Automobile Financing

Automobile Dealership Financing

When a buyer chooses a direct lending option, such as obtaining a loan directly from an automobile dealership or financial institution, the buyer uses the loaned funds to purchase the vehicle and becomes legally obligated to pay the amount lent plus a specified finance charge monthly or at another designated interval over a set period of time that typically ranges from three to six years.

Most automobile dealerships have an on-site Finance and Insurance (F&I) department that facilitates the loan process. The first step in the process is typically having the buyer complete a credit application that asks for personal information such as date of birth and Social Security number, details about [Page 215]employment history and income sources, and data related to existing debt and credit accounts. The F&I representative uses this information to obtain a credit report of the buyer's previous and existing credit obligations and repayment history. The credit report provides details on each account held by the buyer, including the account number, account type and terms, account credit limit, recent balances, and payment activity. If applicable, the credit report also indicates a creditor summary of past-due information and any legal actions taken to collect payment on the accounts. Only a buyer who is seriously considering financing with the dealership should agree to have a credit report generated; each time a credit report is run, the individual's credit score can be lowered.

The credit report information is sent to the dealership's lenders—banks, finance firms, or credit unions—to determine which one offers the lowest interest rate for the specific buyer. The lender bases its rate on the buyer's credit report, completed credit application, and details about the terms of the sale, such as the amount of down payment the buyer will make. Buyers with a good credit history and established sources of income benefit from lower rates than buyers who have a history of late repayment, a previous bankruptcy, or very low or unstable income. In instances where buyers fail to qualify for vehicle financing on their own, a cosigner with favorable credit history and income may be required. The cosigner assumes equal responsibility for the contract, meaning that if the primary borrower cannot pay back the loan, the cosigner is obligated to make the payments.

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