The majority of vehicles purchased are financed entirely or in part. The Federal Trade Commission (FTC) mentions that the average price of a new car in March 2007 was $28,000 and the average price of a used car was $15,000. Few consumers can pay this out-of-pocket and require financing. Financing a vehicle simply means acquiring a car loan to complete an auto purchase.
Direct Lending
One way to finance a vehicle purchase is through what is called direct lending. This is when you seek loan funds directly from a commercial source like a bank or credit union. The lender provides the car buyer funds to complete a purchase in exchange for repayment of the loan principal and an agreed upon interest rate. Buyers pay the dealer using the borrowed funds and they repay the lender over a stated term period.
Dealer Financing
Dealer financing is fairly common, according to the FTC. With dealership financing, the deal provides the loan to the buyer but often sells the loan or passes it on to a secondary lender. Convenience is the major benefit of dealer financing highlighted by the FTC. Dealers like to offer financing to consumers because it makes the buying process simpler. Dealers usually have access to a wide range of lenders and financing options to suit your needs, sometimes including special incentive programs.
Financing Process
With direct lender financing, you need to contact the lender ahead of making a purchase decision on a car. With dealer financing, you make your purchase selection and the finance manager at the dealership takes a credit application and searches for the best loan program for you. In November 2008, the National Automobile Dealers Association (NADA) distributed its "Automotive Financing FAQs." In response to a common question about whether poor economic conditions limited financing options for car buyers, NADA pointed out that if you have a steady job and good credit score, plenty of banks, credit unions and financial institutions want to lend to you.
Legal Considerations
The FTC discusses several important consumer protection laws that affect car buyers when financing a vehicle purchase. The Truth in Lending Act, for instance, relates to any loan and requires the lender to disclose in writing key terms of the loan, including "APR, total finance charges, monthly payment amount, payment due dates, total amount being financed, length of the credit agreement and any charges for late payment." The Consumer Leasing Act, Credit Practices Rule, Equal Credit Opportunity Act and Fair Credit Reporting Act are other consumer protection laws you should get to know before financing a vehicle.
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