Understanding Finance for Your Car Purchase

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January 27, 2012

Now that you have found that car you want to purchase, you need to understand finance for your car purchase. Certain factors come into play that determine which route makes the most sense relative to your financial situation. It is helpful to have an understanding about the process that goes into determining an auto loan and how lenders evaluate you as a risk. This process is important because it can play a significant role in the type of car you end up with.

The Finance Process

The finance process begins when you make the decision to purchase a vehicle. Most people do not walk into a dealer's showroom with cash in hand, ready to pay the full purchase price. They are looking to obtain some form of financing for the car they are looking to purchase. Once the salesperson has finished with their role in the deal, its time for the finance team to take over and begin their work.

The Finance Department

A finance department for an auto dealer may consist of one or several people. The finance manager heads the department and has the job of assessing the applicant's risk and placing it with the lender most likely to provide financing. A good finance department maintains relationships with many lenders and institutions in order to obtain a broad range of options for their customers.

The information used to determine the terms for financing comes from a credit application that is completed by the buyer. The application contains information regarding the individual borrower's name, date of birth, banking and other financial information, social security number, etc. This information is used to obtain a credit report on the borrower as well as to determine the interest rate on the amount financed.

Importance of Credit Scores

Customers with consumer credit scores over 700 tend to get better rates than those with a score of 620. Credit scores below 620 are considered sub-prime and qualify for those companies that specialize in the sub-prime market. The interest difference between a 700 and a 620 can be as much as 0.05% to 0.10%, which means $50 to $100 a month in additional loan cost.

Closing the Sale

The finance manager or their staff will present the offer to the buyer and, upon acceptance, execute the necessary documents to close the sale. The buyer then signs a loan agreement that states the terms of the loan to complete the sale. This process usually happens on the same day the car has been selected by the buyer.

It is important to ask questions during the application process and understand your rights as a borrower. The loan application represents an offer to purchase the vehicle but final acceptance of the terms of the offer only takes place when you sign as the borrower. If you fail to ask appropriate questions before that acceptance, it may end up you costing you a lot of money later on.

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