This section will familiarize the reader with the different types of contracts he may encounter while in the “F&I” office. Admittedly, it is rare that a dealer will try to put forth some exotic document. However, it is good to know where to look on each contract to make sure the numbers match the agreed upon price.

Often the “F&I” manager’s strategy is to begin by having the customer sign some innocuous documents, such as DMV or federal forms, and then roll into the contracts an item that could include some undisclosed charges.

In the old “System House” technique, the “F&I” manager would have the paperwork pre-printed with the “Back-End” profit already included. Then he would pattern the process by having the customer “get used to signing.” Often the “F&I” manager will have all of the documents on his lap and present one after the other to the customer in a quick, systematic fashion, with very little disclosure. The idea is that the customer will rarely interrupt the fast paper stream. Customers must read what they are signing regardless of the disclosure being offered by the “F&I” manager.

Retail Installment Contract

Most car loans that are offered at new car dealerships are written as retail installment contracts. These contracts have equal scheduled monthly payments. At the end of the payments, the lender will release the borrowed collateral to the customer. These payments are calculated using simple interest, which means that the interest on the loan is calculated on the declining balance. You will need a car loan calculator to determine your payment accurately. In other words, the more you owe on the vehicle, the larger the percentage of the monthly payment that is being used to pay the finance charge.

Here is the simple interest payment formula:


Simple interest has its benefits, because if the customer pays more than his scheduled payment, that overage is applied directly to the principal of the loan. For example, if a customer’s monthly payment is $300 and he pays $350, that overage of $50 will be applied directly to the principal balance on the loan and not to the interest. This does not mean that the payments will be adjusted, but that the Term of the loan will be shortened.

Because simple interest is calculated in this way, a customer can consider a longer term loan to achieve a low monthly payment that also allows him the option to pay it off in a shorter period of time. For example, a 5 year, $20,000 car loan at 7% interest will produce a payment of $406 per month. A monthly payment for the same amount for 4 years is $479 per month. In this scenario, the customer can agree to the 60 month loan and his payment will be only $406; however, if he pays $479 every month, he will pay it off in exactly 4 years.

On a retail installment contract, the APR (Annual Percentage Rate), Finance Charge, Amount Financed, Total of Payments, Total Sale Price, Number of Payments and Monthly Payments will be printed in a “truth in lending” box on the loan document. All new car dealers will adhere to these federal lending laws.

Example of Truth in Lending Disclosure:

disclosure boxflat

The important peripheral items a customer must look for are the “extras” that could have been added onto the loan without the dealer’s disclosure. These are found under the “Itemization of Amount financed,” just below the “truth in lending” disclosures. This column will detail the rebates, down payment and trade-in amounts. Also, it will itemize “LA&H” insurances, extended warranties and service agreements. Customers must make sure there are no mystery charges listed in this column.

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