How to read a car loan contract: the numbers to check first

When you finance a car at the dealership, the long document you sign is usually a retail installment sale contract. You agree to buy the car and pay for it over time. The FTC notes that the dealer typically sells that contract to a bank, finance company or credit union, which then collects your payments. That is why the name on your monthly statement may not be the dealer's.

The contract can run to several dense pages, but a handful of numbers tell you most of what you need. Here is the order to read them in.

Step 1: Find the federal disclosure box

In the US, the Truth in Lending Act requires the dealer or lender to give you written disclosures about the cost of credit before you sign. On many contracts these sit together in a box, which is why people call it the TILA box. The CFPB lists four figures to find there:

• Annual percentage rate (APR): the yearly cost of credit, including the interest rate and certain mandatory fees. It can be higher than the interest rate you were quoted.

• Finance charge: the cost of credit in dollars, meaning the interest and certain fees you pay over the life of the loan if every payment is on time.

• Amount financed: the amount you are borrowing.

• Total of payments: everything you will have paid by the end of the term.

Here is a sample box for a fictional deal at Northgate Motors:

APR 7.9% · Finance charge $7,352 · Amount financed $28,400 · Total of payments $35,752 · 72 payments of $496.56

Two quick checks. First, the amount financed plus the finance charge should equal the total of payments. Second, the APR should match the rate you were told. If either is off, stop and ask why before you sign.

Step 2: Check what makes up the amount financed

Most contracts break the amount financed into parts: the cash price of the car, taxes and government fees, dealer fees, optional products, the payoff of any old loan, minus your down payment and trade-in. Lay this next to your buyer's order (our guide to reading a buyer's order line by line walks through each charge).

Look hard at optional products. The FTC says add-ons such as GAP coverage, window etching and service contracts are not free, that you can decline them, and that dealers may not add them without telling you. It also says credit insurance is not required by federal law, and if a dealer requires it, its cost must be included in the APR. If an add-on appears that you did not agree to, ask for it to be removed and for a new contract to be printed. Our guide to spotting dealer add-ons lists the common names.

Step 3: Read the payment schedule

The disclosures also show the number of payments, the amount of each and when they are due. The length of the loan changes the total cost more than most people expect. Using the same sample $28,400 at 7.9%:

• 60 months: about $574 a month, about $6,069 in finance charges.

• 72 months: about $497 a month, about $7,352 in finance charges.

• 84 months: about $441 a month, about $8,664 in finance charges.

The FTC warns that longer loans, such as 72 or 84 months, can leave you owing more than the car is worth. If the dealer shows you only a monthly payment, ask for the term, the APR and the total of payments as well.

Step 4: Read the clauses below the box

The rest of the contract sets out what happens if things go wrong. The CFPB notes that the disclosures should also tell you about late fees and whether you can pay the loan off early without a penalty. Read these sections slowly:

• Late charges: how much, and after how many days.

• Prepayment: whether paying early reduces the finance charge, and whether any fee applies.

• Security interest: the lender usually keeps a claim on the car until you finish paying.

• Default and repossession: what counts as a missed payment and what the lender can do.

• Dispute terms: whether disputes must go to arbitration instead of court.

• Conditions on financing: whether the deal depends on the dealer finding a lender to buy the contract. If it does, ask what happens if no lender accepts it.

You do not have to understand every legal term, but you should know where each of these appears so you can ask about it.

Step 5: No blanks, and keep a copy

The CFPB says you should receive a completed disclosure, not a blank one. Make sure every line that applies is filled in, and that any line that does not apply shows a zero or "N/A." You can ask for the disclosures before you sign so you have time to review them, and you can walk away if you feel rushed. Keep a full signed copy.

If you are in Canada

Canada's Financial Consumer Agency (FCAC) says federal, provincial and territorial laws require your lender or dealer to give you a disclosure statement before the agreement is final. It explains the total cost of borrowing and other key terms. Ask for a copy and read it before you sign.

Which rules apply depends on the lender. A loan from a federally regulated institution, such as a bank, falls under federal consumer protection law. If the lender is not federally regulated, provincial or territorial laws may apply, and FCAC notes that some independent car-finance companies may not be covered. Complaints about the loan go to the lender first; complaints about a dealer go to your provincial or territorial consumer affairs office.

Questions to ask before you sign

• What is the APR, and does it match the rate I was quoted?

• What is the total of payments, and how much of that is finance charge?

• Which items in the amount financed are optional, and what is the total if I remove them?

• Is the financing final, or does it depend on a lender accepting the contract?

• Can I pay the loan off early, and does that cost anything?

• Can I take the contract home, or at least have time to read it here?

Get a second pair of eyes on your loan contract

EasyToDecode is launching soon. You will be able to upload your own contract and see the APR, amount financed, total of payments and every add-on pulled out, each quoted from the page it came from, along with anything missing and questions to send the dealer. See how it works or join the waitlist to hear when it opens.