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Paying for
Your Car: Financing or Outright Purchase
If you decide that you want to own your new car (not lease
it), you can pay for it in full, or finance your purchase and make
payments over time. Most car purchases in the United States are
financed. If
you finance, the total cost of the car increases because you are
also paying for the cost of credit, which includes interest and
other loan costs. You will also have to consider how much you can
pay as a down payment, your monthly payment, the length of the loan,
and the annual percentage rate (APR). Keep in mind that annual percentage
rates are usually higher and loan periods are shorter on used cars
than on new ones.
What
to Consider When Deciding to Finance
Before you buy
your car, shop for the best financing. Dealers and lenders offer
a variety of loan terms and payment schedules. Compare the Annual
Percentage Rate (APR) and total finance charges offered by banks,
credit unions, savings and loans institutions, and other loan companies
with the financing offered by the auto dealer. You will be better
prepared to negotiate the selling price and make your buying decision.
Keep these rules
in mind while shopping:
- Because interest
rates vary, shop around for the best deal and compare the annual
percentage rates (APR).
- When comparing
the offers, look at the total cost and not just the monthly payments.
- Read and
understand every document you are asked to sign. Do not sign anything
until you have made a final decision to buy.
- Do not take
possession of the car until the financing paperwork is final.
Other conditions
to consider when determining financing:
- Sometimes,
dealers offer very low financing rates for specific cars or models,
but may not be willing to negotiate the price of these cars. To
qualify for these special interest rates, you may be required
to make a large down payment. With these conditions, you may find
it is more affordable to pay higher financing charges on a car
with a lower sales price. Or you may need to purchase a car that
requires a smaller down payment.
- Be cautious
about advertisements offering financing to first-time buyers or
people with bad credit. These offers often require a big down
payment and a high APR. If you agree to financing that carries
a high APR, you may be taking a big risk. If you decide to sell
the car before the loan expires, the amount you receive from the
sale may be far less than the amount you need to pay off the loan.
If the car is repossessed or declared a total loss because of
an accident, you may be obligated to pay a considerable amount
to repay the loan even after the proceeds from the sale of the
car or the Insurance payment have been deducted.
Before
You Sign the Purchase Agreement
If you decide
to finance, make sure you understand the following aspects of the
loan agreement before you sign any documents:
- The exact
price you are paying for the vehicle
- The amount
you are financing
- The finance
charge (the dollar amount the credit will cost you)
- The APR,
annual percentage rate (a measure of the cost of credit, expressed
as a yearly rate)
- The number
and amount of payments
- The total
sales price (the sum of the monthly payments plus the down payment)
- Dealer finance
managers may try to "flip" your purchase to a lease, ignoring
the agreed upon sales price and the promised allowance on the
trade-in. Examine dealer documents carefully to make sure you
are buying, not leasing, the vehicle. Clues like a balloon payment
and "base mileage" disclosures indicate that you are looking at
a lease agreement, not a finance contract.
Remember:
Do not sign anything until you have made a final decision to buy.
Do not take possession of the car until the financing paperwork
is final.
Credit
Insurance Options
Some dealers
and lenders may ask you to buy credit Insurance. Credit Insurance
pays off your loan if you should die or become disabled. Before
you add this cost, check to see if any other Insurance policies
you have provide adequate coverage. Remember, buying credit Insurance
is not required for a loan.
Credit
and Sublease Broker Scams
A new and rapidly
growing area of consumer fraud involves criminals who prey on people
who have credit problems and who are having difficulty getting loans
to buy cars.
There are two
main schemes:
- The "credit
broker" promises to get a loan for you in exchange for a high
fee. In many cases, the "broker" takes the fee and disappears.
- The "sublease"
broker charges a fee to arrange for you to "sublease" or "take
over" someone else's car lease or loan. Such deals usually violate
the original loan or lease agreement. Your car can be repossessed
even if you have made all of your payments. You also might have
trouble insuring your car.
Vehicle
Repossessions
When you borrow
money to buy a car, you should know that:
- The lender
can repossess the car if you miss a payment or for any default
(a violation of the contract).
- The lender
can repossess the car without advance notice.
- After repossession,
the lender might be able to require you to pay off the entire
balance of the loan in order for you to get the vehicle back.
- The lender
can sell the vehicle at auction.
- The lender
might be able to sue you for the deficiency if he/she sells the
car for less than you owe. This is true even in voluntary repossessions.
- The lender
cannot commit a "breach of the peace," for example,
breaking into a home or physically threatening someone, in the
course of a repossession of a car.
If you know
you are going to be late with a payment, talk to the lender to try
to work things out. If the lender agrees to a delay or to modify
the contract, be sure you get the agreement in writing.
Some states
have laws that give consumers additional rights. Contact your state
or local consumer protection office for more information.
 
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