Introduction
Before you Arrive at the Dealership
What Happens When You Apply for Financing ?
What Influences Your APR ?
What About a Co-Signer ?
I Am Upside Down, What Should I Do ?
Should I Lease ?
Introduction
With prices averaging more than $20,000 for a new vehicle and $9500 for a four year old vehicle, most consumers need financing or leasing to acquire a 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 the dealership agree to a price and enter into a contract, 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:
- Convenience- Dealers offer a buyer vehicles and financing in one place.
- 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.
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Before You Arrive at a Dealership
Do some research:
- Get a copy of your credit report ( Click here to find out about your credit) so you are aware of what creditors will see. Errors or accurate negative information can impact your ability to get credit and/or your finance rate.
- Identify your transportation needs
- Check auto buying guides, the internet and other sources to find out the price range and other information for the vehicle you want to buy.
- Compare current finance rates being offered by contacting various banks, credit unions, or other lenders. Compare bank quotes and dealer quotes; remember, there may be restrictions on the most attractive rates or terms from any credit source.
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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 F&I department manager or your sales consultant 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 date 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 are variety of factors like your credit history, length of employment, income and expense 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 on what appears on the individual’s credit report and score, the completed application and the terms of the sale, such as the amount of the down payment. (Click to find out how the lender sees you) 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 special 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 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 rate that you negotiate with the dealer is usually higher than the wholesale rate described earlier. The negotiation can occur before or after the dealership accepts and processes your credit application.
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What Influences APR ?
Your credit history, current finance rates, competition, market conditions and special offers are among the factors that influence your APR.
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What About a Co-Signer ?
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 signer’s 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 someone’s co-signer.
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I Am Upside Down, What Should I Do?
The first thing to understand is that you probably didn’t get there overnight. Negative equity usually occurs as you trade in one vehicle for another and then trade again before you have had time to get to that magic number we call “equity.”
The second thing you have got to understand is that the amount you are upside down won’t go away overnight either.
One thing is for sure, if you keep on doing what you’ve been doing, you gonna keep on getting what you’ve been getting.
The only way, other than cash down, to get out of a negative equity situation is discipline. Americans, by our very nature, are an impatient group. When we want something we want it now. This is the major cause of negative equity; we keep trading before we hit that “magic number”, and we keep adding depreciation on top of depreciation, compounded by longer and longer term financing. This snowball is becoming the industry and our customers' biggest headache.
THE ANSWER: Make the commitment and bite the proverbial bullet and keep your vehicle long enough to reach the “magic number”. You can reduce the time it takes by putting down more cash, or adding to your monthly payment if you so choose.
REMEMBER…no matter what you do you will always be upside down without the right cash down payment.
THE KEY: Is to match your desire to trade, with the trade cycle that gets you to the magic number at that time. Let us help you set up a plan that gets you out of your current negative equity and then a plan that coincides with your driving habits.
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Should I Lease A Vehicle?
If you are considering leasing, there are several things to keep in mind. The monthly payments on a lease are usually lower than a monthly finance payment on the same vehicle because you are paying for the vehicles expected depreciation during the lease term, plus the 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 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 specific 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 will 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. Many manufacturers now offer extended warranty programs to help manage the risk of excess wear and damage at lease end.
Click here for more information on Leasing a Vehicle
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