Understanding Car Loan Agreements

OK, so you’ve figured out what type of car you need, determined how much you could comfortably afford to pay and tested a series of cars—before choosing the one best suited to your needs (and your personality). You then negotiated a great purchase price for new car and got a good deal on your trade-in too.

Now, you’re anxiously eyeing the stack of papers the dealership wants you to sign and just come to grips with the importance of also understanding car loan agreements. Don’t worry though; we’ve got you covered. Here are the main things to which you should pay attention before signing a financing contract.

Descriptive Information

How embarrassing would it be to learn you signed an agreement to take a loan on a car other than the one you thought you were buying? As improbable as it sounds, signing a deal with the wrong vehicle identification number (VIN) could land you in a different car.

Be sure the VIN on the loan agreement matches the VIN on the car you want. It’s entirely possible for the make, model and colors to match, while optional equipment is different. You should also verify your name, address and driver’s license number are accurately recorded on the agreement.

Watch Out for Additional Fees

While most sellers will tell you there are no additional fees involved, some are inevitable. There are legitimate license and registration fees as well as taxes to consider.

However, be wary of loan origination fees, convenience fees and the like. Those can sometimes be added simply to pad the dealer’s profit. The best move is to negotiate the price of the car with all fees and taxes included. That way you don’t get blindsided with extras on the paperwork.

You also want to read carefully to ensure add-ons are not slipped into the deal at the last minute. Undercoating, upholstery protection, extended warranties and anti-theft devices are among the items that can “magically appear” on your loan agreement. Don’t sign for anything upon which you had not previously agreed—or do not want.

Do the Math

What’s the use of negotiating a spectacular deal if you fail to ensure the terms you were quoted are reflected upon the document outlining what you will pay? While most dealers are honest people—and mistakes can be made—some people will say one thing but write something else on the loan agreement.

Make sure the sale price of the car is what you agreed to. Ditto the amount you’re credited for your trade-in. The interest rate or APR should be what you agreed to as well. Subprime car loans from RoadLoans and others have slightly different terms, read for those as well.

You also want to be careful to ensure taxes and fees all line up in accordance with the purchase price. Once you sign, that’s what you’ve agreed to pay. Unraveling it can be difficult after the fact.

Speak Up

Read the contract thoroughly and question anything you do not understand. It’s better to feel slightly uncomfortable admitting you don’t get something, than it is to spend 36, 48, 60, 72 or even 84 months paying for something you didn’t want.

Above all, make sure the explanations you get are thorough and make sense. Don’t allow them to gloss over details and don’t let anyone shame you into signing before you’re certain you have the exact terms you want.

Loan agreements are full of words with which you might be unfamiliar. Before you get into a situation in which you’ll need to decipher one, read over this glossary of terms to help you get a feel for what you’ll be likely to encounter.

While it might seem as if you’re home free once you’ve settled on a price, that’s when the final stage of the car-buying process actually begins. Understanding car loan agreements is just as important as the pre-purchase steps you took to ensure you got a good deal on your new car.