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You have rights when borrowing money to buy a new or used car or truck. Two federal agencies, The Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC), have information to help you make smart moves when using loans to pay for new or used cars or trucks.
https://www.consumerfinance.gov/consumer-tools/auto-loans/
https://consumer.ftc.gov/shopping-and-donating/buying-and-owning-car
What kind of loan can I use to buy a car or truck?
There are two kinds of car loans, Direct Lending and Dealership Financing.
Direct Lending
Direct lending car loans come from a bank, finance company, or credit union. You will pay the amount loaned to you plus a finance charge. The finance charge is the interest on the loan.
The loan usually lasts somewhere from three to seven years. You may see this written in months, like 36 to 84 months.
See what kind of loans your bank offers. It may save you money over what a car lot offers.
You can shop around with other lenders for a better deal on a loan. Here are the advantages of a direct loan:
- You know ahead of time how much your loan will cost.
- You know the loan’s interest rate (APR, or annual percentage rate).
- You know how much money you can borrow to buy a car. This may help you work out a price with a car dealer.
- An approved car loan ahead of time can help you shop around among different dealers.
Dealership Financing
You apply for dealership financing through the dealer selling the car or truck you want to buy. Your loan with the dealer will say how much you agree to pay, the finance charge on the borrowed money, and how long the loan lasts.
The car dealership usually sells your car loan to a bank, finance company, or credit union. The company that buys your loan will service the account and take payments from you.
The advantages of dealership financing are:
- A range of ways to borrow money. The dealer may have ties to banks and finance companies with different loan options. But dealerships want to make a profit on the loan. Dealership financing may not give you the best price.
- Dealers sometimes offer special deals programs. The carmaker may offer a low rate on the loan or something else to get you to buy. They may cover only certain cars and trucks or may only apply to people with strong credit. Ask the dealer if you qualify for a special deal.
What do I need to know before I get a car or truck loan?
If you get a loan, make sure you understand what you are agreeing to before signing any papers. You should know the following:
- The exact price you will pay for the car or truck.
- If there is a down payment and how much it will cost.
- How much money you will owe through the car loan. (This is called the amount financed by the loan.)
- What the finance charge is (The extra amount over the car price the loan will cost you).
- The interest rate (APR).
- How much each payment is, and how many months of payments you will make.
- If more than one payment a month is needed.
- The payment due date You can often change this before the loan is made, but you may not be able to change it later.
- The total sales price (the sum of everything you will pay under the loan).
Should I get more than one loan offer?
Yes. Shop around. It should be free to get a loan offer. You should get a few and compare the financing offers. Focus on more than just the monthly payment amount.
The Louisiana Motor Vehicle Sales Finance Act (La. R.S. 6:969.1) has rules for car and truck loans. It decides how high the interest can be on a loan. The most you can be asked to pay in interest is between 18% and 33%, depending on things like how old the car is. If you have good credit, your interest rate should be much less.
Find out more at La. R.S. 6:969.10.
How will I know if I can afford the car loan payments?
Add the cost of the car loan on top of everything else you pay for every month, like your rent, mortgage, utilities, food, or other bills.
Example:
You have $1,500 to spend each month. After you pay your rent, utilities, food, and other debt payments, you have $150 left over. That means you cannot afford a $300 monthly car loan payment.
Owning a car has other monthly costs like gas, car insurance, and repairs. Insurance on a newer car is often higher than on an older one.
One rule of thumb: spend at most 10% of monthly take-home pay on a car loan payment and 20% monthly for total car expenses.
Here are more resources on figuring out what you can afford to pay for a car loan:
- https://consumer.gov/managing-your-money/making-budget#!what-to-know
- Comparing auto loans (consumerfinance.gov)
- https://www.nerdwallet.com/article/loans/auto-loans/much-spend-car
It’s a good idea to create a budget worksheet before starting the loan process: https://www.consumer.gov/sites/default/files/pdf-1020-make-budget-worksheet_form.pdf.
What if I stretch out the time to pay back the loan to lower my monthly payments?
Most car loans are for 3 – 5 years. Creditors may offer longer-term loans, like 72 or 84 months, i.e., 6 or 7 years. Longer-term loans may also have higher rates (APR).
The more time you take to repay the loan, the more money the loan will cost you. Cars quickly lose value once you drive off the lot. Paying back money over a long time may mean you end up owing more money than the car is worth.
Do I have to buy gap, credit, or disability insurance when I buy a car?
No, it is up to you. Add-on insurance is not required by law. It’s against the law for a lender to put credit insurance in your loan without your knowledge or permission. If you buy it, get a copy of the policy and keep it.
Be aware that buying insurance will increase the total cost of the loan to you since it will likely be financed in the loan. Consider the price and if it’s worth it.
Check your existing insurance policies to avoid duplicating benefits.
Do I have to buy extended warranties when I borrow money to buy a vehicle?
No. If you do, get all the details, including price, time of coverage, limits of coverage, and a copy of the policy.
Can I negotiate with the lender on my loan?
Yes. You should try to get the best deal for yourself. By negotiating for better terms on your loan, you can reduce the amount of money you pay over time. For example:
- Getting a lower interest rate (APR) means you will pay less to borrow money. The total cost of your loan will be lower.
- A shorter loan term (making monthly payments for fewer months) will reduce your total loan cost. A longer loan can reduce your monthly payment, but you pay more interest over the life of the loan.
- A higher down payment, or a higher price for your trade-in, will reduce the total amount financed because you will have to borrow less money.
- Optional “add-on” products like extended warranties, GAP insurance, or credit insurance that are added to your loan amount will increase your total cost because you will be borrowing more money.
If you do not like the loan terms, you can walk away.
The lender wants me to have a co-signer for my loan. Is this required?
If your credit history is limited or needs improvement, a co-signer with good or excellent credit could help lower your interest rate and may be required by the lender.
Some people have a parent, family member, or friend co-sign. Beware, the person who co-signs is legally saying that they are just as responsible as you are to repay the loan.
You both should think carefully about this decision. If you default on the loan, the co-signer will be sued like you since they are also responsible for the debt. This is true even if the co-signer does not use the vehicle.
Federal law generally prohibits a lender from requiring you to have a co-signer if you apply for a loan individually, and you can qualify under the lender’s standards for creditworthiness for the loan.
Can I cancel the sale and financing within three days of the vehicle sale?
No. In Louisiana, once the parties have agreed to the sales contract, it can be valid.
What can I do if I have issues after the vehicle is bought?
You can contact the local Better Business Bureau in your area to see if they can resolve your issues. In the Greater New Orleans area, their number is 504-581-6222.
For a new vehicle sale, you should contact the vehicle manufacturer.
See our other blog post about used car warranties here.
If it is a used vehicle, the Louisiana Used Motor Vehicle Commission “LUMVC” may be able to offer assistance. Call the office at 800-256-2977 or fill out a complaint form at: https://lumvc.louisiana.gov/wp-content/uploads/2019/02/Consumer-Complaint-Process.pdf.
You can’t stop making payments on the loan if there are problems with the vehicle. Payments are due until the loan is canceled.