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Lesson 15 of 20 Outline

Dealer education / Selling and financing. Lesson 15 of 20. 11 minutes.

Financing: terms, rates and the APR

After this lesson you can

  • Compute a monthly payment and an APR from the contract's terms.
  • Know the California cap on finance markup and when it applies.
  • Follow the buy-here-pay-here rules on payments, GPS trackers and repossession.

Terms of financing: whose credit it is

A financed sale takes one of three shapes, and the law that prices it follows the shape. In the first you sell on a conditional sale contract and assign it to a bank or finance company. You are the creditor at signing, Regulation Z calls the deal a credit sale (12 CFR 1026.2(a)(16)), and the Rees-Levering Act governs the contract, with the assignee stepping into your place as holder (Civil Code 2981(e)). In the second you keep the contract and collect it yourself; that is buy-here-pay-here, the last section. In the third the buyer borrows from a bank or credit union and pays you cash; Rees-Levering does not touch a loan from a supervised financial organization (2982.5(a)). If you help arrange such a loan you take no commission, and if the buyer is refused the sale is rescinded (2982.5(b), (d)).

The terms a conditional sale contract states are Regulation Z's: the amount financed, the finance charge, the annual percentage rate, the payment schedule and the total of payments (12 CFR 1026.18(b), (d), (e), (g), (h)). Civil Code 2982 requires them whether or not Regulation Z applies, which matters above the dollar threshold at which Regulation Z stops (12 CFR 1026.3(b), adjusted every year). The full list is the Truth in Lending lesson's.

The finance charge and the APR

The finance charge is the cost of credit in dollars: every charge the buyer pays, to you or to a third party you require, as a condition of credit, that a cash buyer would not pay (12 CFR 1026.4(a)). Interest, a time price differential, add-on or discount charges and loan fees are finance charge (1026.4(b)); sales tax and a document fee charged to cash buyers too are not. Civil Code 2981(j) adopts the definition and carves out late and deferral charges. The annual percentage rate states the finance charge as a yearly rate that accounts for the amount and the timing of the payments, computed by the actuarial method in appendix J to Regulation Z or by the United States Rule (1026.22(a)(1)). A disclosed APR is accurate within one eighth of one percentage point on a regular contract, one quarter of a point on an irregular one (1026.22(a)(2), (3)).

California contracts compute the charge one of two ways, and the contract says which. On the simple-interest basis a constant rate is applied to the unpaid balance as it falls, on a 365-day year and actual days (Civil Code 2981(o)). On the precomputed basis the original balance is multiplied by a rate and by the number of payment periods, fixing the whole charge on day one (2981(p)); the contract then says how the unearned charge is refunded on early payoff, by the actuarial method or the Rule of 78s (2982(f)). A precomputed rate is an add-on rate, and an add-on rate is not an APR. Take $12,000 financed for 48 months at 6 percent add-on: the finance charge is 12,000 times 0.06 times 4, $2,880, and the payment is $14,880 divided by 48, $310.00. To convert, find the APR whose payment on $12,000 over 48 months is $310.00: at 11 percent the formula below gives $310.15, at 10.75 percent $308.69, so the APR is about 10.97. Disclosing 11.00 is inside the tolerance; disclosing 6 is a violation.

Computing a monthly payment

One formula does it, on any calculator with a power key. Let r be the monthly rate, the APR divided by 12, and n the number of payments. The payment is the amount financed times r, divided by one minus (1 + r) raised to the power of minus n. Work $12,000 at 11.9 percent for 48 months:

  1. r = 0.119 divided by 12 = 0.0099167.
  2. (1 + r) raised to the 48th power: 1.0099167 to the 48th = 1.605853. Its reciprocal, 1 divided by 1.605853, is 0.622722.
  3. 1 minus 0.622722 = 0.377278.
  4. Amount financed times r: 12,000 times 0.0099167 = 119.00.
  5. 119.00 divided by 0.377278 = 315.42. That is the monthly payment.

The total of payments is 48 times $315.42, $15,140.16, and the finance charge is that less $12,000, $3,140.16. Check the first month: interest is 12,000 times 0.0099167, $119.00, so $196.42 of the payment is principal and the balance falls to $11,803.58; run 48 months and it reaches zero. The formula in reverse checks a lender's quote: given the payment, try rates until the formula returns it, and disclose within one eighth of a point of what you find.

Allowable rates

California's usury limit, Article XV, section 1 of the Constitution, lets the parties to a loan for personal, family or household purposes agree in writing to no more than 10 percent a year, and exempts banks, credit unions, industrial loan companies, pawnbrokers and personal property brokers (read 2026-10-22). A conditional sale contract at 11.9 percent is lawful anyway, under a rule the courts have held since 1927 and the Supreme Court restated in Boerner v. Colwell Co. (1978) 21 Cal.3d 37: a bona fide credit sale is not a loan or a forbearance of money, so the usury law does not reach it. Assigning the contract to a finance company does not make it a loan; the court cited a 1931 case, Ricker v. Fay, on an automobile installment contract sold to a finance company. Courts look at substance, not form: a transaction that is a loan in substance is tested as a loan.

In place of usury the Legislature prices credit sales by statute, for vehicles through Rees-Levering. A simple-interest contract with more than $2,500 financed has no rate ceiling (Civil Code 2982(j)(1)). A precomputed contract, or any contract at $2,500 or less, may carry no more than the greater of a graduated schedule or 1 percent of the unpaid balance for each month of the term: $2,000 over 24 months may carry at most $490, the schedule's figure, about 22 percent APR. Minimum charges of $25 to $75 are allowed (2982(j)(1)(B), (C)). A late charge is 5 percent of an installment at least 10 days late, once (2982(k)). The buyer may prepay in full at any time without penalty and gets the unearned charge back (2982(l)); a holder who violates that owes three times the finance charge paid (2983.1(a)).

The cap on your markup

When you assign a contract the lender quotes a buy rate, you may write the contract above it, and the lender pays you a share of the difference, called participation or reserve. The Car Buyer's Bill of Rights capped that share in Civil Code 2982.10, and the cap is a dollar figure. You may not accept from the assignee, as compensation based on the finance charge, more than the finance charge the contract would carry at an APR of 2.5 percent if its original term is 60 payments or less, or 2 percent if longer (2982.10(a), read 2026-10-22). On the $12,000, 48-month contract the payment at 2.5 percent is $262.97 and the total $12,622.48, so your participation may not exceed $622.48; over 72 months at 2 percent the cap is $744.38. The trade calls this the 2.5-point cap, but a 2.5-point spread on the example, 11.9 percent against a 9.4 buy rate, adds $696.59 of finance charge, and you may keep at most $622.48 of it.

The cap does not apply to a full-recourse assignment; to an assignment more than six months after the contract date; to an isolated bona fide error you refund promptly; or to motorcycles and off-highway vehicles (2982.10(b)). And once the buyer has signed, financing and payment terms cannot change without the buyer's written agreement (2982(h)).

Buy-here-pay-here dealers

You are a buy-here-pay-here dealer if you sell on conditional sale or lease contracts and assign fewer than 90 percent of them to unaffiliated finance sources within 45 days; a contract paid off within 30 days does not count (Vehicle Code 241). Excluded are a lessor of vehicles two model years old or newer, and a dealer who certifies all of its used inventory under 11713.18 and runs an on-site shop licensed by the Bureau of Automotive Repair with five ASE master technicians (241.1). Two 2012 bills wrote the duties: AB 1447 the definition, the warranty and the device and payment rules, AB 1534 the value label.

The warranty comes first. No retail sale or lease of a used vehicle without a written warranty of at least 30 days or 1,000 miles, whichever comes first, covering the engine, transmission and transaxle, drive components, cooling system, alternator, starter and ignition, brakes, suspension, steering, seat belts, factory air bags, the emissions parts needed to pass a smog check, the heater, their seals and gaskets, and the electrical parts that affect them (Civil Code 1795.51(a), (e)). You pay 100 percent of parts and labor, with no deductible and no inspection charge (1795.51(c)). On a claim you repair, reimburse the buyer's reasonable repair cost, or cancel the sale and refund in full less damage the buyer caused; a cancellation takes written notice, a receipt, and the refund the next day, and is not a repossession (1795.51(b), (d)). The car meets every Division 12 equipment rule, the buyer cannot waive any of this, and a warranty you never handed over is treated as given (1795.51(j) to (l)).

Every used vehicle you offer carries a label headed "REASONABLE MARKET VALUE OF THIS VEHICLE" in 16-point bold type with 12-point text, next to the window sticker or prominently on the car, stating the average retail value for its condition, mileage, year, make and model from a nationally recognized pricing guide within the last 60 days, the guide's name, the date, and that the figure is for comparison shopping and is not the price; a prospective buyer gets a copy of the guide information (Vehicle Code 11950).

The device and payment rules are Civil Code 2983.37. You may track a sold vehicle only if the buyer was told of the device and consented in writing, and only to verify the device, repossess, or locate the car to service the loan. You may disable a vehicle by starter interrupt only if the paperwork told the buyer at the sale that the device is installed, that a warning comes five days before use on a weekly-payment contract and ten days on any other, that a final warning comes at least 48 hours before by a method the buyer chose, and that the buyer can start the car for 24 hours after a shutoff in an emergency. You may not require payments in person, the down payment excepted, and a deferred down payment tendered on time but not in person is no ground to repossess or charge a fee. Each violation is a misdemeanor with a fine of up to $2,000. Repossession needs a default: without one the holder may neither accelerate nor repossess (2983.3(a)). The rules after a repossession are in the Truth in Lending lesson, and since October 1, 2026 misstating when a car may be repossessed violates the CARS Act (Civil Code 1784.40(k)).

Sources

  • 12 CFR 1026.2, 1026.3, 1026.4, 1026.18 and 1026.22, Regulation Z, read 2026-10-22.
  • Civil Code 2981, 2982 (as re-enacted by SB 766, operative October 1, 2026), 2982.5, 2982.10, 2983.1 and 2983.3, the Automobile Sales Finance Act, read 2026-10-22.
  • California Constitution, Article XV, section 1, usury, read 2026-10-22.
  • Boerner v. Colwell Co. (1978) 21 Cal.3d 37, the time-price doctrine, read 2026-10-22.
  • Vehicle Code 241 and 241.1, the buy-here-pay-here dealer, and 11950, the reasonable market value label, read 2026-10-22.
  • Civil Code 1795.51, the buy-here-pay-here warranty, and 2983.37, tracking, starter interrupt and payments, read 2026-10-22.
  • AB 1447 (Stats. 2012, ch. 740) and AB 1534 (Stats. 2012, ch. 741), enrolled texts, read 2026-10-22 for which bill added which section.
  • Civil Code 1784.40, the California Combating Auto Retail Scams Act (SB 766), read 2026-10-22.
  • DMV, Lesson Plan Guidelines for Used Vehicle Dealer Education Programs, OL 2000 (rev. 12/2007).