Top 5 Things You Should Know About Financing a Car
Financing a car can be an intimidating process. Whether you are buying your first car or tenth, there are a few things to take into consideration before signing on the dotted line. Doing your homework and arming yourself with auto loan information can turn what might be an intimidating process, into something fun and exciting.
Here are the top five things we think you should know before you head down to the bank or dealership.
1. Understand Your Financing Options
Direct lending
Obtaining an auto loan from a finance company, credit union, or bank is considered direct lending. As the borrower, you enter into an agreement with the lending agency and agree to pay the amount borrowed plus interest over a designated period.
The benefit of direct lending over financing a car through a dealership is that you have far more options available in the type of vehicle you can buy. You are not solely limited to dealerships and car lots, and can seek private sales.
Dealership financing
Financing a car through a dealership is an agreement wherein the dealership and buyer enter into an agreement where the buyer pays the cost of the vehicle and interest, financed over a period. Once a contract is signed with the dealership, they may hold the contract internally or sell it to an assignee (such as a finance company or bank.) The assignee will then be responsible for servicing the account and collecting payments.
2. Know Your Credit Score
Knowing your credit score before heading to a bank or dealership for an auto loan is advantageous for a number of reasons. Having a good credit score can often improve the interest rates lending agencies can offer you. Generally, the better your credit score, the better the terms offered. If you find you have less than stellar credit, it may be worth your time to investigate your credit report for negative or inaccurate items. Taking the time to improve your credit prior to purchasing can get you a better auto loan in the end.
3. Determine Your Budget
In these tough economic times, it’s important to be financially responsible. Understanding what you can afford, as well as any additional costs that may be associated with a purchase, is very important when financing a car. Be sure to research the make and model of car you are interested to determine any common mechanical failures it may have and factory warranties that are included in the price of purchase. Extra costs could include:
Increased insurance rates
Insurance rates are generally calculated based on the age and model of vehicle. If you’re making a large jump in age the age of vehicle being purchased it could significantly increase the amount of insurance you pay yearly or monthly.
Mechanical repair costs
The associated costs of owning a newer vehicle can’t be overlooked when considering vehicle repair. Although many new vehicles come with warranties up to 100,000 miles newer models of cars come with far more specialty features which may not be included in the warranty – features such as remote key-less entry, foot-operated touch-less lift gate and camera assisted parking to name a few.
Hidden extras and extended warranties
Many dealerships will offer extra services such as rust protection and extended warranties. It is important to make sure you understand what the factory offers in terms of protection plans and warranties, as often it makes these add-ons unnecessary.
4. Research Federal and State Law
There are a number of laws that regulate financing a car with a dealership – making sure you understand the laws that apply to the process is just another tool in your arsenal of auto loan information. It’s recommended that you familiarize yourself with the following federal laws so you know where you stand:
- Truth in Lending Act (TILA)
- Equal Credit Opportunity Act (ECOA)
- Fair Credit Reporting Act (FCRA)
- Credit Practice Rule
If you would like further information about these laws and the protection they provide you as a consumer, please visit the Federal Trade Commission’s (FTC) page on understanding vehicle financing for more information about auto loans.
5. Understand the Terminology
Understanding the terminology involved when financing a car is important. Here are a few auto loan terms that should help:
- Annual Percentage Rate (APR) – is the annualized auto loan interest rate your will be charged by the lender.
- Finance Charge – is the cost lenders charge for using credit.
- Extended Service Contract – this optional protection plan is generally offered on specific mechanical and electrical components of the vehicle and is in addition to warranties offered by the manufacturer.
- Credit Insurance – is an optional form of insurance that covers scheduled payments should you die or become unable to work. The cost of this optional insurance must be fully disclosed in writing by the lending agency.
- Fixed Rate Financing – offers a consistent or fixed finance rate throughout the term of the contract. Fixed rate financing offers the benefit of having a consistent payment every month, although the interest rate tends to be a little higher.
- Variable Rate Financing – is where the finance rate fluctuates over the course of the contracts term. Variable rates can fluctuate with the industry there for payment amounts may vary.
Buying a new vehicle should be a fun and exciting process. If you need help in finding out what car financing options are available, AmONE is here to help. You can either complete our easy-to-use loan solutions form or call AmONE toll-free at 888-401-0330 to speak with one of our financial search specialists. AmONE’s offices are open Monday through Friday from 9:00 AM to 9:00 PM and on Saturday from 9:00 AM to 5:30 PM Eastern time.
