car buying process

An Overview of the Car Financing Process

The best way to buy a car is to pay for it in cash. However this isn’t always possible. In fact, almost two-thirds of all car buyers use some form of financing to cover at least part of the car’s cost. Car dealerships offer some form of financing and an increasing number of new and used car buyers are making their vehicle purchase this way. In fact, the past few years has seen a significant increase in the number of people arranging finance through car dealerships.

What makes car dealership financing so attractive for most people is the fact that it is very convenient. Many people today are struggling to stay afloat financially, and simply cannot cope with the extra expenses involved in buying an automobile outright. With so many people earning so much less than they did in the past, auto dealers are now offering long term loans as a solution.

These long term auto loans which can be as long as ten years, allows people to drive off in a brand new or used car that they wouldn’t ordinarily have been able to afford if they were required to pay for it upfront. When buying a car, most customers focus on the purchase price of the car, and feel the battle is over once they have negotiated a price they are happy with.

In that moment, people assume they are obligated to sign up to whatever finance deal is put in front of them since the dealership has “given them a break on the car’s purchase price”. The seemingly small monthly payments they are required to make over the full term of the finance seem like a small price to pay, and they are just glad for the opportunity that they often don’t bother reading the fine print to better understand exactly what they are signing up to.

It is critically important to understand what you are signing up for when you finance a car through a car dealership. Car dealerships earn more from the financing process than they do from the tiny profit margins held in the cars themselves, and they will try to make as much money as they can off of you as they possibly can. If you are not prudent enough to read the terms and conditions and understand the full implications of what you are signing up to, you may be on the losing end of a very bad deal. And like many unfortunate buyers, you’ll only realise this when it is far too late.

Here are a few basic tips that are important for you to follow before you sign your life away on that new or used car:

Understand the different types of finance options available to you

There are different types of car finance depending on what part of the world you live. Once you’ve signed up to a finance agreement, you won’t be able to change it mid-stream. You would have to settle your current agreement before taking out a different one. It is therefore important to understand the implications of each type of these finance options before you commit to anything:

  • Personal Loan
  • Hire Purchase
  • Leasing
  • Dealer Finance
  • Personal Credit Purchase (PCP)
  • Personal Contract Hire (PCH)
  • Credit Card Finance
  • Adverse Credit Finance

Here are a few tips to keep in mind.

Check your credit history to ensure it is 100% accurate

Before making your way to the dealership, check your credit history through the main credit agencies. Make sure there are no errors in the report, and take a copy with you to the dealership. Do not assume that the information on your credit report is accurate, as it can get your finance application denied even if you have a stellar credit score and credit history. If there are any errors in the report, make sure you get it corrected before applying for finance. Take a copy with you to the dealership.

Get pre-approved for a car loan before you arrive at the dealership

It is important to stay calm and in control of the entire process, because the finance manager at the dealership will try to control you with all sorts of mind games. Keep in mind that this is what they have been trained to do. However, you’ll be in a strong negotiating position by getting a range of pre-approved offers before you go to the dealership. This will mean that the dealer will have to compete for your business by offering similar or better offers.

Read all paperwork thoroughly

Before you sign anything, it is absolutely essential that you take the time to read every quote, offer and contract you are being given and ensure that you fully understand what you are committing yourself to. Ask for finance quotations for the exact vehicle you are considering, in writing.

In the UK, it is a Financial Conduct Authority (FCA) requirement that an agent of a finance company (usually the Business Manager at the dealership) gives you a specific and complete quotation for the exact vehicle you are considering. In the US, the Federal Trade Commission  is responsible for educating consumers and businesses about their rights and responsibilities. But these bodies can only do so much. Make sure you get a complete breakdown of all fees and charges, interest, and most importantly, the total cost of borrowing.

It is important that you understand all fees involved, all the terms and conditions and all of your obligations. When you are actually being presented with a finance contract to sign, there are many pages of paperwork which you have the right – and the obligation – to read and understand.

FCA requirements mean that you have to be given documents called Pre-Contract Information and Adequate Explanations, which summarise exactly what you are agreeing to. You have the right to take this information away and read it if you like, although the dealer will try their hardest to get you to sign the contract straight away.

Ask questions

Don’t be afraid or embarrassed to ask questions if there is anything you’re having an issue with. In fact, it is important to ask questions all the way through the entire process, because the way the finance manager or sales executives answer your questions should give you an indication of how you’re going to be treated. Expect to be given complete answers that answer your questions thoroughly. Don’t accept vague or one-line answers to pertinent questions.

7 days ago

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