score.
Since the bank, finance company, or credit union does not deal
directly with the prospective vehicle purchaser, it bases its
evaluation upon 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
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.
Should I lease a vehicle?
If you are considering a lease, there are several things to
keep in mind. The monthly payment on a lease is usually lower than
the monthly finance payment 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.
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.
To be certain the terms of a lease fit your situation,
consider the beginning, middle, and end of lease costs. Compare
different lease offers and terms, and also consider how long you
may want to keep the vehicle.
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. Also, when your lease expires
you are responsible for excess wear and damage, as well as missing
equipment. Additionally, you must service the vehicle in
accordance with the manufacturer's recommendations.
For more information about leasing, check out "Keys to Vehicle
Leasing," a publication of the Federal Reserve Board. You can
request a copy from:
Take the time to know and understand all of the terms,
conditions, and costs to finance a vehicle before you sign the
contract. Review and compare the financing terms offered by more
than one creditor.
Extended Service Contract (Optional)*
Contract in Months
* Any items that are "optional" are not required for the
purchase. If you do not want these items, tell the dealer and do
not sign for them.
This example will help you compare the difference in the
monthly payment amount and the total payment amount for a 3-year
and a 5-year credit transaction. Generally, longer terms mean
lower monthly payments and higher finance charges. You'll also
need to factor in the cost of automobile insurance, which may vary
depending upon the type of vehicle.
3 Years (36 Months)
5 Years (60 Months)
NOTE: All dollars have been
rounded for this illustration. The numbers in this sample are for
example purposes only. Actual finance terms may be different.
The importance of credit health
You already know the significance of maintaining a high credit
rating. Unfortunately, many people do not realize how easily
criminals can obtain a person's private data-and wreak havoc on
their credit. The bottom line is, when it comes to maintaining a
healthy credit rating, prevention is the best medicine. Here are a
few tips for helping prevent identity theft:
Protect your Social Security
number-don't carry your card in your purse or wallet
Shred documents containing
personal information before throwing them away.
Shield your computer from viruses
Check your bills and bank
statements-review carefully for unauthorized charges or
withdrawals and report them immediately.
Review your credit report
thoroughly-look for accounts you don't recognize, especially
newly opened accounts.
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
Web site: www.equifax.com
P.O. Box 2104
Allen, TX 75013
Web site: www.experian.com
P.O. Box 1000
Chester, PA 19022
Web site: www.transunion.com
Remember ... when visiting the dealership:
Negotiate your finance or lease
arrangements and terms.
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.
After completing the vehicle purchase or
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
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.
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
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
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
Web site: www.federalreserve.gov
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:
To order additional brochures on the
information provided here, please call: (888) 400-2233
This information is provided solely for educational and
informational purposes and does not constitute legal advice.