Financing Your Vehicle

Most consumers need financing to purchase a vehicle. Some buyers obtain a loan directly from a finance company, bank, or credit union. In that situation, the buyer deals directly with the lender 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, the lender pays the dealership for the vehicle.

Often, dealers encourage buyers to use “dealership financing.” In this arrangement, the dealership presents the buyer with the terms of the financing agreement. The dealership may retain the contract, but usually sells it to an assignee (such as a bank, finance company or credit union). The assignee services the account and collects payments.

When financing your purchase through a dealership, you may end up paying more than necessary for the loan. Even though your credit history may qualify you for a lower interest rate from a lender, on occasion, dealers may mark up interest rates and profit from the increased rate. Be sure the dealer gives you the lowest rate for which you qualify.

Military personnel are provided some additional protections when looking for a new vehicle. Make sure the lender is aware of a deployment so they can honor the interest rate cap of 6 percent specified in the Servicemembers Civil Relief Act (SCRA). A vehicle lease can also be broken without penalty if the service member is later deployed, according to the SCRA. Some insurance companies offer discounts to service members. And some lenders provide military automobile loans that offer lower interest rates and down payments, but use caution because this also means it will take longer to pay down the loan.

Tips:

• Take the time to shop around for the lowest finance source before you shop. Get financing quotes from your local bank, credit union, and even Internet-based lenders. Get a free copy of your credit report by calling (877) 322-8228 or visiting AnnualCreditReport.com and know your credit worthiness. By obtaining your credit report and shopping for the lowest-cost financing source, you can protect yourself from being charged an unreasonable and unnecessarily high-interest rate.
• Get the “buy rate” if you use dealership financing. When a dealer arranges financing, the interest rate can include hidden markups that are not based on your credit-worthiness. Some dealers do not disclose the lowest rate for which you qualify, known as the Buy Rate, or the amount of money the dealership is making for arranging financing. The Buy Rate is the rate at which you are approved for a loan based solely on your creditworthiness. In many instances, the dealer then adds a markup to the Buy Rate originally offered by the lender and quotes that higher rate to the buyer. The dealer typically receives 70 to 75 percent of the markup as an additional payment from the lender. Ask the dealership to disclose to you, in writing, both the Buy Rate and the markup.
• Compare available rates. You should compare the dealer-quoted interest rate with financing quotes from local banks, credit unions, and the Internet, and choose the lowest annual percentage rate and the lowest number of payments for which you can afford the monthly payment.