Your Vehicle Purchase Agreement: How to Read & Understand It

Written by Ray Shefska

My career in the retail automotive business started in 1977. Buying a car doesn’t have to be anxiety inducing, stressful, or painful. Instead it can be confidence inspiring, fun, and convenient. Let me show you how.

June 10, 2020

Buying a car isn’t easy. Finding the right vehicle, negotiating a fair price, sitting through the finance and insurance office … It’s a long, tenuous, and generally uncomfortable journey. The final hurdle you face is signing the vehicle purchase agreement; a confusing and convoluted document that outlines the selling price, fees, taxes, your trade in, and more.

Car dealers sell tens, if not hundreds of cars each month. That means dealers are very familiar with vehicle purchase agreements — they look at them everyday. On the other hand, most car buyers only purchase a vehicle once every few years (at most). Who do you think has a better understanding of the contract? The dealer or the customer?

The answer is obvious.

That being said, you shouldn’t blindly sign off on your vehicle purchase agreement. Instead, we highly recommend you watch the video embedded on this page or read through the remainder of this written guide.

For many, purchasing a vehicle is the second largest transaction of their life. With that in mind, it’s important that you have a thorough understanding of what you are signing for. You need to be prepared to sniff out any “hidden” fees or unexpected “extras” the dealer may be adding to your purchase.

Without further adieu, let’s dive in.

If you’re financing your purchase

The first thing you will see on your new car purchase contract will be information required by the federal Truth-in-Lending Act – or “TILA” for short. This information will not be present on your contract if you are not financing your purchase.

vehicle purchase agreement federal truth in lending disclosure

There are four key pieces of information that must be included in the Truth-in-Lending Disclosure:

  1. Annual Percentage Rate: the APR is the cost of credit expressed as a yearly rate in a percentage;
  2. Finance Charge: cost of credit expressed as a dollar amount (this is the total amount of interest and certain fees you will pay over the life of the loan if you make every payment when due);
  3. Amount Financed: the dollar amount of credit provided to you (this is normally the amount you are borrowing);
  4. Total of Payments: the sum of all the payments that you will have made at the end of the loan (this includes repayment of the principal amount of the loan plus all of the finance charges)

By law the dealership must review each of these four components of your purchase with you. Savvy finance managers will circle the boxes on the contract with the back of their pen so that it leaves a mark on the carbon copy of the contract as “proof” that they reviewed the document with the client.

Below this you will find details about your payment schedule. At this stage in the process, nothing should be foreign here; this should show the agreed-to loan financing option you selected.

vehicle contract payment schedule

Below that, you’ll notice a few disclaimers. One of importance is the prepayment notice. If you pay off your loan early you will not be subject to any penalty. Always keep this in mind when you are financing a vehicle purchase.

Itemized purchase components

Next comes a list of all components of the contract broken out in an itemized fashion. This section of the contract is intended to make it clear to you what you are purchasing and how much you are financing to make the purchase. For many people this section of the contract gets confusing, but it doesn’t have to be. Let’s break it down line by line. Feel free to refer back to this page when you’re reviewing your own contract in the future.

itemization of amount financed

Cash price

The first item you see in the itemized section of the contract is the cash price, also referred to as the selling price of the vehicle. This amount, plus the doc fee total the entire cash price or selling price of your purchase.

Down payment

The down payment section refers to any money you put down on the purchase. If you are trading in a vehicle this will include (like the example above does) a trade in allowance, payoff, and net trade in. If you owe more than your current car is worth, you will see a negative value on line 2C. If you were to put cash down for your purchase that would show on line D, and if you have any incentives or rebates that go towards your down payment those would show on line E.

Unpaid balance of cash price

This is simply the cash price minus the down payment amount.

As it sounds, this section refers to any fees being paid to other parties on your behalf. In the example above you see “N/A” everywhere. That means the customer did not roll their taxes, title, and registration into the loan for their purchase. Instead, they paid those fees out of pocket when they went to register the car in their name. This section will typically be full of numbers that vary from state to state (since each state has different sales tax, title fees, and registration fees). If specific insurance coverages were purchased (which very few people purchase nowadays), and they were rolled into your loan, you would see those amounts in lines E, F, and G. The same goes for lines H through P.

Amount financed

The total amount financed is the sum of section 3 and section 4. The unpaid cash balance, plus the amount paid to others on your behalf.

The actual vehicle purchase agreement

Believe it or not, everything we’ve reviewed thus far is actually not the vehicle purchase agreement, it is the retail contract required for finance purchases. If you aren’t financing your vehicle purchase you won’t be reviewing a document like the one above. Instead you’ll see something similar to what we’re about to cover, the real purchase agreement.

The purchase agreement restates everything on the retail contract (just on slightly different parts of the page) and includes a few other important items, two worth calling out specifically:

  • The buyer’s trade in certification; and
  • The warranty disclaimer and documentation fee notice.

Buyer’s trade in certification

This section of the vehicle purchase agreement only comes into play if you are trading a vehicle in during your purchase. When you sign the contract you certify that:

  • The title is not salvaged;
  • The airbags are intact and in working order;
  • That the odometer has not been modified; and
  • That the emissions system has not been modified.

If any of these conditions are not met, or you do not disclose them to the dealer, they can void the transaction. As with all situations, honesty is the best policy, so be sure to tell the truth before signing the dotted line!

vehicle purchase agreement trade in certification

Warranty disclaimer and documentary fee notice

vehicle purchase agreement warranty notice

The final section to make you aware of on the vehicle purchase agreement is the warranty disclaimer and doc fee notice.

The warranty disclaimer makes it clear that the purchase is being made “as-is,” with no additional warranties (from the dealer). As the disclaimer states, any warranties from the manufacturer are not “party” to the dealer, and you can leverage them anywhere the manufacturer supports, not just the dealership where you are making your purchase.

Then, below that is the documentary fee notice. This states the reason why you see a “doc fee” on the purchase of your vehicle. Doc fees vary from state to state, and as we’ve written about before, you’ll never be able to get a dealer to remove a doc fee from their contract, but you can get them to discount a vehicle the amount of the fee.

The vehicle purchase agreement and retail purchase contract certainly do look intimidating, but that shouldn’t stop you from understanding how to read either of the documents. Our hope is that after reading this guide you will feel more comfortable and in control when you are going over them with the finance manager when completing your purchase. Remember, always ask questions when you’re not sure about something. If there is something that you don’t understand, seek clarification. Never sign a document if you are not 100% sure what you are signing. Don’t worry, you are in control and now you know what to look for.

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