Understanding Vehicle Financing
The most common type of vehicle financing, 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.
Dealership financing offers the buyer several benefits including the following:
- Convenience – One stop shopping for the buyer with vehicles and financing in one place.
- Multiple financing relationships – Dealerships offer buyers a variety of financing options through their relationship with multiple lenders and manufacturers.
- Special programs – Dealerships may offer manufacturer-sponsored rebates, incentives and low-finance rate loans to buyers.
The dealership will obtain a copy of your credit report, which contains information about current and past credit obligations, your payment record and data 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 creditor’s 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 a variety of factors, like your credit history, length of employment, income and expenses 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 upon what appears on 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 discusses the terms under which they are willing to approve the loan with the dealership.
Your dealer may be able to offer manufacturer incentives, such as promotional finance rates or cash rebates 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.
For many years banks and finance companies participating in subprime auto loans have relied on a computer generated scoring system known as your Beacon. The Beacon score was developed to help quickly analyze a loan application. Even people with good credit may have Beacon scores that fall into a range that triggers an automatic brief interview to ask you some basic questions about your personal budget, income sources and use of credit. You shouldn't be offended by a Beacon driven interview, in many cases it is simply a computer generated formality.
What Influences Your APR
Credit history, debt to income ratio, loan to value, current finance rates, competition, market conditions and special offers are among the factors that influence your APR (annual percentage rate).
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.
After Completing the Vehicle Purchase or Lease:
When you finance a vehicle, the assignees (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.
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.