Dealership Financing

If you use the dealer in obtaining financing, you will most likely negotiate with the dealer's F&I (finance and insurance) representative the terms of the retail installment sale contract. The dealer will then sell the contract to a separate company. The money that the company pays to the dealer to buy your contract pays the dealer for your car. When the company buys the contract, the dealer will transfer and assign the contract to that company. The company then becomes what is called an assignee. The company now has the right to receive monthly payments from you.

Your credit history and the terms of the installment sale contract dictate whether the company will buy the installment sale contract from the dealer. For example, a certain company may only buy contracts with finance charge rates between 5% and 15% with repayment periods over three years. Because of this, dealers must qualify customers much the same way a bank or credit union would. This is why a dealer will examine your credit history and financial background. Often your credit application and the proposed terms of the contract will be submitted to the company the dealer believes will buy the installment sale contract. The dealer does this so when it tries to sell your contract to the company, it can be sure that the contract will be acceptable under the company's requirements and that the company will buy the contract. The funds from the sale of the contract go to the dealer to pay the dealer for the car, and you will begin to make installment payments to the assignee.

When you obtain financing this way, you complete a credit application with the dealer, who may review your credit report and other aspects of your credit history. Your credit score and credit history will impact the terms of the contract. You may negotiate the terms of the contract with the dealer. The interest rate that a potential assignee may pay for the contract may be different from the interest rate that the dealer offers you. In other words, under the assignee's guidelines, a person with your credit history may be eligible for a 6% interest rate. The dealer may offer a 7% interest rate. If you accept the 7% rate, the dealer may receive the 1% difference in the interest. A few states require that dealers inform you that this happens and that your interest rate can be negotiated.


Don't be afraid to negotiate your interest rate with the dealer. The interest rate they offer you first may not be the best interest rate you may be entitled to. The interest rate is important because it determines the amount of interest you'll pay over the life of your contract, and the amount of your monthly payment.

Sometimes, you may have an immediate need for the vehicle and do not want to wait for the dealer to find an assignee for your contract. If this is the case, the dealer can give you the car while it searches for a company willing to buy the contract. This arrangement is called a "spot-delivery" (in other words, you take delivery of the car "on the spot"). This type of delivery is usually conditioned on the dealer finding a buyer of your contract. If the dealer is not able to find a buyer for the contract, it will request that you return the car. In spot-delivery situations, your contract with the dealer will tell you that you may ultimately have to return the car. Any agreement should also discuss what happens to any trade-in vehicle you provided. You should discuss this possibility with the dealer and understand if your transaction is subject to a spot-delivery agreement. In some circumstances, if the dealer is not able find a buyer for your contract, in addition to requiring you to return the car, the dealer may request that you renegotiate the terms of your contract. In other words, you may have to agree to a higher down payment or higher interest rate for the dealer to find a buyer and for you to receive the necessary financing. You don't have to agree to these new terms, but renegotiation may be the only way to keep the car and obtain your financing.