Car Financing for Beginners

One of the most misunderstood concepts on leasing or buying a new car loan is a way of financing really works. I'll say it again later, but the key concept to understand is that dealers do not lease cars, and loans. Repeat: New car dealers are not finance cars. However, traders can affect what you pay for support.

Dealer always sell for cash

Car dealers are independent businessmen approved franchise with one or more manufacturers. They do not work for the manufacturer. No manufacturer owned car dealerships. In some cases, a large delegation may hold multiple representative offices in various locations. These stores can sell the same vehicles brand, or different brands. Dealers buy cars from the manufacturer, usually with large loans from a bank or finance company. The bank interest traders on these loans. Dealers must sell cars to pay off loans and interest thereon, and cover other costs of running a business.

Traders always get cash for their cars, either directly by the customer or a finance company or bank that a customer has borrowed money. A common misconception is that the dealers customers cash rebate. This is not true because dealers generally make more money on the funded loans or leases - in the form of supply or raising interest rates.

Dealers do not finance leases and loans

When a dealer sells or leases a car to a customer, has finance companies or banks that work by providing its customers with the financing they need. Most traders use the car maker "captive" finance company such as GMAC, the Ford Motor Credit, and American Honda Finance. Dealers arrrange financing for its clients - as a service. Customers can arrange their own financing if they wish.

Key point: dealers are not leases and loans. The delegates do not approve customers for leases or loans. Dealers are not processed leases or loans or receive payments for leases or loans. Traders, just take lease and loan applications and try to arrange for the financing of customers.

Dealers using independent finance companies or banks on behalf of clients

The seller can make a quick preliminary check of the credit history of customers using one of the three major credit reporting agencies. This is NOT on loan or lease approval, but only to determine whether the customer has credit problems so severe that it would be pointless to continue with the transaction.

Remember, the dealer is the company had no funding - can approve customers for loans or leases. The finance company or bank in which the merchant sends the lease or loan application will have on their property and check to see not only the credit history and payment history, but credit score and debt to income ratio. Control credit is much more detailed than the simple check that the dealer can do.

What you pay - your credit rating
When a finance company or bank check your credit score will fall into one of three categories. First, you could be rated a "prime" customer, or "A" category. This means that your FICO score is above 680. You qualify for the best rate.

If your credit score is between 620 and 680, which is "near-prime" and will pay as much as 5% higher rate than someone with a better result.

If your score is below 620, considered "sub-prime" and is almost certain to have difficulty finding a bank or finance company that is willing to give you a loan or lease. If you find one, your interest rate will likely be extremely high.

Delegates can change your interest rate

One of the possible "hidden" fees when buying or leasing a car is a label that traders can add to your interest rate, even when you have a good credit score .. Tell the usual rate from the finance company used by the trader is 6.0%. The dealer marks the rate by a percentage, ie 2.0%, making your real rate of 8.0%. This markup is nowhere mentioned in the documents you sign. Car dealers say the practice is to cover the cost of financing their brokerage customers. " In fact, it's extra profit, or simply do concessions made to customers elsewhere in the Agreement.

Automotive News reports that some companies such as DaimlerChrysler Services, the Honda Finance, and GMAC have settled on an agreement marking 2.5% limit. California now has a law that provides 2.5% maximum markup for most car loans. So it seems that 2.5% is now the magic number in the industry.

A common question from automotive consumer is, "Can I negotiate my rate?" In most cases you can try to negotiate the labeling, but not the base rate, which is set by the finance company based on your FICO score. In the past, there was no good way to know whether the car dealer was marking up the rate, but now, with the recent "agreement" and the laws, we can assume that the percentage markup is going to be as much as 2.5% added the base rate. Lease rates are particularly difficult to negotiate because the interest rate is known as "money factor" (see the discussion of lease finance charges on a monthly rent our article), and the rate does not appear in your lease.

Be aware that not all dealers mark up interest rates, but appears to be a growing practice. Also, remember that the base rate will be determined by how a finance company values ​​your credit history and credit score. This is why it is important to understand how the credit ratings. A low score or report errors in your credit history can easily high base rate, even without signs. Therefore, knowing your credit score and shopping around for better prices is always a good thing to do.

Dealers can check your credit, but little attention has

Many customers mistakenly assume that when the dealer says it has done a credit check and lets the client sign the papers that the deal is done and everything is wrapped up legally. Not true. Clients often think they can somehow keep a car that has not been paid for just because they have signed cards or that there is a small technical error in their contract. This is also a misconception.

What you are signing and what it means

When a customer rents or buys a car with a loan, he or she signs the documents, essentially, to say: "I agree to rent or buy this car, using funds that could be lent to me by a finance company or bank (if approved by me) that the dealer will try to arrange for me and if not these funds have been approved by a finance company or bank, the agreement is void, unless the dealer can not find another company funding would approve. If approved funds, the finance company or bank will pay the dealer directly to these funds are borrowed for me. The finance company or bank will then work directly with me to arrange a monthly payments to repay this loan or lease. I understand that the dealer will then pay in full for the car and will no longer be involved in the lease or loan. "

If the lease or your loan is approved

The finance company or bank can find problems in the credit history of the client / scores or debt to income data that makes them the flag of the application as high risk. They ask the merchant to inform the client that the request was not approved, or that extra money needed, or that a co-signer is required to resubmit its application for approval. Finance companies and banks operating through a representative; Not work with the customer directly to the payment book arrives after approval.

With a lease, a finance company will sometimes ask for payment when there was no original, or may ask for a larger security deposit, if any, when there was none originally. Often, this will allow the payment remains the same even if the total cost of the agreement has increased.

If the finance company or bank does not approve a lease or loan the customer does not pay the dealer for the car and the car still belongs to the dealer, even though you have already enabled the customer to drive the car home before few weeks. If the vendor is not paid, will want his car back, regardless of contracts, the customer may have signed.

What are your options?

First, the customer should always know their own credit history and FICO score before ever setting foot in a showroom of the dealer. In this way, there will be no surprises later. Secondly, the customer can ask the dealer if you cooperate with other banks or finance companies who might be willing to approve the loan or lease. Thirdly, the customer can always shop for their lease or loan and get pre-approval for a spending limit.

Al Hearn is founder, owner and manager of two popular cars of consumer websites, Lease Guide and Used Car Advisor, which provides free car purchase, sale, leasing, financing and advice.



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