Not everyone can pay for a car with cash. For most car buyers, especially those with subprime credit, taking out an auto loan is the way to go. But while auto loans make it possible for many to get behind the wheel, they also carry risks. Abusive car dealers tend to bind their customers with predatory auto loans. Fortunately, there are several ways to protect yourself from getting ripped off by unscrupulous dealers and being stuck with a burdensome auto loan.
Red Flags for Predatory Auto Loans
You as a consumer have the responsibility to be vigilant when you purchase a car and take out financing. Before we go to the how-to’s of avoiding predatory auto loans, let’s learn first how to spot them.
Approving False Information. If the dealer says it’s okay to put false information in your credit application, your dealer is most probably bringing you into a predatory auto loan deal.
Yo-Yo. A yo-yo scam happens when the dealer asks you to sign paperwork that does not finalize the deal. Signing the papers allows you to take the car home. However, the dealer would call after a few days to tell you that your loan application was not approved. You would be forced to renegotiate the deal and end up getting a higher interest rate.
All Kinds of Credit Accepted. Predatory lenders usually target people with bad credit. They put up ads that say bad credit isn’t a problem. While these ads give hope to subprime borrowers, they don’t disclose that the interest rates will be higher than what is normally given to borrowers with good or even similar credit.
“It’s Part of the Package.” If there are too many add-ons or extras included in your purchase, the dealer is most likely trying to inflate the cost of the deal so it can earn more profit. Some dealers would force you—as if you don’t have a choice—to pay for more items along with the car saying that they are part of the “package.”
How to Avoid Abusive Auto Loan Deals
With the signs of predatory auto loans in mind, here are some ways on how you can avoid being a victim of auto loan rip-offs.
Know your credit score well. It’s important to pull out a copy of your credit report before applying for an auto loan. Once it is in hand, look at your credit score and find out what kind of interest rate you will most likely get. This is how you can know whether the dealer is overcharging you. Believe it or not, one reason why car buyers get ripped off is they do not bother finding out their credit scores before approaching a dealer or lender.
Do business with legitimate lenders only. Give importance to legitimacy as a criterion for choosing a dealer or lender. You can verify a company’s legitimacy by looking it up on BBB’s website. Also, consider approaching banks and credit unions first for car financing before independent lenders and dealers.
Walk away if you’re not comfortable. Don’t be hesitant to leave the dealership if you feel that you are being pressured on the sale. Keep in mind that you can’t let the deal be in favor of the dealership. Otherwise, it will hurt your pocket and credit.
Government Efforts Against Predatory Lending
Recently, car dealerships have gone under the scrutiny of the Consumer Financial Protection Bureau or CFPB. The CFPB said that car dealerships have been using dealer markups or dealer reserve for unfair and discriminatory lending practices. According to the bureau, dealers, aware of their borrowers’ credit standings, abuse their role as middlemen between lenders and their customers by marking up interest rates. Dealers charge higher interest rate to minority borrowers than Caucasian borrowers with the same credit standings.
CFPB officials deem suing lenders working with dealerships to hinder dealers from evading the law and stop discriminatory lending among borrowers of different races. The bureau seems to tighten its supervision over auto dealerships after a long time of focusing their oversight on mortgage lenders, credit card companies, credit bureaus and banks.