FAQ Credit Management
Vehicle Financing 101
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 of time.
For the vehicle buyer, dealership financing offers:
  1. Convenience - Dealers offer buyers vehicles and financing in one place.
  2. 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.
  3. 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 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.
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:
Publications Services
Board of Governors of the Federal
Reserve System
Mail Stop 127
Washington, DC 20551
This brochure is also available on the Web at: www.federalreserve.gov/pubs/leasing .
Shop for the best deal when financing a vehicle
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.
Creditor#1 Creditor#2 Creditor#3
Negotiated Price of Vehicle
Down Payment
Extended Service Contract (Optional)*
Credit Insurance (Optional)*
Guaranteed Auto Protection(Optional)*
Other Optional* Products:
Amount Financed
Finance Rate (APR)
Finance Charge
Length of Contract in Months
Number of Payments
Monthly Payment Amount
* 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.
Sample comparison
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)
Amount Financed $20,000 $20,000
Contract Rate (APR) 8.00% 8.00
Finance Charges $2,562 $4,332
Monthly Payment Amount $802 $407
Total of Payments $22,562 $24,322
Down Payment 10% 10%
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 and spyware.
  • Check your bills and bank statements-review carefully for unauthorized charges or withdrawals and report them immediately.
  • Stop pre-approved credit card offers-call 1-888-5OPTOUT.
  • 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
Phone: 800.685.1111
Web site: www.equifax.com
Experian
P.O. Box 2104
Allen, TX 75013
Phone: 888.397.3742
Web site: www.experian.com
TransUnion Corporation
P.O. Box 1000
Chester, PA 19022
Phone: 800.916.8800
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 lease:
  • 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 difference.
  • 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.
Federal Laws
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 lease.
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 Act.
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
Phone: 202.452.3693
Web site: www.federalreserve.gov
State Laws
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: www.naag.org).
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.
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