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Financing: Tips and Information for Purchasing a Car

Research Before You Buy

Compare vehicle prices. Once consumers learn the loan amount for which they can be approved for financing, they may check out sources such as newspapers, television, the Internet and word of mouth. Car dealerships may change their offers daily depending on the market. Many dealers are willing to negotiate if the consumer knows exactly how much they intend to spend. Although many ads offer good deals, some are too good to be true. Consumers should be realistic about prices for new cars; it would be helpful to read our page on Deceptive Car Advertising before making a final decision.

Compare financing rates. Consumers may check the Internet, call various lenders and explore opportunities in printed ads and television to see what interest rates and financing terms are available. These factors may vary widely from week to week depending on sales, the local market, and a consumer's credit. A good place to start is with a lending institution with which a consumer already has a relationship, such as a bank, credit union, or mortgage lender. Even if a consumer's credit is not perfect, an institution familiar with that consumer's history may be willing to lend money to purchase a vehicle at a reasonable interest rate.

Payment. Consumers should assess their monthly income and budget to determine how much they can afford to pay per month and the total loan amount that could be approved for financing. The Internet offers many websites which contain monthly and yearly payment calculators to assist in figuring these amounts.

Credit. It is important for consumers to see their credit reports before the dealers see their reports. Consumers may seek to influence the dealer's credit determination by taking steps to correct any inaccurate negative information. Please see our page on Credit Repair to learn how to correct inaccurate negative information.

Spot Financing. This is when the consumer takes possession of the vehicle conditioned on obtaining financing for it. The "sale" may not be final even though the dealer has congratulated the consumer on the purchase and has made verbal statements leading the consumer to believe that the proposed sale is final. During the time period (which should not exceed a reasonable amount of time) when financing is being finalized, any trade-in brought in by the consumer should not be sold, there should be no charge to the buyer if financing fails, and the dealer should refund all deposits. Spot financing is a convenience that allows consumers to take cars home before financing is approved; however, abuses of spot financing business practices can lead to problems and losses for consumers. If the consumer believes that financing has been approved at a certain interest rate, price or term, but is later told that they can only qualify for financing at a substantially higher interest rate, many consumers feel pressured into agreeing to the more expensive rate. The consumer has the choice to return the vehicle and reject the new terms, and does not have to accept the higher interest rate.

Note: Spot financing is also referred to as "spot delivery" and although the practice is legal in Tennessee, it is subject to many considerations. There should be some documentation presented to the customer which addresses these matters in some detail. The consumer should read such documentation carefully prior to signing and be clear on what responsibilities they may assume from making such agreements. Also, it is an unfair and deceptive practice for dealers to make oral statements which mislead the consumer to believe that the sale is final before financing is completely finalized.

Terms to Know:

(In general, these terms must be disclosed in writing to the buyer.)

Truth in Lending Act (TILA). This is the federal law which requires that the creditor (bank or dealer) give the consumer a written disclosure of the terms of the deal before they sign the contract.

MSRP. This stands for Manufacturer's Suggested Retail Price. It is the price at which negotiations usually begin. The dealer can sell the car for any price they believe is necessary to make a profit, sometimes far greater than the MSRP.

Credit Life Insurance. Optional insurance which pays the monthly payment if a consumer is disabled or the entire remaining balance if the consumer dies. Financing cannot be conditioned on a consumer's purchase of credit life insurance.

GAP. Guaranteed Auto Protection insurance pays any remaining amounts owed on the vehicle in the event of destruction or theft if the regular insurance will not cover it.

APR. The Annual Percentage Rate is the cost of credit for one year.

Assignee. The entity (bank, credit union, finance company) who purchases a consumer's contract from the dealer. The consumer is responsible for making payments to the assignee.

Buying a new car can be exciting but if consumers have a problem with the purchase of a vehicle, they may contact the Motor Vehicle Commission at (615) 741-2711 or the Division of Consumer Affairs.