What to look for in a contract
For many people, arranging financing to buy a car is their first signed contract that carries significant financial obligations. Besides the questions you need to ask yourself (How much can I afford to pay? How do I plan to use the car? How much will insurance cost?), there are a number of questions you should be prepared to ask the dealer (or other lender) before signing the purchase contract.
Sit down with your teen and come up with a list of all the questions you think should be answered in the contract. Use your own purchase contract as a model, if you have one. See if your list includes the following questions:
- What interest rate will I be paying? The actual annual percentage rate (APR) will probably depend on your credit score, which the lender will obtain from a credit bureau. Make sure the APR is printed in the contract before you sign it.
- Are there any possible penalties? Find out if paying off the loan early will result in a prepayment penalty or any other hidden charges.
- What are my total upfront costs? Include items like down payment, taxes, license and registration fees, and other miscellaneous fees or points.
- What is the total amount being financed? The total price you’re being quoted should be the sum of your upfront costs and any loan amount.
- What is the exact amount of each monthly payment? And exactly how many payments will you make?
- What is the loan's term length? Find out exactly how long the loan is for and when monthly payments are due. Find out how big of an interest rate reduction you'd qualify for with a shorter-term loan — it could save a lot of money in the long run.
- Is the deal contingent on any third-party approvals? Make sure you’ve been fully approved by the lender at the agreed-upon rate before taking possession of the car. You can always come back in a few days when they have a signed financing deal.