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99 Auto Loans Questions and Answers

Are there any costs for repossessing a car?

Yes, in almost every state you may be charged several hundred dollars for the cost of the repossession, though some states have laws that limit the amount.

Can I negotiate the interest rate with the dealer?

Yes. The interest rate is always negotiable, just like the price of the car.

The first price the dealer offers for the car may not be the lowest price available to you, and the first rate for the loan the dealer offers you may not be the lowest rate you qualify for. 

TIP: Ask the dealer what the “buy rate” is and negotiate for a rate as close to the buy rate as you can. Negotiating like this could save you thousands of dollars over the life of the loan.

Can I prepay my loan at any time without penalty?

Generally, yes. However, rules about this vary according to state law. Review your disclosures and contract before you agree to purchase the car and enter the loan. These documents will tell you whether there may be a penalty for paying early.

If you find that the loan you received has a high interest rate, you may later be able to refinance for a lower interest rate and payment, prepaying the original loan in full. Ask your bank or credit union about interest rates.

TIP: When you receive your Truth in Lending Act disclosure, review it along with your contract before signing. Look for information about any prepayment penalties, your interest rate, APR and payment amount. If what’s on paper doesn’t not match what the dealer told you, ask for an explanation.

Can a lender or dealer ask me about the alimony, child support, or separate maintenance payments that I receive?

In general, only if you want the creditor to consider such payments as part of your application for credit. A lender or dealer may ask whether income stated in your application comes from alimony, child support, or separate maintenance payments. However, the lender or dealer must tell you that you do not have to reveal such income if you do not want it considered.

Can a lender or dealer ask me about my race, color, religion, national origin, or sex?

For non-mortgage transactions, generally, a creditor cannot ask about your race, color, religion, national origin, or sex.

Can a lender or dealer consider the fact that I am not a citizen of the United States?

A creditor such as a lender or dealer cannot discriminate on the basis of national origin. However, a lender or dealer may ask about your permanent residency and immigration status. A lender or dealer may consider this information or any additional information that may affect its rights and remedies regarding repayment.

A lender or dealer may also take into account any law, regulation, or executive order that limits dealings with citizens of certain countries.

Can a lender or dealer consider my age when deciding whether to give me an auto loan?

Generally, a creditor such as a lender or dealer cannot use your age to make credit decisions. However, there are exceptions to this rule. For example, age can be considered in a valid credit scoring system.

But even then, the credit scoring system may not disfavor applicants 62 years old or older. (It may favor applicants 62 years or older.)

In addition, a lender or dealer may relate your age to other information about you that the lender or dealer considers in evaluating creditworthiness. For example, a lender or dealer may consider your job and length of time to retirement to determine whether your income (including your retirement income) will be adequate for the life of the loan.

Can a lender or dealer consider my sex or marital status when deciding whether to give me an auto loan?

A creditor such as a lender or dealer cannot discriminate on the basis of sex or marital status.

If you are applying for joint credit or credit secured by collateral (like a motor vehicle), the lender or dealer may only ask if you are married, unmarried, or separated. The lender or dealer may explain that the “unmarried” category includes single, divorced, and widowed persons.

A lender or dealer may consider your marital status as it affects the creditor’s ability to reach the property in the event of nonpayment. For example, for auto loans, a creditor could consider whether your spouse has an interest in the property that is being offered as collateral for the loan.

Can a lender or dealer consider whether I receive income from a public assistance program when deciding whether to give me an auto loan?

A creditor such as a lender or dealer cannot discriminate against you because you receive public assistance income. Like any other income, a lender or dealer may consider whether your public assistance income is likely to continue. If your income is not likely to continue, that fact can be considered in determining your creditworthiness.

Can shopping for a car loan have an effect on my credit?

Here’s the bottom line:  Any change to your credit score from shopping will be a minor price to pay for getting the best deal on a car, mortgage, or student loan.  If you have a great credit history, shopping around may have no impact on your credit score at all. And even if your credit history is less than stellar, the impact from shopping around for a loan is likely to shave off between one and five points.  On a typical credit score of around 675 that’s not likely to affect you much, especially when you compare that to the hundreds or even thousands of dollars you could save by finding a better interest rate on a loan.    

For specific types of loans -- auto, mortgage, and student loans - credit scoring models are also designed to take shopping for a loan into account.  Let’s say you are looking around for an auto loan and you authorize five lenders to check your credit score.  All those credit checks -- the industry calls them “inquiries” – should either count as zero or one inquiry, if the inquiries are made in a short period such as fourteen days.  If you shop for a mortgage loan at the same time you are shopping for an auto loan, the shopping you do for those two loans should count as two inquiries.

Tip:  When you apply for a loan and the lender checks your credit, a credit score is created for the lender.  According to one major credit scoring company, any inquiries that took place in the 30 days prior to that scoring will not affect your credit score.  So it’s a good idea to do your loan shopping in a timely manner.

The rules on inquiries are different if you are applying for new credit cards. Credit scoring companies consider consumers who apply for several new credit lines in a short period of time to be a higher risk and they adjust credit scores accordingly.  

But don’t worry about all those promotional offers for credit cards impacting your credit score.  Those promotional inquiries do not count against your credit score.

The dealer told me I was required to purchase an extended warranty to get the promotional interest rate, but the paperwork I signed said it was optional. Do I have to purchase it?

If the paperwork says the warranty is optional, the dealer can’t require you to purchase it.

If you believe that your dealer has misrepresented the terms of an agreement, you may file a complaint with the FTC and your state attorney general. Also, you may want to consider contacting a private attorney for assistance.

Do I have to get my loan from the dealer?

No, you do not have to get a loan from the dealer.

You should shop for the best deal. A bank or credit union may be able to offer you better terms than the dealer.

If you decide to ask a dealer about financing, know that the rate the dealer offers is negotiable, just like the price of the car. The first price the dealer offers for the car may not be the lowest price available to you, and the first rate for the loan the dealer offers you may not be the lowest rate you qualify for. Just like a car has a wholesale price you can look up, you can ask the dealer about the “buy rate.”

Do I have to negotiate my car purchase at the same time as I negotiate how much I get for my trade-in or the terms of a loan from the dealer?

You are not required to get a loan from a dealer or trade in a car to purchase a car from the dealer. You should negotiate each part of the deal separately and comparison shop to get the best overall deal.

Here are some steps you can take:

Step 1 - You can go to the dealer and research car prices as if you are buying for cash. Even if you know you’re trading in the car, you don’t have to tell the dealers that when you are shopping around.   
 
Step 2 - If you still have an outstanding balance on the car you are trading in, find out the payoff amount from your lender so you know how much you have to pay before your old loan is fully paid.

Step 3 - You can get a quote on your trade-in. You should look up the value of your current car by comparing what you could sell the car for at other dealers or to other persons directly (the “private sale” value), either through checking newspaper classified, searching services such as Edmunds, National Automobile Dealers Association, or Kelley Blue Book  (online or at your local library), or even negotiating with others before getting a proposal from the dealer.

Step 4 - Then negotiate the interest rate for your loan separately, comparing interest rates obtained from your bank or credit union. Before you go to the dealer, you can find out what interest rates you may qualify for based on your credit history, how much you want to pay for the car, what your trade in is worth, and what you can make for a down payment. 

You should know, though, that you may need to apply to get a precise quote, and getting quotes from multiple lenders over a long period of time could have a negative impact on your credit score. For most people, any negative effect will be small, while the benefits of shopping around could be significant. You can also  minimize any negative impact by doing all your rate shopping in a short amount of time.

Negotiating the car price, the trade-in value, and financing rates separately - or even financing the new car with someone other than the dealer - may improve your overall deal. Breaking the transaction into different pieces may take some of the pressure off you while you shop around and save you money in the long run.

Does a lender or dealer have to consider my part-time or retirement income?

A creditor such as a lender or dealer cannot discount or refuse to consider your (or your spouse’s) income because it comes from part-time employment. A lender or dealer also cannot discount or refuse to consider income that is an annuity, pension, or other retirement benefit. Like all other forms of income, however, a lender or dealer can consider the amount of the income and likelihood that it will continue.

How do I know who my auto loan lender or servicer is?

After you obtain a loan, you will generally receive a welcome letter from your lender or servicer giving you information about your loan that includes contact information. You can also find contact information for your lender or servicer on monthly bills or coupon books you receive. Make sure you keep and pay attention to your paperwork, as it can tell you:

  • Who your lender or servicer is
  • Where to send your payments
  • What counts as an “on time” payment (usually when the lender receives it,not when you mail it)
  • Payment due dates
  • Who to contact if you are having difficulty making payments

How do I pay back my Personal Line of Credit?

Like a credit card, you will pay a monthly bill that shows your advances, payments, interest, and fees. There is always a minimum payment, which may be as much as the entire balance on the account. You may also be required to “clear” the account once a year by paying off the balance in full. Read your account agreement carefully to ensure you understand what you will be required to do. If your line of credit has a minimum payment, you will pay less in interest if you consistently make more than the minimum payment.

How does a bank or credit union decide what interest rate to offer me on an auto loan?

A bank or credit union will typically consider several main factors:

  • Your credit score and credit history
  • The length of time you’ll be paying back the loan, called the “loan term” or “term of the loan"
  • The amount of your down payment as a percentage of the value of the car
  • Whether you are purchasing a new or used car

TIP: Your annual percentage interest rate can vary as much as 10 to 15 percentage points  based on your credit score and history, which could mean the difference between getting a loan at 5 percent versus one at 15 percent - so be sure to check your credit report for any errors before you shop for financing. And don’t forget to apply for a few loans from different lenders, such as banks or credit unions, before going to the dealership.

How will I know if my car is going to be repossessed?

If you are late on your payments, a creditor may “accelerate” your loan, meaning that you must pay the full amount of the loan all at once. If you do not pay, a creditor can take or “repossess” the car. Some states require a final notice from the lender to the consumers and a chance to catch up on late payments.

I am getting collection calls. What can I do?

You should first determine whether you really are late on your payments. Check your bank account information to make sure your payments were withdrawn. You should also make sure that your payment was either mailed or sent electronically to the right place by contacting your lender or servicer directly.

If you aren’t late or you disagree with the amount the debt collector says is due, you can dispute the collection claim. Even if you are late, remember that you have rights when dealing with debt collectors, and it is against the law for a collector to harass you or make false statements to you.

I am married or was previously married, and I am applying for an auto loan in my own name. Can a lender or dealer ask me about my spouse or former spouse?

Generally, a creditor such as a lender or dealer may request information about your spouse or former spouse only if:

  • Your spouse or former spouse will be allowed to use the account
  • Your spouse or former spouse will be responsible for paying debts on the account
  • You are relying on your spouse’s income or former spouse’s income to repay the credit requested
  • You reside in a “community property” state
  • You are relying on property located in a “community property” state to repay the credit requested
  • You are relying on alimony, child support, or separate maintenance payments from a spouse or former spouse to repay the credit requested

I am a member of the military or spouse/family member of a servicemember. Aren't there limits as to what I can get charged for a loan?

If the loan was obtained by the servicemember, or jointly by the servicemember and spouse, prior to active-duty military service, then the loan rate is capped by the Servicemembers Civil Relief Act of 2003 (SCRA) at 6% during active-duty military service. You must provide your creditors with written notice and a copy of you or your spouse’s military orders calling you or your spouse to active duty in order to receive this protection.  

The SCRA applies to active-duty members of the Army, Navy, Air Force, Marine Corps, and Coast Guard; members of the reserves when on active duty; members of the National Guard mobilized under federal orders for at least 30 consecutive days; and active commissioned officers of the Public Health Service or the National Oceanic and Atmospheric Administration.

Learn more about the Servicemembers Civil Relief Act.

The Military Lending Act also limits certain consumer credit extended to servicemembers on active duty and their dependents. This law says a lender can’t charge more than 36% on certain payday loans, vehicle title loans, and tax refund anticipation loans.

Contact your local Judge Advocate General’s (JAG) office to learn more about lending restrictions. You can also seek assistance from your installation financial readiness office.

I am a member of the military or spouse/family member of a servicemember and I think I have a loan that exceeds what I can be charged by law. What should I do?

If you think you have been overcharged for a loan, you should seek legal assistance. It is possible that you won’t have to pay the charges that exceed the legal limit. Check with your local JAG office for more information. To find your JAG Legal Assistance Office use the locator.

I am in the military (Active, Guard or Reserves) and afraid my car is going to be repossessed. What rights do I have?

If you financed your car through your dealership and you made a payment on your vehicle before you entered active duty, the SCRA may protect your car from repossession while you are on active duty.

Check with your local JAG office for more information. To find your JAG Legal Assistance Office use the locator.

I am in the military (Active, Guard or Reserves). What legal protections do I have if I get activated, ordered to move, or deployed?

The Servicemembers Civil Relief Act of 2003 (SCRA) gives you and your family many financial protections. Among other things, the SCRA provides that the interest rate on pre-service financial obligations may not exceed 6% during military service, protects you against repossession of a car  if you entered an installment sales contract or lease before you entered military service, and gives you the option of terminating a vehicle lease early after you enter military service. 

However, you must take certain actions, such as giving your creditors written notice and a copy of your military orders calling you to active duty, in order to take advantage of these protections. The SCRA also provides protections for some obligations of military dependents. State laws can also protect you. Consult your local JAG office for more information. To find your JAG Legal Assistance Office use the locator.

I am in the military, and I have been ordered to move overseas or deploy. Can I get out of my car lease without paying a penalty?

The Servicemembers Civil Relief Act (SCRA) says if you enter into a car lease and later get orders to Permanent Change of Station (PCS) overseas or to deploy for at least 180 days, you can terminate the car lease without paying a penalty.

To terminate the lease you have to provide a written notice of termination to the person from whom you leased the vehicle (the lessor) and include a copy of your military orders. The notice can be delivered by hand, by a private carrier, or by certified mail with return receipt via the US Post Office.

You also have to return the vehicle to the lessor within 15 days from the date of your written notice. The lease is terminated only after written notice is provided AND the car is returned to the lessor.

The lessor can’t charge you for the early cancellation of the lease, but can still charge you for any taxes, title and registration fees, summonses or any other outstanding fees, including charges for excessive wear and tear and mileage that were due and unpaid on the date of termination. Any advance payments you made must be refunded within 30 days of the termination.

Contact your local JAG or installation Legal Assistance Office for more information.

I am not married but want to submit a joint application for an auto loan with another person. Can we be treated differently from married joint applicants?

Generally, a creditor such as a lender or dealer must evaluate married and unmarried applicants by the same standards. A lender or dealer may not treat married joint applicants differently from unmarried joint applicants based on the existence, absence, or likelihood of a marital relationship.

I applied for an auto loan, but the lender or dealer denied my application. I think that the lender or dealer discriminated against me. What are my rights under the law?

The Equal Credit Opportunity Act makes it illegal for a creditor such as a lender or dealer to discriminate in any credit transaction, including auto loans, against any applicant because of:

  • Race
  • Color
  • Religion
  • National origin
  • Sex (Gender)
  • Marital status
  • Age (if the applicant is old enough to enter into a contract)
  • Receipt of income from any public assistance program
  • Exercising in good faith a right under the Consumer Credit Protection Act, which includes consumer protection statutes relating to credit

This means that a lender or dealer may not use any of the above grounds as a reason to:

  • Refuse you an auto loan if you qualify for it
  • Discourage you from applying for an auto loan
  • Provide you an auto loan on terms that are different from the terms given to someone else who is similarly situated to you, such as having similar creditworthiness

If you believe that you were discriminated against on any of these grounds, you can file an official complaint by calling toll-free at 1-855-411-CFPB (2372). You can also tell us about your experience without filing a formal complaint.

If you believe that your dealer discriminated against you on one of these bases when you sought an auto loan you can file a complaint with the Federal Trade Commission (FTC), as the CFPB does not have jurisdiction over all auto dealers.

In addition, state or local law may prohibit discrimination on additional grounds.

I bought a car and got a call from the salesperson who said that I need to come back to the dealership to discuss my loan. I thought I had been approved. What can I do?

What you are describing could be a practice called a “yo-yo” scam or “spot delivery”. This happens when you drive away with the vehicle before the sale is finalized and later get told by the dealership that they couldn’t fund the loan at the agreed-upon terms. They ask you to bring back the car and renegotiate the loan for a higher interest rate. You may be entitled to legal protections in these situations.

You should review the contract and disclosures before agreeing to the sale and entering the loan to make sure you understand the terms of your deal. Find out if the financing and the loan rate is final before you take the car off the dealer’s lot. A dealer may require you to return the car if the sales contract states that the sale is not final, or that the sale is conditional on the dealer being able to find someone to buy your loan within a short duration of time.

However, if the contract did not contain a clear statement that the deal was not final or that the sale was conditional on the dealer being able to find someone to buy your loan within a short duration of time, and if you already signed all of the documents before you left with the car, you may have a right to keep it and make the payments as agreed. If you are asked to return to the dealer to discuss your financing and it was not disclosed to you that the deal was not yet final, you may file a complaint with the FTC and your state attorney general.

TIP: The best way to protect yourself from a yo-yo scam is to make sure the loan and sale are final BEFORE taking the vehicle home.

I bought a used car and financed it at the dealership. They told me that the car was in good shape, but it turned out to have serious mechanical problems. The dealer says the warranty doesn't cover any of the problems. I can't afford to pay my loan payment and get the car fixed. What can I do?

Federal and state laws exist that may protect you in this situation. For example, some states have lemon laws that may provide a way for you to get paid back for a car that repeatedly fails to meet standards of quality and performance. Your options vary based on your individual facts. Contact your state attorney general or the FTC for more information. 

I found the car of my dreams but the dealer says that I have to have a down payment. When I said I didn't have the money the dealer said that if I add a GPS and a stereo he will be able to get me a loan for the full amount. What should I do?

Ask the dealer why you can only get approved for the full amount with a GPS and stereo, and ask the dealer to put the offers in writing. The dealer may be trying to scam you into buying the add-ons by telling you that the only way you can get the loan is if you buy the GPS and stereo. Report dealers making offers like this to your state attorney general.

You can also shop around at other dealers and lenders. Knowing your options will help you negotiate the best overall deal.

Before I go shopping for rates at a bank or credit union, is there any information I should have with me?

The more information you gather before shopping for a car loan, the more accurate a quote you can receive. Think about:

  • Whether you are looking for a new or used car
  • The general type of car you are interested in (if you don’t have a specific make and model in mind)
  • What you can afford to pay for a car loan each month
  • How quickly you want to pay off the loan
  • The down payment you can afford to make

I have a car I would like to trade in. How can I find out what my trade-in is worth and what other steps can I take?

You can look up the value of your car using websites such as the Kelley Blue Book and Edmunds.com. Additional resources, including the Kelley Blue Book, may also be available at your local library.

If you still have a loan for the car you plan to trade in, there are steps you should take to make sure you don’t end up with both old and new debt:

    1. Get the payoff amount from your current lender before going to the dealership. This is the amount it will take to pay off your existing loan, and it will likely be different from any outstanding balance listed on your statement or coupon book.
    2. Find out which department of your current lender to contact to confirm that, once you have your new loan, your old loan has indeed been paid off.
    3. After about a week, use the contact information to find out if your old loan has been paid off.
    4. If your loan has not been paid off, contact your dealer. If, after reasonable efforts, your loan has still not been paid off, you may file a complaint with the FTC and your state attorney general.

TIP:  If you know that your payoff amount is more than the dealer is willing to give you for your trade-in - which means that even after you trade in your car, you’ll owe money on it - you should consider whether it makes sense to go through with the transaction and purchase the new car.

I just applied for a car loan. When I went over the paperwork again, I noticed for the first time that it listed me at a higher rank than I really am. Is this OK, or will I get in trouble?

Even if a dealer or lender prepared  the application for you, you are still responsible for the information on it. You should immediately let your lender or dealer know that the information is not accurate. This could have been an honest mistake, but unfortunately there are some disreputable dealers and lenders that will put in false information so you can get a bigger loan than you qualify for.

If you believe the incorrect information was put in on purpose, you should report it to your installation JAG and work with a different dealer or lender. Your installation JAG can also help with additional reports being filed with the FTC and the state attorney general.

You may also want to make an appointment with your installation’s financial readiness team. These professionals can help you figure out how much money you can afford to spend on buying and maintaining a vehicle.

I leased my car and it was repossessed. Will I still owe money?

You may owe up to the total amount of the remaining lease payments and any past due balances, plus excess wear and tear, excess mileage, and the costs of the repossession and resale.

I owe more on my current loan than my current vehicle is worth. Can I still get a new car?

If you buy a new car while you still owe money on your old car, your new car loan may not cover both the amount you still owe on your old car and the amount you will owe on the new car. This could lead to a big debt.

If you owe more than your current car is worth – sometimes referred to as being “underwater” or having “negative equity”  – you should consider whether you can afford a new car.

You should look up the value of your current car using websites such as the Kelley Blue Book and Edmunds.com. You may also find the Kelley Blue Book and other resources at your local library. Look up the “private sale” value, because that’s what you can get if you sell your car to an individual. Then call your lender to find out how much you still owe on your loan.

A car dealer will probably offer to “roll in” the balance of your old loan into a loan for a new car. This is called a “negative trade-in,” because the trade-in adds to the cost of the new loan, rather than reducing it. This might make the new loan unaffordable. Be very careful to make sure you understand the total cost of the new loan and the monthly payments – and the loan term (in months) – before you agree to anything.

TIP: Be sure to talk to your dealer about any outstanding loans or financing and ensure that your dealer pays off your current loan if you trade in a car with a balance due on your current loan.

I saw an advertisement for 0% financing. How can I find out if I will qualify?

In general, only consumers with the highest credit scores qualify for 0% financing offers. Before you shop, check your credit report at one of the three nationwide consumer reporting agencies – TransUnion, Equifax, and Experian – and check for errors. If there is incorrect, negative information on your file, it could prevent you from receiving better offers.

You should also know that 0% deals often require you to pay back the loan in a relatively short period of time, such as 36 months. A shorter loan duration can be good for you because it means you will pay less interest over the course of the loan, but it means a higher monthly payment.

Sometimes you get a choice between the promotional financing (which provides a lower interest rate) and a manufacturer rebate (which results in cash). You should shop around for other loans from banks or credit unions to find out whether you will save more money by taking the manufacturer’s rebate and arranging your own financing.

I want to apply for an auto loan. Can a lender or dealer ask me about my children or dependents?

A creditor such as a lender or dealer may ask about the number and ages of your dependents. A lender or dealer may also ask about dependent-related financial obligations or expenses.

However, a lender or dealer may do so only if the creditor asks for this information without regard to sex or marital status (or any other prohibited basis). A lender or dealer cannot ask you about your birth control practices, your intentions concerning having or raising children or your capability to have children.

I was asked to co-sign financing for a car. What am I being asked to do and what does this mean for me?

If you co-sign a loan, you are legally obligated to repay the loan in full. Co-signing a loan is not simply serving as a character reference for someone else; it means that you risk having to repay any missed payments immediately. And if the borrower defaults on the loan, you will have to repay the entire loan yourself, and your credit score may go down.

Your credit score may also be affected if the borrower is late with any payments. Co-signing a car loan does not mean you have any right to the car, it just means that you have agreed to become obligated to repay the amount of the loan if the primary borrower does not.

Co-signing a loan may also affect your ability to obtain loans for yourself because you have taken on the obligation to pay the loan. Lenders ask for a co-signer when they do not want to take on the full risk of loaning money to that particular borrower. Read the terms of the loan and consider carefully whether you wish to take the risk of co-signing.

I was told I need to have a co-signer in order to get financing. What does that mean?

A co-signer is a person – such as a parent or other close family member or friend – who pledges to pay back the loan if you do not.

Having a co-signer on your loan can be a benefit to both you and your lender because it gives your lender additional assurance that the loan will be repaid. For this reason, your loan’s interest rate could be 10 to 15 percentage points less with a more creditworthy co-signer, which could mean the difference between getting a loan at 5 percent versus one at 15 percent).

If you do not repay your loan, however, your co-signer will be liable for repayment even if the co-signer never drove your car. In addition, any late payments made on the loan would affect both your credit and your co-signer’s credit profile and score.

I was told I still owe money even though my car was sold. What can I do?

Even if your car is repossessed and sold, you may still owe a balance if the proceeds from the sale are not enough to pay off the amount you owe. You are entitled to an accounting of the proceeds of the sale, which will tell you if you owe any additional money on the loan. Any amount that you still owe is called a “deficiency balance.” State laws describe how the sale has to be conducted and whether and how a deficiency can be collected.

I was told that I was too young to get an auto loan. Is this possible?

A creditor such as a lender or dealer cannot discriminate against a credit applicant because of age unless the applicant is too young to legally enter into a contract. State law governs the age at which an individual can enter into a legally binding contract.

If I am married, can a lender or dealer turn down my application for an auto loan in my own name?

If you are applying for individual credit in your own name, a creditor such as a lender or dealer may not deny you credit because of your marital status. If you are creditworthy, you may get your own auto loan, and a lender or dealer generally may not require that your spouse co-sign.

If I need to have a co-signer, can a lender or dealer require that it be my spouse?

No. If you do not individually qualify, the creditor such as a lender or dealer may request a co-signer, guarantor, endorser, or similar party. Your spouse may function as this additional party. But a lender or dealer cannot require that it be your spouse.

If I pay late, will I have to pay a fee, and when will that fee be assessed?

Whether a late fee is assessed and the amount of the late fee varies by lender and according to state law.  You will generally be charged a fee if you are 15 days late. Check your contract to see what it says about late fees.

If I want to rely on the alimony or child support that I receive in my auto loan application, does a lender or dealer have to consider that income?

Yes, if the payments are likely to be consistently made. A creditor such as a lender or dealer can consider the amount of such income and likelihood that it will continue, as with all other forms of income.

In determining this, a lender or dealer may consider factors such as whether there is a written agreement or court decree, how long and how regularly you have been receiving payments, and the creditworthiness of the payor when that information is available.

I'm thinking of buying or leasing a car. How can I decide how much I can afford to borrow?

1. Assess your financial situation by creating a monthly budget. If you’re not sure how to do this, seek help from a non-profit credit counselor.

  • Add up all of your fixed expenses (rent/mortgage, utilities, phone and other recurring monthly bills, savings, child support payments, insurance premiums, and any existing loans including outstanding credit card debt).
  • Then add up your estimated additional expenses – for food, gas, entertainment, emergencies and unexpected expenses, and whatever else is not a set monthly expense.
  • If you didn’t have a car before, don’t forget you’ll also have to pay for car insurance, maintenance, and registration. Shop around for car insurance before you shop for a car, to get a sense of how that will affect your budget.
  • If you will be trading in a car but still owe money on it, be sure to find out how much you will need to budget for paying off that loan and add that amount as well to the expense column.
  • Subtract all expenses from your take-home pay and any other income you receive on a regular monthly basis.
  • What is left is the amount you have to make monthly payments on a car loan or lease.

2. Review your credit.

One of the first things you should do before applying for an auto loan is review your credit report at one or all of the largest consumer reporting agencies – Equifax, TransUnion, and Experian. You are entitled to a free copy of your credit report  from each of these agencies every 12 months, and you should request it at annualcreditreport.com.

Review your credit report and dispute any errors  that you find. A serious negative error on your credit report could affect the interest rate you get for a car loan and end up costing you thousands of dollars.

Any negative information on your credit report (such as late payments, delinquencies, settlements, or bankruptcy filings) will influence your ability to obtain a loan or to obtain one at a low interest rate.

TIP: Many types of accurate, negative information on your credit report must be removed after seven years. If you find a negative item on your report that is over seven years old you should dispute it.

3. Save for a down payment.

It’s important to know how much you can afford to spend on a down payment before you call around for loan quotes or go to a dealer. This will help you understand what cars you can afford.  Also, if you are able to offer a solid down payment on a car, you will be in a better position to negotiate the final sale price of the vehicle as well as the terms of your loan.

4. Research loan options and consider getting prequalified or preapproved for a loan.

It’s a good idea to shop around for a loan before heading to a dealer. You may want to consider getting prequalified or preapproved for an auto loan from a bank or credit union  before visiting an auto dealer.

You should know, though, that asking for quotes from multiple lenders could have a negative impact on your credit score. For most people, any negative effect will be small while the benefits of shopping around could be significant. Concentrating your applications in a short period of time can minimize the effect on your score. And knowing that you have loan options will help you negotiate the best overall deal.

When you are offered different loans, compare all the terms. You should be looking not just at the monthly payment you’ll have to make (and whether you’ll be able to make it given your budget ), but also at the interest rate you’re being offered and the length of the loan. A higher rate or a longer term will result in additional interest costs for your loan.

Don’t forget to read the fine print of any loan contract. For instance, some loans have a “prepayment penalty,” which means that you will have to pay a penalty if you pay off your loan before the end of the loan term. Even if you’re not planning to pay off your loan before the end of the term, you may want to avoid loans that have a prepayment penalty in case your situation changes.

My auto lease is expiring. What are my obligations? What are my rights?

Your obligations and rights depend on what is in your lease, so you should read the lease carefully. Generally, you must repair any damage or unreasonable wear and tear on the car, return the vehicle, and also pay any extra mileage fees required under the lease.

If you have the option to purchase the car, called a “purchase option,”  you can buy the car for the purchase option amount, which would allow you to avoid paying any damage, wear and tear, or mileage fees.

My bank will only approve me for a $25,000 loan, but the dealership tells me I can qualify to borrow more. Who's right?

An auto dealer may be willing to offer you a higher loan amount than a bank, credit union, or other lender.

One reason is that the dealer has a strong incentive to sell cars, so it may offer a higher loan amount to increase the chance that you will buy the car. Also, many dealers end up selling loans to other lenders or companies, so they may not have as much risk if you don’t pay back the loan as other types of lenders. And manufacturers may offer incentives to financing sources that result in your qualifying for a larger loan amount.  

No matter what type of financing you are considering, you are not required to borrower the maximum amount available. Just because a lender or dealer says you can afford a particular monthly payment or qualify for a particular loan amount doesn’t mean that you can or should borrow that amount.

Always determine your needs and budget for yourself. Be sure to include total estimated vehicle expenses such as taxes, insurance, maintenance, gas, and annual registration to figure out how large a car loan you can afford. And if you’re not sure how to calculate your monthly budget yourself, seek help from a local non-profit credit counselor.

My car has been repossessed, and I was told it will be sold. What can I do?

Under state law, a lender must notify you of a private or public sale. If your vehicle will be sold at a public sale, you have the right to bid on the vehicle. If a private sale will be made, you have the right to pay the full loan amount and the repossession costs and have the car returned to you. You may have other rights and obligations under state law.

My contract says "precomputed interest" on it. What's the difference between a simple interest rate and precomputed interest?

Simple interest and precomputed interest are different ways to calculate your interest due. The simple interest method uses the amount or actual balance outstanding on the day your payment is due. If you pay more than your monthly payment, this amount should get smaller as you pay down your loan. The precomputed interest method always uses the original payment schedule to figure interest, even if you make payments early.

If you have a contract with precomputed interest and plan to pre-pay your loan early in full or make larger payments in advance of your regularly scheduled amount, you will not get the same reduction in the interest charges that you would if your contract had a simple interest rate. If you pay on time for each payment over your loan term, there is little difference between simple and precomputed interest. 

TIP: If you think there’s a possibility you may want to pre-pay your loan in full or pay more than what you owe to pay your loan off earlier, a loan with precomputed interest may not make the most financial sense for you. Dealers, not banks and credit unions, may offer precomputed interest. Shop around and compare multiple offers.

My dealer offered me credit insurance. What is it?

Credit insurance makes your car loan payments if you cannot for certain reasons. When you are applying for your auto loan, you may be asked if you want to buy credit insurance – or it might already be included in your loan offer.

If you are considering credit insurance, make sure you understand the terms of the policy being offered. There are four main types of credit insurance:

  • Credit life insurance, which pays off all or some of your loan if you die
  • Credit disability insurance, also known as accident and health insurance, which makes payments on the loan if you become ill or injured and can't work
  • Involuntary unemployment insurance, also known as involuntary loss of income insurance, which makes your loan payments if you lose your job due to no fault of your own, such as a layoff
  • Credit property insurance, which protects personal property used to secure the loan – in the case of an auto loan this would be your car – if it is destroyed by events like theft, accident, or natural disasters

Before deciding to buy credit insurance from a lender, think about your needs, your options, and the cost of insurance. Credit insurance can be expensive and, if financed as part of your loan, it will increase your loan amount and you will pay additional interest. Consider whether another type of coverage with a monthly payment makes more sense for you than financing the entire premium as part of you loan.

TIP: If you decide you need insurance, there may be cheaper ways for you to obtain coverage.  For example, life insurance may be less expensive and allow you to pay off more than just the amount of your car loan.

My dealer offered me debt cancellation insurance. What is it?

Some banks and credit unions sell “debt cancellation” and “debt suspension insurance” under various names. These programs are similar to credit insurance in terms of their function, but fees and other features may be significantly different.

In general, debt cancellation promises to eliminate the debt if you die or cancels the monthly payment if you become disabled, unemployed, or suffer some other specified hardship, if you meet the qualifications and there are no exclusions that apply to you.

Debt suspension is different. It temporarily postpones all or part of your monthly payment while you are facing a specified hardship – you are still expected to make the suspended payments in the future.

TIP: If you decided you need insurance, there may be cheaper ways for you to obtain coverage.  For example, life insurance may be less expensive and allow you to pay off more than just the amount of your car loan.

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My dealer offered me Guaranteed Auto Protection (GAP) insurance. What is it?

Guaranteed Auto Protection (GAP) plans may be offered to you when you buy a new car. GAP protection covers the difference between what your insurance pays if your vehicle is totaled and  the damage to your vehicle exceeds the actual cash value (ACV), and the amount you still owe the lender at that point.  

If you're told you must purchase a GAP plan to qualify for financing, the cost of the GAP program must be included in the finance charge and reflected in the disclosed annual percentage rate. Only if the plan is optional can it be excluded from the charge and annual percentage rate.

TIP: Ask your dealer what “gap” will exist the day you take delivery of your car. If that is an amount you can pay with other resources, you should consider whether the GAP coverage is a good idea for you. Remember, any add-on product costs you not just the upfront cost but also the interest of paying for this product over the life of the loan.

My dealer told me I had to purchase an extended warranty or Guaranteed Auto Protection (GAP) insurance. Is this true?

It is highly unusual for a lender to require an extended warranty or GAP insurance. If your dealer says you are required to purchase a product like GAP insurance or an extended warranty, ask them to show you where your sales contract says it is required. If the contract does not explicitly state that it’s required, the dealer can’t make you purchase it.

My dealer told me I have to purchase credit insurance. Is this true?

Credit insurance is almost never required, and lenders cannot deny you credit if you refuse to buy optional credit insurance.

Credit insurance is usually expensive and you may be able to accomplish the same goal by obtaining other coverage, such as life insurance. Other coverage may be cheaper and provide you with more flexibility by allowing you to pay off more than just the amount of your car loan. Before you sign any loan papers, ask the lender whether the loan includes any charges for credit insurance.

My lender or dealer said that my spouse had to co-sign my auto loan. Is this right?

In general, a creditor such as a lender or dealer cannot require your spouse’s (or another person’s) signature for individual credit if you qualify on your own for the amount and terms requested. If you are applying for joint credit, however, a lender or dealer may require your spouse’s signature (or the signature of the person with whom you are applying).

My paperwork says that an assignee holds a lien on my vehicle's title. What does that mean?

The assignee is a bank or other institution that buys the car loan from your lender. You owe the loan to the assignee. The assignee can take possession of your car if you default or fail to make payments on your loan.

Is the price for add-ons such as an extended warranty or Guaranteed Auto Protection (GAP) insurance protectable?

Dealers often charge different amounts to different people for the same add-on products, like extended warranties or GAP. Like the terms of the loan, the price of the add-ons is negotiable. But be careful about buying any add-ons. You can ask for an itemization of any amount you are quoted, including the sale price, the total amount financed, the term, and the estimated interest rate. If you really want an add-on, you may want to negotiate with the dealer by getting an offer from another dealer and asking them to beat that offer.

If, after the dealer has told you the price of your car as well as your interest rate, your monthly payment doesn’t add up to the itemization you asked for or received earlier, or if the payments has extra costs that you did not agree to, you may file a complaint with the FTC and your state attorney general.

Should I buy or lease? What's the difference?

You should carefully compare the costs of leasing and buying. Leasing is almost always more expensive in the long term. Usually, it takes longer to get full ownership of a car through a leasing agreement than by getting a loan to buy the car. If you buy a car with a loan, it might take five years to pay off. However, if you decide to purchase a leased car at the end of the lease, it might take seven or eight years to pay for the car.

Paying for a purchase after a lease takes longer because leases typically last three years, but then you have to make a very large payment – called a balloon payment – at the end of those three years if you want to buy the car under the purchase option. You may have to take out a four- or five- year loan to make that payment, which makes the total time until you’re finished paying for the car seven or eight years.

If you choose to lease a car and then decide to return it, you will be responsible for any excess wear and tear and any excess mileage charges. If you have to return a leased car early, you may be charged thousands of dollars in unpaid lease fees.

Also, bear in mind that if you make a habit of always turning in your leased car at the end of the lease and then leasing another car, you are putting yourself in the position of paying lease payments into the indefinite future. This will nearly always be more expensive than taking out a loan to buy a car. If you buy a car, you will pay off the loan at the end of the loan term (typically four to five years), and then you will own the car outright. Today, many new cars last more than 10 years before they need to be replaced.

Should I finance my car at the dealer or go to a credit union or a bank?

Your first step should be to make an appointment with your installation’s financial readiness team. These professionals can help you figure out how much money you have available for buying and maintaining a vehicle. You then should shop around for the best financing deal.

Should I have car insurance lined up before I purchase a car?

If you don’t own a car or don’t have current insurance, you should shop for insurance before you purchase a car. If you already have car insurance on a car you own, your current insurer can tell you how to add any new car to your policy.

All lenders require that you have insurance for damage to the car. If you don’t have the required insurance, the lender may take out force-placed insurance to cover your car. Force-placed insurance protects only the lender, not you, and will add to the cost of your loan. Force-placed insurance is usually a lot more expensive than what you can obtain by finding an insurance policy yourself.

Insurance costs can vary widely so it can pay to shop around. It’s very important to know the cost of insurance in deciding whether you can afford a new car. You should budget for insurance when you figure out what kind of monthly car payments you can afford.

There is a "military no credit check" sign at the dealer down the street. Since I have never had a loan, would this be a good place to establish credit?

“Buy Here Pay Here” dealerships typically finance auto loans “in-house” to borrowers with no credit or poor credit. You may see signs like “no credit – no problem” or “military E-1 and up.” The interest rate on loans from these dealerships can be much higher than loans from a bank or credit union.

Normally, a bank or credit union will limit the amount it will lend for the purchase of a car based on the car’s book value. The bank or credit union will not loan more than the book value of the car because the vehicle in question simply isn’t worth it. But when a dealer acts as its own “bank,” it may not set such limits. So you may end up paying thousands of dollars more than the car’s actual book value.

Don’t be fooled into thinking that you have no choice. Even if you have poor or no credit, there may be banks and credit unions that are willing to help you establish good credit. Knowing your options for financing before you start negotiating to buy a car can help you get the best overall deal.

What is an Actual Cash Value (ACV)?

An Actual Cash Value (ACV) is the value of the car according to widely recognized independent sources such as the National Automobile Dealers Association or Kelley Blue Book. This value is important for insurance and loan-to-value computations.

What is amortization and how could it affect my loan?

Amortization describes the process of gradual payment of the amount on your loan. For each of your monthly payments, a portion is applied towards the amount of the loan – the principal – and a portion of the payment is applied towards paying the finance charge – the interest.

A greater percentage of your monthly payment is applied to interest early in the life of the loan, and a greater percentage is applied to the principal at the end. Thus, the principal balance decreases slowly at first and more quickly closer to the end of the loan term. So if you default early in the life of the loan, you will still owe a significant amount on the principal because only a relatively small percentage of your monthly payments were applied to the principal.

What are manufacturer incentives?

Manufacturer incentives are special deals, like 0% APR or cash rebates, that you may have seen advertised for new cars. Often, they are offered only for certain models of cars.

Manufacturers offer these deals many times when they are having campaigns to sell certain models, or because they have a large inventory that they want to sell more quickly.

If you are interested in these types of offers, read the fine print to see if you qualify. Sometimes these incentives are limited to people with high credit scores or to loans of a shorter duration.

What are some special issues I should be aware of as a servicemember when I am buying a car?

Many finance companies will not let you move your vehicle to a base overseas. Don’t trust the dealer’s word – get it in writing that the lienholder will allow you to move your car to your overseas base (many do not, and the law does not require them to do so).

Also, get in writing that the warranty and (if applicable) extended warranty will be valid if you need to have any repairs done outside the continental U.S. (many warranties are not valid overseas).

If you take out a car loan when you are not on active-duty status, and then you enter active-duty status, you should request that your lender reduce your interest rate on your loan to 6%.  You must provide them with a copy of your orders. Learn more about the Servicemembers Civil Relief Act.

Be careful of lenders that say you have to pay with an allotment. In general, good lenders will allow you to choose the best form of payment for you.

What is an auto loan interest rate? What does APR mean?

An auto loan’s interest rate is usually the most important part of the price you pay for borrowing money. The total cost of credit, stated as a yearly rate, is called the annual percentage rate (APR).

What is a base price?

The base price is the price of the car by itself. The manufacturer’s base price excludes charges for optional equipment (like a sunroof) and excludes mandatory charges for taxes, title, and registration. The base price also excludes the cost of optional add-ons such as credit insurance, service contracts, window etching, and rustproofing.

What is a breach of peace and what does it mean for repossession?

Under state law, a lender may not repossess a car unless it can do so without a breach of peace. The definition of breach of peace varies depending on your state, but it typically includes things like threatening the use of force or breaking into a garage to obtain a vehicle.

What is a buy rate?

A buy rate is the interest rate that a lender quotes to your dealer when you seek a loan directly through the dealer. Your dealer may offer you a rate that is higher than the buy rate.  The rate the dealer offers you is called the “contract rate.”  Sometimes the lender pays the dealer a fee that is based on the difference between these two rates, which can give the dealer an incentive to charge you a higher interest rate than you qualify for.

TIP: Ask the dealer what the buy rate is and offer to pay the buy rate plus a flat fee, rather than paying an interest rate that is above the buy rate. This could save you thousands of dollars over the life of the loan.

TIP: The dealer may offer you a higher interest rate than you can get directly from a bank or credit union. Shop around to find out who offers the best interest rate.

What is a capital cost reduction?

If you are leasing a vehicle, the initial down payment on the lease is called a “capital cost reduction," because it reduces the amount you pay monthly for the value of using the car.

What is dealer or dealership financing?

Dealer or dealership financing means that you are granted credit directly from the dealer from whom you are purchasing a vehicle. The dealer may then sell the credit contract to a bank or other company. In contrast, with bank or credit union financing, you obtain the loan directly from the bank or credit union.

Tip: The APR offered by the dealer may be higher than what you can obtain by taking out a loan directly from a bank or credit union. In general, dealers and lenders are not required to offer the best rates available. You may be able to save a lot of money over the life of the loan by negotiating the interest rate with the dealer.

Tip: When a dealer advertises special financing rates, read the fine print to see if they are for a particular length of loan, type of car, or for people meeting a certain credit standard. In some cases, you may have a choice between a manufacturer’s rebate or a special financing rate. Shop around for auto loan interest rates before you go to the dealership so that you know what interest rate you could get elsewhere.

What is a deficiency balance?

A deficiency balance is the difference between how much a car is sold for following repossession and the amount of the loan remaining. In most cases, consumers must still pay the deficiency balance.

What is the difference between dealer-arranged and bank financing?

With bank or credit union financing, often called “direct auto lending”, you go directly to a bank or credit union and apply for a loan. You can get an interest rate quote or a conditional commitment letter from the bank or credit union before you go to the dealership to buy a car. The bank or credit union offers certain terms, and those terms are negotiable.

In dealer-arranged financing, often called “indirect lending,” the dealer initially makes the loan and then immediately sells the loan to a bank, credit union, or other finance company that has approved your credit before the dealer made your loan. In this situation, the dealer may be able to increase the interest rate above what you have qualified for before offering you the loan. 

Tip: In general, dealers and lenders are not required to offer the best rates available. You can save money over the life of the loan by negotiating for the best interest rate available to you.

Tip: In both dealer-arranged financing and bank financing, you should know that your interest rate is negotiable, so you should get quotes from multiple lenders to compare offers. Just like the price you pay for the car is negotiable, so is the interest rate.

What is the difference between fixed- and variable-rate financing?

Fixed-rate financing means the interest rate on your loan does not change over the life of your loan. With a fixed rate, you can see your payment for each month and the total you will pay over the life of a loan. You might prefer fixed rates if you are looking for a loan payment that won’t fluctuate.

Variable-rate financing is where the interest rate on your loan can change, based on the prime rate or another rate called an “index.” With a variable-rate loan, the interest rate on the loan changes as the index rate changes, meaning that it could go up or down. Because your interest rate can go up, your monthly payment can also go up. The longer the term of the loan, the more risky a variable rate loan can be for a borrower, because there is more time for rates to increase.

What is the difference between paying interest and paying off my principal?

Generally, any payment made on a loan will be applied first to any fees that are due (for example, late fees). Next, remaining money from your payment will be applied to any interest due, including past due interest, if applicable. Lastly, any remaining money from your payment will be applied to the principal balance of your loan, including past due principal, if applicable. Principal is the money that you originally agreed to pay back while interest is the cost of borrowing the principal.

Contact your loan servicer to verify their policies and procedures for applying payments, as these can vary from servicer to servicer. If you plan to pay more than your monthly payment amount, you can request that the servicer apply the additional amount immediately to the loan principal. However, the servicer may refuse if your loan was precomputed.

What is the difference between a warranty and an extended warranty?

Auto manufacturers typically provide warranties as part of the overall cost of a new vehicle. These warranties will cover certain car problems and last for a certain number of months or years and miles of driving.

In addition, auto dealerships often sell extended warranties.  Sometimes, these extended warranties are called service contracts. These extended warranties cover the costs of some unexpected car repairs not covered by the manufacturer’s warranty. They can be very profitable for the dealer and expensive for you. However, you don’t have to buy an extended warranty when you purchase a car or at any time.

When deciding whether to purchase an extended warranty, you should consider the cost of the extended warranty, the types of problems it covers, the additional length of time covered, and how you expect to use your vehicle. Extended warranties typically exclude routine maintenance such as oil changes and tire replacement.

You should also check whether the coverage of the service contract overlaps with the problems and time periods the manufacturer’s warranty covers to avoid paying for unneeded coverage. You may find that any additional coverage is not worth the additional cost.

What is a down payment, and what effect could it have on my loan?

A down payment is an initial, upfront payment you make towards the total cost of the vehicle. It is usually given in the form of cash and/or trade-in (typically of another vehicle) at the time you finalize the transaction. If you are buying the vehicle outright, an auto loan is typically used to cover the remaining balance for purchasing the vehicle.

A down payment helps ensure that the lender can recover the balance due on the loan in the event that you default.

What is an extended warranty or vehicle service contract?

An extended warranty or vehicle service contract covers the costs of some types of repairs in addition to or after the manufacturer’s warranty ends.

Tip: Extended warranties and vehicle service contracts typically exclude routine maintenance such as oil changes and tire replacement. Consider the cost of the warranty, and what is covered and excluded, as well as how you plan to use the vehicle before purchasing an extended warranty or vehicle service contract. You may find that the additional warranty coverage is not worth the additional cost.

What is a Finance and Insurance (F&I) department?

The Finance and Insurance (F&I) department is a division of a car dealership that markets loans  to customers after they have agreed to buy a vehicle there. A car salesperson may refer you to someone in the F&I department after you decide to purchase a car.

You don’t have to finance your car through the dealership, and often you can obtain better interest rates through a bank or credit union that you contact separately from the dealer.

What is force-placed insurance? Can my lender make me pay for insurance they provide?

In order to get a loan to buy a car, you must have insurance to cover the car. If you fail to obtain insurance or let your insurance lapse, the lender has the right under the car sales contract to get insurance to cover the car. This insurance is called “force-placed insurance.” This insurance protects only the lender, not you, but the lender will charge you for the insurance. Force-placed insurance is usually a lot more expensive than what you can obtain by finding an insurance policy yourself.

What happens if I left some of my things in my vehicle and it was repossessed?

Your rights vary depending on your state, but most states require repossessing companies to make any of your possessions left in the vehicle available to you. You will have to go get them at a time that is convenient to the repossessing company. If you discover that your car has been repossessed and you left your property in the car, contact your lender immediately to arrange to get your belongings.

What happens to my credit report if I am late making payments on my auto loan or my car is repossessed?

If you are late making your auto loan payments this will likely show up on your credit report and may affect your ability to obtain other credit. Late payments will show up on your credit report for 24 months and repossessions can stay on your credit report for seven years.

What if the lender offers to just take the car back and forgive the loan? Will it affect my credit report?

You must get the lender to state in writing that returning the car fully satisfies your loan. Additionally, you must ask the lender to also confirm in writing that it will not report your return of the car to the credit reporting agencies as a “repossession.” Unless you take these steps, your returning the car and turning in the keys does not stop the lender from claiming that you owe more money on your car loan.

What is included in the monthly payment?

The monthly payment will always include the principal and the interest on your loan. Your monthly payment may also include credit insurance charges or other add-ons.

If your monthly payment is higher than your loan agreement calls for, check with your lender or the servicer identified on your statement – there might be an error. If you talk with your lender or servicer and are not satisfied with their answer, you can file a complaint with the FTC and your state attorney general.

What is a co-signer?

A co-signer is another person who also takes full responsibility to pay back the loan. Often a co-signer will be a family member. The co-signer is obligated to pay any missed payments and even the full amount of the loan if the borrower doesn’t pay. The co-signer’s credit also can be harmed if the borrower is late making payments.

Having a co-signer on your loan gives your lender additional assurance that the loan will be repaid.

What is an assignee?

An assignee is a person or a company to whom a loan or credit contract has been sold. For example, an auto dealer who extends credit to you may sell the credit contract to a bank, making them the assignee. You owe the money to whoever has purchased your loan contract.

What is a loan-to-value ratio? How is it calculated? How does that impact my financing?

A loan-to-value ratio (LTV) is the total dollar value of your loan divided by the actual cash value (ACV) of your car. It is usually expressed as a percentage.

Your loan terms may be affected by the loan-to-value ratio, because the car is the collateral for the loan, which means that if you default on your loan, the lender can take the car. The lender may seek a down payment to reduce the size of the loan and make it less likely that the amount you owe on the loan will be more than the car is worth.

Your car’s actual value is often lower than what you paid, especially immediately after you purchase a new car. The value of a new car typically goes down sharply when you drive off the lot, and then declines more slowly as you continue to use it.

TIP: Increasing the amount of your down payment may decrease the interest rate on your loan.

What is a Manufacturer Suggested Retail Price (MSRP)?

The Manufacturer Suggested Retail Price (MSRP) is the base price that the carmaker – the manufacturer – suggests. It does not have to be the actual base price that you pay. Many consumers negotiate to purchase the car for a price below the MSRP.

Tip: When you’re shopping for a car, you should ask for quotes that include all mandatory charges as well as any charges for optional products that you want to purchase. You should shop around for the best deal on the price of the car, the interest rate on your car loan, and any trade-in.  Shopping at multiple dealers can help you get a better price on the car. Shopping around with multiple lenders before you purchase the car can help you get the best interest rate available to you on your car loan.

What is a money factor or lease factor?

A money factor is also known as the “lease factor,” and it is a way to present the implicit rate of interest charged on financing a lease with monthly payments. If you multiply the money factor by 2400, it equals the effective interest rate.

TIP: If you are shopping for a lease, ask the dealer what “money factor” is being used to calculate the lease payment. Ask if that is the lowest money factor available.

What is negative equity?

Negative equity happens when the market value of your car is less than the amount you have left to pay on your car loan. In other words, if you tried to sell your car, you likely wouldn’t be able to get more than what you already owe on it. This is sometimes referred to as being “underwater” or “upside down” on your loan.

Negative equity can occur if you purchase a new car and take out a loan for a large portion of the purchase price, because the value of a new car decreases sharply when you drive off the lot. It can also happen if you entered a car loan with a relatively long term or the resale value of your car falls due to quality issues with that model.

What is residual value?

In automobile leasing, residual value is how much your car is estimated to be worth at the end of your lease. The estimated value is used in calculating your monthly lease payments and purchase option price. A purchase option price is the amount listed in your lease contract for which the lender agrees to sell you the automobile if you choose to buy the car after your lease is up.  

TIP:  If you are approaching the end of your lease term, compare the purchase option amount in your lease contract with the value of the same make and model of the car you are leasing using National Automobile Dealers Association or Kelley Blue Book to help decide whether you want to buy the car.

What is risk-based pricing?

Risk-based pricing occurs when lenders offer different consumers different interest rates or other loan terms, based on the estimated risk that the consumers will fail to pay back their loans.

This means, for example, that lenders will generally offer a higher interest rate to you if they view you as a higher risk borrower - say, because you recently declared bankruptcy, lost a job, or are several payments behind on a mortgage.  For the same exact loan, lenders will generally offer a lower interest rate if they view you as a lower risk - say, because you have a good credit score and are employed.

Each lender uses its own process to determine the risk that you will default on a loan, but most use your credit score, employment status, income, and other outstanding debts, among other factors.

If a lender relied on a credit report in making a lending decision about you, you should get a Risk-Based Pricing notice if you receive less favorable terms than other borrowers with better credit histories. This notice includes information about how to get your free annual credit report, your credit score, the score range, and the negative factors affecting the score. 

Lenders may NOT use certain legally prohibited factors to come up with their risk-based pricing. The Equal Credit Opportunity Act makes it illegal for a creditor such as a lender or dealer to discriminate in any credit transaction, including auto loans, against any applicant because of:

  • Race
  • Color
  • Religion
  • National origin
  • Sex (Gender)
  • Marital status
  • Age (if the applicant is old enough to enter into a contract)
  • Receipt of income from any public assistance program
  • Exercising in good faith a right under the Consumer Credit
  • Protection Act, which includes consumer protection statutes relating to credit

This means that a lender or dealer may not use any of the above grounds as a reason to:

  • Refuse you an auto loan
  • Discourage you from applying for an auto loan
  • Provide you an auto loan on terms that are different from the terms given to someone else who is similarly situated to you, such as having similar creditworthiness

If you believe that you were discriminated against on any of these grounds, you can file an official complaint by calling toll-free at 1-855-411-CFPB (2372) - or tell us about your experience without filing a complaint.

If you believe that your lender or dealer discriminated against you on one of these bases when you sought an auto loan, in addition to filing a complaint with the CFPB, you should also file a complaint with the Federal Trade Commission (FTC), as the CFPB does not have jurisdiction over all auto dealers.

State or local law may prohibit discrimination on additional grounds.

What should I do if I expect difficulty making my auto loan payments?

If you expect difficulty making payments, contact your lender or loan servicer and try to work out a payment plan. Ask what options are available to you. Also, be sure to ask about any negative impact such options could have on your credit report. If you are told there will not be any negative impact if you select one of the options you are offered, ask for confirmation in writing. If you have trouble making your car payment, the sooner you contact the lender the better chance you have of working out an arrangement that gives you time to get back on track.

What should I do if I think an auto dealer or lender is violating the law?

Keep all the documents, voicemails, and records of your interactions with the dealer or lender. If your problem is with a lender  or a Buy Here Pay Here dealer, you may file a complaint with the CFPB and your state attorney general. If your problem is with a traditional dealer, you may file a complaint with the FTC and your state attorney general.  Also, you may want to consider contacting a private attorney for assistance.

What is a Truth-in-Lending Disclosure? When do I get to see it?

The federal Truth-in-Lending Act - or “TILA” for short - requires that borrowers receive disclosures about important terms of credit. These important terms include the APR, the monthly payment, the total amount of finance charge to be paid, whether you can prepay your loan without a penalty, and other important terms.

The law says you must receive your TILA disclosure before you are legally bound to pay your loan. You should always insist on receiving and reviewing your TILA disclosure before you sign your loan contract.

Note that the TILA disclosure is often provided as part of the loan contract, so you may be given the entire contract for review when you ask for the TILA disclosure. You should review it all, paying special attention to the disclosures noted above.

What is Vendor's Single Interest (VSI) insurance?

VSI insurance protects the lender, but not you, in the event that the car is damaged or destroyed. The cost of the insurance may be passed on to you in the overall cost of your loan or may appear as a separately itemized charge. 

Where can I get information on auto loan rates?

You can shop for loans at individual banks or credit unions, and online at sites like Bankrate.com or Edmunds.com.

Tip: Get quotes from several lenders. By shopping around, you may get a better offer. You should know, though, that you may need to apply to get a precise quote, and getting quotes from multiple lenders over a long period of time could have  a  negative impact on your credit score.

But for most people, any negative effect will be small, while the benefits of shopping around could be significant. You can also  minimize any negative impact by doing all your rate shopping in a short amount of time.

Will an auto loan help me rebuild my credit?

If you make timely payments, an auto loan will help you build your credit if the lender reports your payments to one or more of the three major credit bureaus (Experian, Equifax, and TransUnion).

Some auto lenders, often called “Buy Here Pay Here” lenders, may not report your loan at all. Some of these dealers may market themselves as a way to rebuild your credit, but you don’t get this benefit if they do not report your loan to a credit reporting bureau. If you are considering taking out a loan with a Buy Here Pay Here dealer, make sure you get a promise in writing that they will report your on-time payments.

Remember that taking out an auto loan will only help rebuild your credit if you make your payments on time.




Copyright © 2013 by Mark McCracken , All Rights Reserved