Understanding Vehicle Financing
Cars are expensive.
The average price of a new car is over £12,000 while a four-year-old car is almost £5,000. With prices like this it is no wonder that most consumers require some sort of financing or leasing to buy a new vehicle. There are many ways to finance this purchase.
Some people use “direct lending” to obtain a loan directly from a finance company, bank or credit union. Here, a buyer agrees to pay the amount financed, plus an agreed-upon finance charge, for a fixed period. Once a buyer and seller enter into a contract and agree on a price, the buyer uses the loan proceeds from the direct lender to pay for the vehicle.
Loans may also be arranged over the Internet.
The most common type of vehicle financing, however, is “dealership financing”. Here, the buyer and seller enter into a contract where the buyer agrees to pay the amount financed, plus an agreed-upon finance charge, for a fixed period. The dealership may retain the contract, but usually sells it to an assignee (such as a bank or finance company), which administers the account and collects the payments.
For the purchaser, dealership financing offers:
- Convenience – Everything is arranged in one place.
- 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.
- Special programs – From time to time, dealerships may offer manufacturer-sponsored, low-rate special offers to buyers.
Before You Arrive at a Dealership
Do your homework:
- Decide before hand how much you can afford to spend on a monthly payment by using the “Monthly Spending Plan” worksheet in this booklet.
- Get a copy of your credit report and make sure it is accurate and up to date.
- Identify your needs.
- Check auto buying guides and research different models to find out how much you should be paying for them.
- Find out what loans are available and at what rates by contacting various banks, credit unions or other lenders. Compare bank quotes and dealer quotes; there may be restrictions on the most attractive rates or terms so read all the fine print carefully.
If you do opt for dealership financing, make sure it is the available, and not simply the easiest option to cross your way. Car finance is one of the largest financial obligations people enter into in life so it is worth doing your homework and finding the best deal possible.