How to Understand Vehicle Finance

Vehicle financing is a means by which an individual may acquire a new or used vehicle without having to pay the full price upfront. Vehicle financing eases the financial pressure on the consumer by allowing the payments to be made over time. When relying on financing to acquire a new or used automobile, the buyer must make monthly loan payments that include interest and finance charges. To become familiar with the process of vehicle financing, you should first know about the different financing options offered by lenders and key terms.

Instructions

1

Understand direct lending. This is a form of vehicle financing in which the consumer takes out an auto loan from a bank, credit union or another financial institution. Under this arrangement, the buyer enters into a business relationship with two separate parties -- the automobile dealership that sells the car and the financial institution that makes the loan. In direct lending, the buyer uses the proceeds from the loan to pay for the car and repays the lender the amount of the loan, plus finance and interest charges, over a stated period. Payment is usually made monthly over terms ranging from 12 to 72 months.

2

Consider dealership financing. In this arrangement the buyer does business with only one party that acts as both the seller and lender. In dealership financing, the seller finances the vehicle, and the buyer repays the financed amount over a stated term. Once the contract is formed, the dealership may either retain the contract or sell it to an assignee. If the contract is sold, the assignee -- usually a bank or credit union -- is responsible for servicing the account and collecting payments from the buyer.

3

Understand and appreciate the benefits of dealership financing over direct lending. Dealership financing is a one-stop solution for buyers, offering vehicles and financing under one roof. Apart from the convenience of having to deal with only one entity, this arrangement also opens up multiple banks and lenders to the buyer, allowing him to choose from a wide selection of financing options offered by various institutions that partner with the dealership.

4

Compare leasing to financing and weigh the pros and cons of each. When you lease a car, you are required to return it to the owner at the end of the term, unless the owner allows you to purchase it at the end of the lease period and you agree to the terms. For a lease, monthly payments may be considerably lower than monthly payments for financing because you only pay for the vehicle's depreciation, plus taxes and rental charges. Other cost considerations in leasing are early cancellation fees, mileage, insurance requirements by the leasing company, and wear and tear on the vehicle.

5

Understand key terms used in vehicle financing, such as "down payment," "amount financed," "APR" and "finance charge." Down payment refers to the amount paid to the dealership at inception, that is, at the time the ownership of the vehicle transfers to the buyer. This may be below 25 percent of the vehicle's price. The amount financed is the amount of credit you receive, and the APR (annual percentage rate) is the cost of the credit, represented in percentage form. The finance charge is the amount you pay to access and use the credit.