By Margaret Mitschke*
In the previous blogs in this loans blog series, we have discussed Texas Usury Laws, Credit Scores, and Student Loans. This blog will focus on car loans, direct lending versus dealership financing, and how to be careful when it comes to taking out a car loan.
Direct Lending versus Dealership Financing
When it comes to financing a vehicle, the Federal Trade Commission states that there are two financing options. The first is direct lending, where you get a loan from a bank, finance company, or credit union. This loan is similar to other loans from banks discussed in the previous blogs in this series. The loan’s interest rate, monthly payment, and time allowed to pay back the loan are often connected to a borrower’s credit and history.
The second financing option is dealership financing. This involves you and the dealer entering into a contract wherein you buy the vehicle and agree to pay over a period of time. There are some benefits to this type of financing, particularly special discounts on certain vehicles or incentive programs offered by the dealership.
Federal and State Laws
A number of laws govern the vehicle financing process:
- The Consumer Leasing Act requires the leasing company or dealership to disclose certain information before a lease is signed;
- The Credit Practices Rule requires creditors to provide a written notice to potential co-signers about their liability if the other signer fails to pay. This rule also prohibits late charges in some situations, and prohibits creditors from using certain contract provisions if the government has found them to be unfair to customers;
- The Equal Credit Opportunity Act prohibits discrimination related to credit because of race, gender, color, marital status, religion, national origin, age, public assistance, or having exercised your rights under the federal Consumer Credit Protection Act;
- The Fair Credit Reporting Act gives the consumer the right to:
- One free credit report each year from each of the three nationwide consumer reporting agencies;
- Know the number they can use to notify credit reporting agencies of identity theft;
- Dispute information in their credit reports that they believe is inaccurate or incomplete; and
- Receive credit reports and scores if they were used in denying credit, taking other adverse action against them, or in certain other circumstances.
- Risk-Based Pricing Rule requires creditors to provide consumers who apply for vehicle financing with information about their credit scores, and how they compare to other consumers; and
- The Truth in Lending Act requires creditors to give you a written disclosure of important terms of the credit agreement before you sign the agreement.
While every finance situation is different, there are certain things you can do to ensure you fully understand the contract’s terms and obligations. In the previous blogs in this series, examples were used to demonstrate how the higher the monthly payment, and the shorter the loan payment period, the less the borrower had to pay back in total. This is also true for car loans. For example, say that the purchase price of a vehicle is $20,000, the annual interest rate is 5%, and there is a down payment of $4,000. The following table shows the difference in the monthly payment amount, as well as the difference in total amount paid.
Also, if you make extra or larger payments than the minimum, you can reduce the amount you owe in total as well by avoiding future interest. Using the 6 years/72 months example from the table above, the chart below shows the difference in total payments if the borrower pays just $50 extra every month instead of paying the minimum $258 per month. This means that $50 is going towards the principle amount, and decreases the total amount of interest due at the end of the loan life. In this example, the total savings on the loan was $482, and the amount of time saved was 13 months.
Some other tips when it comes to taking out a car loan include:
- Check to see how the interest rate may be adjusted or changed in the future;
- Check to see if prepayments, advanced payments, or extra payments are allowed on the loan;
- Make sure that any extra payments are put towards the principle of the loan, and not just interest. Payments put towards interest do not decrease the total amount that is still owed, while principle payments do;
- Try to pay more than the minimum amount due for a monthly loan payment, if the lender allows.
As an SHSU student, you have access to a full-time attorney on campus to help you with a variety of legal matters. If you have questions, or would like to have your loan documents reviewed, please feel free to contact us and make an appointment at (936) 294-1717, or go online at http://www.shsu.edu/legalservice to schedule a free consultation with our attorney.