You will want to make sure that you understand the terms of the financing of your purchase, regardless of who provides the financing. Knowing the terms of your financing will help you shop around for the best deal. Whether under an installment sale or a loan, you will receive from the finance source a Truth in Lending Disclosure that will disclose all of the important terms. The Truth in Lending Disclosure usually appears in a separate section in the loan agreement or retail installment contract, and will tell you:
- The Annual Percentage Rate (APR) (this must be conspicuous—for example, printed in much larger type than the size of the rest of the type in the document);
- The method by which the creditor sets the finance charge;
- The balance on which the creditor computes the finance charge;
- The dollar amount of the finance charge (this must also be conspicuous);
- The amount to be financed (the amount of credit);
- The total dollar amount that will be paid (the amount financed plus the finance charge plus any down payment); and
- The number, amount, and due dates of payments.
The APR is the Annual Percentage Rate. The APR is similar to an interest rate, but it also includes certain fees that are considered finance charges. Some finance charges are up-front charges that you pay to borrow the money for the purchase of the car. The APR could be higher than the finance charge rate on the loan or retail installment sale contract if it includes these certain up-front (prepaid) finance charges. The APR is what you will want to use to shop around to find the best terms. Generally, the lower the APR on a loan or retail installment sale contract, the cheaper the it will be for you.
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Compare APRs from different lenders and dealers. This is the best way to compare the "cost" of borrowing the money. The monthly payments may be different as a result of other factors, but the APR will give you an idea of the cost of each loan.
Manufacturers and dealers often offer loans with extremely low APRs. While these rates are actually available, a customer must be eligible for the special rates. Usually the eligibility is tied a customer's creditworthiness and credit score. Generally, only customers with good credit histories are eligible for the best special rates. If you have a weak credit history, you may not receive the advertised rate when you go to a dealer to buy your car.
Remember that you can always make a down payment on the car. In some cases, you will be required to make a down payment due to less than perfect credit. This will reduce the amount of the loan you will need. If the term of the loan remains the same, the lower the loan amount, the lower your monthly payments will be.
If you currently have a car, you may want to trade it in when you buy your new car. Even if you still owe money to your previous lender for your current car, you may be able to trade it in. You may be able to negotiate the price the dealer is willing to pay for the trade. If the car is worth more than you owe, the dealer will buy the car from you and that money can be used to pay off the outstanding balance to the previous lender. You can use any remaining money as a down payment on your new car. If the amount the dealer is willing to pay for the trade is less than the amount you owe the previous lender . this situation is called being "upside-down" or having "negative equity." The dealer will often pay off the negative equity and include that amount in the amount of your new loan. Make sure that you understand if this is happening and don't be afraid to ask the F&I representative to clearly explain the calculations to you.