How to avoid auto loan rip-offs
Buying a car is one of the biggest investments you'll make, so make sure you're not getting a raw deal on your financing.
This post comes from Stacey Bumpus at partner site GoBankingRates.com.
It’s not easy being a car buyer. Unless you have the privilege of paying cash for a vehicle, you’re probably going to have to finance it, either with a private lender or through a car dealership.
Unfortunately, some car dealerships have a reputation for sticking their customers with predatory auto loans strapped with extremely high interest rates.
The good news is there are ways to protect yourself from being taken advantage of by a dealership when acquiring an auto loan.
Government pushes to stop predatory auto loans
Predatory lending has long been an issue for consumers hoping to make big-ticket purchases such as homes or cars. There seems to always be a company awaiting an opportunity to take advantage of unsuspecting buyers.
But what is predatory lending? Basically, it’s unfair or fraudulent practices some lenders use during the loan origination process.
This unsatisfactory form of lending reached its peak shortly before the financial crisis. But while most of the attention was focused on subprime mortgages, car buyers faced their own struggles with predatory lending.
In the months following the crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act was drafted and ultimately signed into law. Among the changes it demanded of Wall Street was acceptance of greater oversight.
This oversight was to come from the Consumer Financial Protection Bureau, which was formed to regulate consumer financial products and services.
Since getting its start, the bureau has cracked down on banks, credit card companies, credit bureaus and mortgage lenders. But auto dealerships have been exempt from the agency’s oversight.
The CFPB planned to change dealerships’ ability to evade the law by suing associated banks that finance predatory auto dealer loans.
It also said in early 2013 that dealerships were using the “dealer markup” when they acted as middlemen between car buyers and auto lenders. In these cases, customers received higher rates despite their satisfactory credit histories.
The bureau found this strategy was used disproportionately with minority buyers, who were charged higher interest rates than Caucasian borrowers with similar financial backgrounds. Officials believe suing the lenders working with dealerships will prevent dealerships from financially benefiting from the “dealer markup.” It could also address the racial lending discrimination that is inherent in predatory lending deals.
4 signs of predatory auto loans
While there are presently no predatory lending laws on the books for the auto industry, there are ways to protect yourself from becoming a victim. One of the first steps is recognizing the signs of predatory auto loans.
It’s not always easy for consumers to know when an auto dealer is attempting to issue a predatory loan. Here are a few signs to help you recognize when you could become a victim:
- Being told false information is OK: If the dealership encourages you to add false information to your loan application to help you secure an auto loan, this is a clear sign that you are working with a predatory lender.
- Loans with tons of packages: If dealers try to sell you on overpriced add-on packages (credit life insurance, disability insurance, GAP insurance, theft deterrent packages, rust proofing, etc.), it’s likely attempting to inflate the vehicle cost and loan size.
- 'Bad credit? No problem!' ads: Very often, predatory lenders will target individuals with poor credit by displaying “Bad credit? No problem!” ads. What they don’t share about these poor credit auto loans is that the rates offered are often considerably higher than what would normally be offered to borrowers with the same credit scores.
- 'Yo-Yo' sales: If you are working with a lender that tries to convince you to enter into a conditional sale agreement rather than a final sale, this is a major sign of predatory lending. In this case, a dealer will send you home with the car, then call you back a few days later to say that your loan wasn’t approved.
It might ask you to renegotiate your loan and, to ensure you don’t try to back out of the deal, tell you your down payment is nonrefundable or your trade-in has already been sold.
How to avoid predatory loans
If you are concerned about becoming a victim of predatory lending, it’s important to arm yourself with some ways to avoid predatory loans altogether:
- Work with reputable financial institutions: One of the best ways to ensure you don’t become a victim of predatory lending is to work with banks and credit unions that have good reputations for issuing auto loans in your area.
- Research reputable dealerships: If you want to take advantage of cash-back bonuses or low-interest financing offers, then you might want to opt for a dealership over a financial institution. Before doing this, research consumer reviews online, check with the Better Business Bureau and even ask around town to find out the lending history of the dealership.
- Understand your credit score’s value: One reason predatory lenders are able to take advantage of consumers is they know that many people don’t understand the value of their credit scores. Check your FICO credit score before visiting any lenders, then research your scores to learn the rates to which you are entitled. This will help you recognize when you’re being overcharged.
- Recognize your personal power: If you feel that you are being pressured to sign a contract that you’re not comfortable with, leave the dealership. This way, you won’t agree to a deal that could destroy you financially.
There’s nothing worse than realizing that you’ve been pressured to take a predatory auto loan that you’re now unable to back out of. Before signing your name on the dotted line of any auto loan contract, take time to think through your decision carefully and make sure you’re not being taken advantage of.
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The section "4 signs of predatory auto loans" is HIGHLY inaccurate. I have over 10 years of experience in the auto industry and can tell you that section misses the mark. Each and every point in that section is an indictment of unscrupulous or lazy AUTO DEALERS. It is an unfortunate commentary that some of these bad apples bring down the truly great auto dealers across the country. However, Car dealers are trying to sell cars. When someone with credit issues comes to dealership that is less than reputable, THE DEALER will do all of the things mentioned in the article. They will ask the customer to falsify information so the financial institution will pay the dealership for the car. They are asking the customer to “Trick” the bank into financing the vehicle. Dealers sell products and get profit from those product sales to protect the customer. These products have little to do with the retail installment contract. Again the finance company, bank or credit union are not involved in what happens at the dealership. Then there are DEALER advertisements. Most, not all, ads we see that talk about ”Bad Credit” are coming from the dealers and not the financial institution. The dealer is trying to get the bank to “buy paper” (term used when dealers referring to the process of convincing the bank to provide financing.) That brings us to the last and most frustrating point for customers, having to bring the car back after they “bought” it. Again, this is a result of the dealer and sometimes the customer wanting to take delivery of the vehicle before the finance source has agreed to the terms of the contract the dealer signed with the customer. If the dealer “spots the delivery” they are betting the finance company will buy the deal. Customer is very excited because they get to take their car home but if THE DEALER can’t get the contract bought, the customer loses.
Hopefully, in the future, there will be commitment from the Money Staff to do a bit more research on this topic for follow-up articles because it is very important for the consumer to have knowledge of these very complex financial transactions.
My advice for consumers:
Know ALL your credit scores and the rates they can get you. Come in with financing set up. If the dealer can beat it, great!
Stick to dealers that close friends or family recommend.
If you have to, absolutely walk away. It can be hard but car buying can’t be emotional.
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