Do you have bad credit? Know that there are several auto lenders in the industry that take advantage of borrowers like you. They know you are desperately seeking for an auto loan and they will lure you into their schemes so that they can make more money. Donâ€™t allow these lenders to rip you off by getting familiar with their ploys and knowing how to avoid them.
1) Yo-Yo Financing (a.k.a. Spot Delivery Scam)
One of the most common auto financing scams is yo-yo financing or spot delivery scam. It is usually pulled on borrowers with bad credit. It works this way:
The dealership will ask you to sign some papers as they make you think that financing has been approved. You will be able to drive the car home after signing those papers. But after a few days or weeks, the dealership will call you back to tell you that the financing fell through and you need to visit them again for another deal. The thing is they will finance you at a higher interest rate. And according to the Center for Responsible Lending, majority of victims lost to unscrupulous dealers and ended up carrying a more expensive loan.
How to Avoid: You can avoid this scam by thoroughly going over the paperwork before signing on the dotted line. Make sure the agreement on the financing aspect of the deal is final before taking the car home. You can also arrange financing with a bank or credit union before walking into any dealership.
2) 0% Financing
Zero-percent financing deals are great-only when they come directly from auto manufacturers. But there are some dealerships that pretend to offer zero-percent car financing. The only way dealers can push down the interest rate to zero is to offset the interest cost theyâ€™d pay directly to the lender and adding that amount onto the vehicleâ€™s price. Car buyers donâ€™t usually know this and just agree to the no-interest offer.
How to Avoid: The only reliable 0% financing offers come from manufacturers. If a dealer tells you that you qualify for the no-interest financing only for a certain vehicle price, it is most likely a scam. Avoid this scam by negotiating the car price first and then the financing. Never negotiate the two simultaneously.
3) Bad Credit Claim
Another thing unscrupulous dealers usually do is lie about your credit score. Theyâ€™d tell you that youâ€™ve got a low credit score and you canâ€™t qualify for a low interest rate. If you agree, your auto loan will carry an interest rate higher than what you actually deserve and the dealer will earn more money.
How to Avoid: At least 6 months before applying for an auto loan, check your credit score and get a copy of your credit report. The credit score lie scam will not work for you if you are armed with this information.
You can access your credit score for free through several websites. But these scores give you only a general idea of the interest rate youâ€™ll most likely get. Experts suggest purchasing your FICO score if youâ€™re looking to take out a mortgage or an auto loan. Paid scores give you a more accurate estimate. In addition, you can get a free copy of your credit report through AnnualCreditReport.com, which is operated by major credit-reporting bureaus in the U.S.