Motor Vehicle Financing
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Dealers and Brokers must follow “Truth in Lending” and “Car Buyer’s Bill of Rights” laws and disclose all terms of financing including any item purchased.
It is illegal to charge more for a vehicle when the customer is financing.
It is legal to give a customer a discount when they are paying cash.
Allowable Interest Rates
Dealers are permitted to use only two methods for computing interest rates; Simple and Precomputed
- Simple Interest is common and most beneficial for Buyers as they pay interest on the remaining balance.
For example, a Buyer financing $10,000 at 10% for three years would only pay about $1,616 in interest charge (10% x remaining balance x 3 years)
- Precomputed Interest is often used for Buyers with bad credit and is less beneficial. Payments are pre-calculated based on the original loan amount.
For example, a Buyer financing $10,000 at 10% for three years would pay $3,000 in interest (10% x $10,000 x 3 years)
Annual Percentage Rate (APR)
Regardless of the method used, Dealers must convert all interest rates to standard APR (Annual Percentage Rate.
The Annual Percentage Rate (APR) is the annual rate charged for the Buyer’s loan, shown as a percentage that represents the actual yearly cost of borrowing over the term of a loan
Monthly Payment Calculations
Your Conditional Sales Contract must include the price of any items purchased and the effect of those items on monthly payments.
The Buyer must be advised of the full cost of the monthly payments with (and without)
- Service Contracts
- Insurance products
- Debt cancellation agreements (known as “gap” insurance)
- Theft-deterrent devices
- Surface protection products
- Contract Cancellation Option Agreements
No charges may be added to the contract without full written disclosure and the Buyer’s signed consent
Maximum Finance Markup Rate
California’s “Car Buyer Bill of Rights” (AB 68) limits a Dealer’s compensation from an institution financing the purchase of a vehicle is limited to no more than:
- 2.5% for terms up to 60 months
- 2.0% for terms of 60 months or longer
This limitation does not apply when the assignment requires the Dealer to bear the entire risk of financial performance for the consumer or when the assignment is more than six months after the date of the Conditional Sale Contract.
Accepting or receiving an amount higher than that authorized would be a cause of action against a dealer’s license and a misdemeanor crime.