Used Car Financing

Apr 30, 2024

If buying a used car, you may need financing for your purchase. For many consumers, auto financing is a complicated and hard-to-understand process, even for those who have previously financed vehicles. Learn how financing works and how to maximize financing on your next vehicle purchase.

1) What is vehicle financing?

A financed purchase is when you purchase an item, like a vehicle, with a promise to pay over time. On the day you sign the financing paperwork, you are the vehicle’s rightful owner. The lender is solely a lienholder with the right to “repossess” your vehicle in the event of a default (e.g., failure to make payment or failure to maintain insurance). If you default on your obligations, the lender can repossess your vehicle without giving you prior notice or taking legal action. 

When you enter into a financing agreement, you will likely sign a Retail Installment Contract (RISC) detailing your financing terms. Under federal law, it is required to have the following information:

  • Annual Percentage Rate (APR): The cost you pay to borrow the money for your purchase, expressed as an annual percentage. 
  • Finance Charge: The dollar amount you pay for the interest on financing your purchase. This is how much more you’re paying for the vehicle for financing it rather than paying cash upfront.
  • Amount Financed: The total amount that is subject to interest.
  • Total of Payments: The total amount you will pay in payments over the life of the loan.
  • Total Sale Price: The total amount you will pay (including your down payment) over the life of the loan.
  • Number of Payments: The number of monthly payments you will make over the life of the loan.
  • Amount of payments: The amount you will pay each month.

Closely examine the above seven items before signing any financing agreements. If any of the numbers are inaccurate, the lender (or the dealer) may be in violation of the Truth in Lending Act (TILA).

2) Should I get pre-approved?

Pre-approval on vehicle financing from a credit union or bank may not always be the best option, but it does have many advantages.

Believe it or not, your bank or credit union will only sometimes get you a better rate than your dealer. Dealers can shop around for the best financing rate, meaning you may get a better deal if they find a lender willing to give you a lower rate.

There are other benefits of getting pre-approved for your next vehicle: 

  • First, you know the lender you will deal with for several years. When financing through a dealer, you do not have a choice of lender. You may get stuck with a lender who is challenging to work with or even reach. 
  • Second, it is final once you sign the pre-approved financing contract with your credit union. If you finance through the dealer—no matter what the dealer tells you—your financing is NOT final until the dealer finds a lender who accepts the contract terms and pays the dealer. 
  • Third, if you get pre-approved, you have ample time to review your financing terms in the comfort of your home and discuss it with your family before committing. When financing with the dealer, you are rushed to sign the documents at the financing office following hours of negotiation. While consumers do have the right to (and should) take their time to review all of the terms before signing the contract, most people spend less than 15 minutes reviewing the paperwork. 

If your primary goal is to get the lowest rate, get pre-approved first, then ask the dealer to beat that rate. 

3) What should I look out for if getting financing at the dealership?

Here are some tips for securing good financing terms from a dealer. 

Say no to buy-here,pay-here

If the dealer suggests you make payments directly to the dealer (a buy-here, pay-here dealer), it’s a good idea to get up and leave. While not all buy-here, pay-here dealers are unscrupulous, financing a vehicle directly with the dealer is generally a bad idea. Calculating financing is a complicated process that requires meticulous records and document management, which the federal government heavily regulates. It is simply too risky to get involved with a dealer that does not have the resources of a financial institution to get the numbers right.

You can negotiate rates with the dealer

When the dealer looks for the best rate for you, they can keep up to three points without telling you. For example, the dealer may find a lender willing to give you the loan for 7% APR, but they offer you a 9% APR loan, intending to profit the extra 2%. You can always negotiate with the dealer to lower their profit on the loan and give you a lower rate.

Take your time reviewing the RISC

You have likely spent hours negotiating with the salesperson, having verbally agreed with the dealer, by the time you review the RISC. Now, you are ready to sign the purchase documents at the financing office. Both you and the dealer will likely want to rush through signing the paperwork. This is when you want to slow down. Take your time and review the RISC very carefully. Make sure all of the RISC numbers align with what you agreed to with the salesperson. Ensure the dealer did not add any extra charges you did not want. You can negotiate during this stage of the transaction.

Wait for your acceptance letter

You sign the RISC and all other paperwork and drive the vehicle home. You’re happy with your vehicle and financing. No matter how tempted you are, do not buy new rims, tires, or other accessories for your car. Remember that regardless of what the dealer told you, your financing is not yet final. Ideally, in a couple of days, you will receive a welcome letter in the mail from the lender of your choice. If you do, your purchase is complete; enjoy your new vehicle! If you receive rejection letters from lenders in the mail, the dealer is likely shopping around for financing. If a lender rejects your application, they are required to mail you a rejection letter and notify you of the possible impact on your credit report.

The dealer has 14 days from the purchase date of your vehicle to secure financing at the exact terms to which you agreed. If the dealer cannot secure financing under those terms within the 14-day window (and refuses to finance in-house), you have the right to return your vehicle. This means getting all of your money back, including your down payment and your trade-in vehicle. If there’s no damage to the vehicle, the dealer can’t charge you for usage unless they notify you (by letter or electronic communication)of their failure to obtain financing. While you cannot force the dealer to keep the original agreement you and the dealer signed at this point, you are not obligated to sign new financing with different financing terms.

    OCJ’s Consumer Confidence Comics

    Issue No. 1—Purchasing a Used Car

    Available in English and Spanish, this comic will help you confidently tackle the complicated transaction of buying a used car.

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