How to Read a Used Car Finance Contract

Every used car buyer who is planning to finance a car will be presented a finance contract. It is important to understand how to read such a contact to properly evaluate all the costs associated with buying a used car.

Financing a used car usually starts with a financing application and ends with a finance contract.  When it comes to knowing what you’re looking at when a finance contract for a used car loan is in front of you, many people don’t feel they know enough to really evaluate it. Below are all the major pieces of information you should find on a financing contract and what they mean.

The contract itself is often printed on a very long sheet of paper. At the top will be basic information about the buyer (you) and the seller, as well as the year, make, model, and vehicle identification number (VIN) of the car being purchased. Then look for a row of information about the annual percentage rate, finance charge, amount financed, total of payments, and total sale price. Below you’ll find more on each of these items:

Annual percentage rate. You, as the buyer, don’t have enough cash to buy the car outright, which is why you’re taking out a used car loan. The lender is charging you a fee for borrowing the money, which is the annual percentage rate or interest rate on the loan. Think of this as the cost of taking out a loan. The annual percentage rate offered to you will vary depending on your credit history and current rates in the market.
Finance charge. Each monthly payment you make on the loan includes a fee for the cost of taking out the loan. Adding up all the fees throughout the life of the loan gives you the total finance charge.
Amount financed . This is the total amount you are borrowing to purchase the car. It’s the dollar amount of the credit being extended to you by the lender. It’s typically not the same as the price of the car if you make a down payment.
Total of payments. This represents what the buyer/borrower will pay in total on payments for the loan over its duration. It includes the amount financed (price of the car less any down payment) and the total finance charges over the life of the loan.
Total sale price. This is the grand total figure you are paying for the car, which means it includes the original price of the car as well as the total finance charges.

There will also be a part of the contract that explains the payment schedule. It includes the number of payments, which will be 12 monthly payments per year times however many years you loan will last (typically anywhere from 3-6 years), the amount of each payment, and how often payments are due (monthly) and when (the day of the month). One other section to look for is one that covers an itemization of the amount financed. It shows the cash price of the car, then subtracts from it the value of your trade-in if you had one and any down payment you make, and then adds in various items such as title fees, any service contracts or GAP insurance you purchase, and so on.

When a finance contract is put in front of you, it can feel very daunting. As long as you are familiar with the various items mentioned above, you’ll be in a good position to examine any finance contract and know what it means.