Car finance
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Car finance refers to the various financial products which allow someone to acquire a car, including car loans and leases.
History
Car financing started with the General Motors Acceptance Corporation circa World War 1.[1]
Car purchases
The most common method of buying a car in the United States is borrowing the money and then paying it off in installments. Over 85% of new cars and half of used cars are financed (as opposed to being paid for in a lump sum with cash).
There are two primary methods of borrowing money to buy a car: direct and indirect. A direct loan is one that the borrower arranges with a lender directly. Indirect financing is arranged by the car dealership where the car is purchased. Legally, an indirect “loan” is not technically a loan; when a car buyer obtains financing facilitated by a dealership, the buyer and dealer sign a Retail Installment Sales Contract rather than a loan agreement. The dealer then typically sells or assigns that contract to a bank, credit union, or other financial institution. Usually, the dealer knows in advance which financial institution will buy the contract. The borrower then pays off the financial institution the same as for a direct loan.[citation needed] Typically, the indirect auto lender will set an interest rate, known as the "buy rate". The auto dealer then adds a markup to that rate, and presents the result to the customer as the "contract rate".[citation needed] These markups have been the focus of some regulatory scrutiny because they can cause variations in interest rates that are not correlated with credit risk.[2]
Car financing options in the United Kingdom similarly include car loans, hire purchase, personal contract hires (car leasing) and Personal Contract Purchases.
In 2016, Toyota was found guilty of racist lending practices.[3]
Dealer financing
Dealer financing is an option automobile dealerships offer to customers purchasing a vehicle. It is a significant source of profit for dealerships, with estimates suggesting that 78 percent of all cars are financed through this method. However, dealer financing may not always be the most advantageous option for buyers. Studies have shown that the average per-unit finance cost can be higher when financing through a dealership than independent lenders. For example, one study found that the price increased by $674 when dealer financing was used, potentially due to additional products or services (an average of 4.63 add-ons per deal) in the financing package.[4]
Car leases
Script error: No such module "Labelled list hatnote". A lease is a contractual agreement between a person who owns the property (lessor) and a person who gets to use it during the term of the lease (lessee). Usually, car leases allow the lessee to drive the car for a certain number of miles for a certain number of years. The lessee pays a fixed monthly payment for the privilege of driving the vehicle, and when the lease ends, the lessee returns the vehicle to the lessor. The lessee pays only for the value of the vehicle for the term of the lease. Lenders calculate lease payments based on the vehicle’s residual value, or what they estimate the car will be worth when the lease is over.[5]
Spot delivery
Script error: No such module "Labelled list hatnote". Spot delivery (or spot financing) is a term used in the automobile industry that means delivery of a vehicle to a buyer prior to financing on the vehicle being completed.[6] Spot delivery is used by dealerships on the weekend or after bank hours to be able to deliver a vehicle when a final approval cannot be received from a bank.[6] This method of delivery is regulated by many states in the U.S., and is sometimes referred to as a "Yo-Yo sale" or "Yo-Yo Financing".[7][8]
See also
References
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- ^ Page Module:Citation/CS1/styles.css has no content."Car Loan".
- ^ Page Module:Citation/CS1/styles.css has no content."CFPB and DOJ Reach Resolution with Honda to Address Discriminatory Auto Loan Pricing - Consumer Financial Protection Bureau". 14 July 2015.
- ^ Page Module:Citation/CS1/styles.css has no content."Toyota Motor Credit settles with U.S. Over racial bias in auto loans". Reuters. 2 February 2016.
- ^ Page Module:Citation/CS1/styles.css has no content.Dayen, David (2024-07-08). "Escape From the Box". The American Prospect. Retrieved 2024-07-09.
- ^ Page Module:Citation/CS1/styles.css has no content.Vincent, John M. (31 January 2019). "How Does Leasing a Car Work?". US News and World Report. Retrieved 13 July 2023.
- ^ a b Page Module:Citation/CS1/styles.css has no content.Ducey, Joe (20 June 2016). "Spot delivery is a bad idea when buying a car". ABC 15 Arizona. Retrieved 26 February 2018.
- ^ Page Module:Citation/CS1/styles.css has no content.Dunn, Catherine (24 November 2014). "Yo-Yo Sales: For Subprime Borrowers, Car Contracts With Many Strings Attached". International Business Times. Retrieved 26 February 2018.
- ^ Page Module:Citation/CS1/styles.css has no content.Carrns, Ann (18 April 2012). "Consumer Advocates Seek Halt to 'Yo-Yo' Car Financing". The New York Times. Retrieved 26 February 2018.
External links
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