Getting a Car Loan? Don't Get Ripped Off
A dishonest auto dealer can saddle you with inflated payments and unnecessary options
Thinking about taking out a loan to buy that dream car? It's more important than ever to protect yourself from predatory dealers, high interest rates and scams.
Today's consumers are financing larger sums of money and taking longer to pay them off than ever before, according to credit reporting agency Experian. During the first quarter of 2015, for instance, the average loan for purchasing a new vehicle was $28,711, with a monthly payment of $488.
The key to getting a good auto loan is doing your own research, according to Jack Gillis, director of public affairs for the Consumer Federation of America.
“Remember that for most of us buying a car are really three separate transactions. You’re buying a car, selling a car, and arranging financing,” says Gillis. “All too often the dealer will try to bundle all three with such statements as: 'What if I can get you out the door for $356 a month?' You have no idea what you’re paying for the car, getting for your trade-in, or paying in terms of financing charges. So it is critical to keep the three deals separate.”
Credit rating scam
Before the dealer discusses financing with you, he pulls copies of your credit score and credit report to review. If you have good credit, he can offer you a lower interest rate.
However, a dishonest dealer might claim that you have a lower credit score than you really do, according to the pro bono law firm Public Counsel. Then he fools you into accepting a higher-interest loan.
Ironically, the dealer isn't even the one who loans you the money. He just works as a middle-man for banks and finance companies. So, instead of borrowing money through the dealer, ask banks, credit unions or loan companies directly for pre-approved financing.
Also, you can obtain your own copies of your credit report’s FICO score, as well as scores from the major credit reporting agencies. “You should shop around for financing with the same vigor you shopped around for the car itself,” says Gillis.
Negative equity fraud
When you owe more on a vehicle than it's worth, you have what's called “negative equity.” For instance, if your car is worth $7,000 but you owe $10,000 on it, you have $3,000 in negative equity.
Dealers might offer to take your car as a trade-in and pay off the entire $10K for you. Sound too good to be true? Sometimes they add that $3K in negative equity to your loan balance without telling you about it, or will even claim otherwise, according to the Federal Trade Commission.
This isn't necessarily a bad deal if it gets you into a vehicle that you really want. But an honest dealer will tell you up front that he plans to add the negative equity to your contract.
Never accept oral promises that aren't included in the contract language. Before signing, study the contract to see what's included in the total balance. Better yet, pay off your current loan before doing a trade-in.
Now that you've gotten approval for financing, are you sure you're borrowing money for a car, and only a car?
“Do not talk financing with the dealer until you have a firm (and satisfactory) price for the car,” says Gillis. “Then beware that in the financing office, you will be under great pressure to purchase additional items that are generally unnecessary and a bad value.”
Some dealers will add options and services to the contract that you didn't ask for, such as rust-proofing, extended service agreements or insurance, claiming that they are required for financing. They aren't. Banks and loan companies don't care about rust-proofing; they care about your credit-worthiness.
It's vital for you to read the contract before signing it. Cross out any unasked-for items and re-total the balance.
Yo-yo or spot delivery
You've picked out a car, gotten approval for a loan, read and signed the contract, then driven your new baby home.
The next day, the phone rings. It's the dealer, claiming that your financing has problems and he's already sold your trade-in, so you need to sign a new loan agreement at a higher interest rate.
You refuse, of course — after all, you already signed and closed the deal.
The dealer then claims the contract wasn't “final” and says he has every right to change it, threatening to repossess your car or report it as stolen if you don't agree.
How to avoid this nightmare scenario? Before signing, check the contract for language such as “conditional upon” or “subject to,” which may indicate that it isn't final. “It is critical to insure that you have been approved completely for the credit terms offered by the dealer before you take possession of the vehicle,” says Gillis.
If you missed a sneaky phrase about conditional terms and the dealer demands a new agreement, reply that you'll first consult with your attorney and the state's consumer protection office.
Related: How To Buy A Safe Used Car