Payment Options: Buying a Car

You have two payment choices when buying a car: either pay in full or finance over time with a car loan. If you finance, the total cost of the car increases. That's because you're also paying for the cost of credit, which includes interest and other loan costs.

You also must consider:

• How much you can put down as a down payment
• Your monthly payment
• The length of the loan
• The annual percentage rate (APR), or interest rate

Used cars usually have higher APRs and shorter loan periods than new cars.

There are also legal implications under consumer law that cover auto loans. This article will guide you through the different consumer protections when financing a vehicle, understanding loan terms, and more.

Car Financing and Consumer Protection Laws

Both federal and state laws protect car buyers from predatory lending and discrimination in financing.

At the federal level, The Truth in Lending Act requires lenders to disclose the actual cost of any consumer credit transaction. This means they must present the loan terms in a way the average consumer can understand. Some of these terms include:

• Payment due dates
• Interest rates
• Refinancing options

Other federal laws promote fairness, accuracy, and transparency in credit reporting:

• The Equal Credit Opportunity Act prohibits discrimination in credit transactions
• The Fair Credit Reporting Act protects your right to know what information is in your credit report and to dispute any errors
• The Risk-Based Pricing Rule requires lenders to notify you if you get less favorable credit terms because of information in your credit report

Under federal law, you can get a free credit report every year from each of the three credit bureaus (Experian, Equifax, and TransUnion). The Consumer Financial Protection Bureau recommends you take advantage of your free annual credit report to ensure it is error-free.

The dealer will likely suggest optional add-ons you can include in your loan. These often include extended warranties, service contracts, gap insurance, and credit insurance. You can decline any of these additional services. The dealer must disclose what your loan payments would be with and without any add-ons.

State laws can also impact your auto loan. Some states set maximum interest rates and have specific requirements for auto loan contracts. It's also important to know how your state governs vehicle repossessions if a borrower defaults on an auto loan.

If you feel an auto dealer or lender has treated you unfairly during the finance process, you can file a complaint with the Federal Trade Commission (FTC). You can also talk to a consumer protection attorney.

Compare Auto Loans and Lenders

Auto loans are a type of consumer debt. Just like mortgages or student loans, you should carefully consider your financial situation and budget before taking on additional debt.

Auto dealers and lenders offer a variety of loan terms and payment schedules. Borrowers should shop around, compare offers, and negotiate the best deal. You do not have to finance your vehicle through the dealership or manufacturer. You can also apply for auto financing through your local credit union or large online banks.

Be cautious about advertisements offering financing to first-time buyers or consumers with low credit scores. These offers often require a significant down payment and a higher interest rate. Agreeing to financing with a high APR involves more risk. If you sell the car before the loan expires, the amount you receive from the sale may be far less than the amount you need to pay off the loan.

If the car is repossessed or declared a total loss because of an accident, you may have to pay a considerable amount to repay the loan. This is the case even after the lender has deducted the vehicle sale proceeds and the insurance payment.

If your budget is tight, consider paying cash for a less expensive car than you initially planned.

Understand Important Loan Terms

If you decide to finance, make sure you understand the following aspects of the financing agreement before you sign any documents:

• Exact price you're paying for the vehicle
• Total amount you're financing
• Finance charge (the dollar amount the credit will cost you)
• APR (a measure of the cost of credit, expressed as a yearly rate)
• Number and amount of payments
• Total price of the car (the sum of the monthly payments plus the down payment)

The Golden Rule of Car Payments

A vehicle loan should not create financial strain. You should be able to comfortably manage your monthly car payment without compromising your ability to maintain other expenses.

The “golden rule of car payments" is a common guideline for determining how much you can afford to spend on a car purchase. This guideline for payments recommends a 20/4/10 rule and suggests you:

• Make a down payment of at least 20% of the purchase price
• Finance the vehicle for no more than four years (48 months)
• Ensure your total monthly vehicle expenses (including principal, interest, and insurance) don't exceed 10% of your pre-tax income

Following this golden rule will help you avoid going upside down on a car loan, or owing more than the car is worth.

Can a Buyer Take Over Car Payments?

It's not always possible for a buyer to take over payments on an existing auto loan. It depends on the lender's policies and whether the loan contract includes clauses that don't allow for loan assumption. Loan assumption refers to transferring an existing auto loan from the original buyer to a new vehicle owner.

If you want to sell your vehicle but haven't paid off the loan yet, check your contract and ask your lender if they allow for loan assumptions. If so, the buyer typically needs to apply for credit approval through the lender. If approved, the lender will transfer the loan responsibilities to the new owner.

If your auto loan lender doesn't allow loan assumptions, the new buyer will likely have to get separate financing to pay off the original loan. The new owner is then also responsible for the new loan's repayment terms.

Need More Help With an Auto Loan? Get Legal Advice

Most of the time, vehicle financing doesn't require legal help. There are certain situations where it may be beneficial to talk to a local consumer protection attorney:

• You may have bought a lemon you financed through an auto loan
• You think the manufacturer or car dealer used predatory lending practices
• The car dealership or finance company did not fairly consider your eligibility for a vehicle loan

An experienced attorney near you can help protect your consumer rights. They can assess for breach of contract, disclosure law violations, and more. Contact an attorney today to learn more.