Financing a Motor Vehicle (or a boat)

Remember when purchasing a motor vehicle or a boat not only that a good deal not only includes getting a great price, but also getting the best financing. Bad financing may negate any savings on the negotiated price of the vehicle or boat!

Due to the high price of new and many used cars, most consumers will need to finance or lease their motor vehicle purchase. It is most important that prior to visiting the dealership that the consumers determine the maximum price they are willing to pay for a motor vehicle and how much they can afford to finance, including the monthly payment. (On this website see new and use car buying)

The cost of financing a motor vehicle will depend on a number of factors, including your credit history and your credit score. Before applying for financing, it may be wise to review your credit report to ensure that it contains accurate information. Inaccurate or negative information will have a direct impact on your financing which may cause you to be refused financing or will effect the terms and conditions of financing, including the amount of the down payment, finance charges, the interest rate, and the length of the loan.

Types of Financial Options

Consumer arranged financing: The consumer makes arrangements with a financial institution, bank, credit union, or finance company to finance the motor vehicle purchase. Consumers who have had a relationship with a specific financial institution may be able to negotiate better financing terms and conditions. Credit union members should always consider financing their purchase with their credit union. Credit unions provide normally provide lower interest rates to their members and the loans are usually simple interest loans which also lowers the cost of financing.

Dealer arranged financing: The dealership arranges financing by either financing the vehicle or arranging financing with a financial institution, including manufacturer's financial company, a bank, or a finance company. In most cases when the dealer provides the initial financing the dealer may eventually assign the finance contract to a financial institution such as a finance company, bank or a credit union that will collect the payments and service the account. There may be advantages in using dealer arranged financing, including convenience since the dealer can arrange finance in addition to selling the vehicle. Another advantage is that dealer may have multiple financial institutions to choose from which provides the buyer with a range of financing options. Also, new car dealers may be able to offer manufacturer-sponsored low-rate programs to finance the buyer's purchase and manufacturer incentives, including cash back on certain models. Always determine whether the vehicle you are considering has any special incentives such as low rate financing or cash rebates.

Applying for Financing

Whether you arrange your own financing with a financial institution or have dealer financing, you will be required to complete a credit application. The application will generally request your name, Social Security number, date of birth, current and previous addresses; current and previous employers and length of employment; occupation, sources of income, total gross monthly income, and financial information on existing credit accounts. Complete all the information on the credit application remembering that the dealer and/or the financial institution will be reviewing your credit report and may also verify other information on the application. It is important to remember that your credit score will have a great influence on how much financing will be approved and at what interest rates and for the length of the loan.

Credit Evaluation

Since dealers usually sell your finance contract to a bank, finance company or credit union, your credit application will be submitted to one or more financial institutions to determine their willingness to purchase your contract from the dealer. These banks, finance companies or credit unions 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. In addition, since the bank, finance company or credit union does not deal directly with the vehicle purchaser, it bases its evaluation upon what appears on the individual's credit report and credit score, the completed credit application, and the terms of the sale, such as the amount of the down payment. Each financial institution decides whether it is willing to buy the credit 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.”

When dealing with a new car dealership, if there are no special financing incentives, you can and should negotiate the annual percentage rate (APR) and the terms for payment with the dealership, just as you negotiate the price of the vehicle. This negotiation can occur before or after the dealership accepts and processes your credit application. If you have a high credit score you should receive the lowest interest rate available.

Loan Approval

If your loan is approved and you agree to the terms and conditions, including the APR (interest rate) and the length of loan, you will be required to sign a document called a finance contract. The finance contract will contain all the terms and conditions of the loan and is a separate document from the purchase contract. Make sure all that you agreed to is noted on the contract and also be sure you understand your obligations and rights as contained in the finance contract.

Motor Vehicle Sales and Finance Terms

Negotiated Price of the Vehicle – The purchase price of the vehicle agreed upon by the buyer and the dealer.

Down Payment – An initial amount paid to reduce the amount financed.

Extended Service Contract – Optional protection on specified mechanical and electrical components of the vehicle available for purchase to supplement the warranty coverage provided with the new or used vehicle.

Credit Insurance – Optional insurance that pays the scheduled unpaid balance if you die or scheduled monthly payments if you become disabled. As with most contract terms, the cost of optional credit insurance must be disclosed in writing, and, if you want it, you must agree to it and sign for it.

Guaranteed Auto Protection (GAP) – Optional protection that pays the difference between the amount you owe on your vehicle and the amount you receive from your insurance company if the vehicle is stolen or destroyed before you have satisfied your credit obligation.

Amount Financed – The dollar amount of the credit that is provided to you.

Annual Percentage Rate or “APR” – The cost of credit for one year expressed as a percentage.

Finance Charge – The total dollar amount you pay to use credit.

Fixed Rate Financing – The finance rate remains the same over the life of the contract.

Variable Rate Financing – The finance rate varies and the amount you must pay changes over the life of the contract.

Monthly Payment Amount – The dollar amount due each month to repay the credit agreement.

Assignee – The bank, finance company or credit union that purchases the contract from the dealer.