Beware - Dealer Financed Auto Loans Can Be Costly

July 12, 2010 by thinkhappy

Beware - Dealer Financed Auto Loans Can Be Costly

Consumer Reports just posted an article written by Anthony Giorgianni on how to avoid making costly errors when purchasing a car using dealer financing.

Before going to a car dealership, it pays to shop around at banks, credit unions and online sources such as Bankrate.com and E-Loan and get pre-approved for a car loan at the lowest interest rate. (Going to multiple lending sources will only count as one hard inquiry on your credit report if it involves a major purchase and is done within a 30 day period.) Having the pre-approval when you walk into the dealership will put you in a position of strength when negotiating a deal. If you do find that the dealership rate is the most favorable, Giorgianni’s article emphasizes the need to be aware of some not-so-favorable practices that can occur with dealer financing:

1. Scam: The dealership quotes an interest rate for the loan, you agree and complete the paperwork. Several days later the dealer calls to say that you didn't qualify for the lower interest rate. You are then faced with three choices: accept a higher rate, make a larger down payment or return the car.

Don’t take immediate delivery of the car and read all of the fine print of the loan agreement Make sure the agreement states the approved loan amount and interest rate before you sign it. 

Reprinted from Technorati. Written by Hollis Colquhoun

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2. Scam: The dealer fiddles with your credit application, maybe increases your income without your knowledge to enable you to qualify for a larger loan.

Review the credit application before signing it and get a copy of the completed application. Check the loan amount and monthly payment to make sure it’s what you anticipated and can afford.

3. Scam: The dealer offers “gap” insurance in case of damage, accident, theft of the car and your loan balance is more than the car is worth, and to cover loan payments in case you lose your job or become disabled.

Solution:

Check with outside insurance providers to understand the coverage you need and compare policy costs to better evaluate the dealer’s insurance once your loan has been approved.

4. Scam: You want to do a trade-in when purchasing a new car but the old car value is less than the value of the outstanding loan. The dealer offers to pay off the old loan as part of the deal. In effect the dealer is adding the old loan balance to the new loan without you realizing it.

Solution:

When buying a new car, understand that the car value will decrease by 20-25% within the first year of ownership. You should be able to make a down payment of approximately 20% when you buy the new car, that way you won’t be “upside down” on the loan within months of owning the car. You shouldn’t buy a new car until you’ve paid off the loan on the old car but if you are shopping for a new car and want to do a trade-in, first go online to get real car values at Edmunds.com and TrueCar.com. If you decide to go with dealer financing, read over every line of the financing and dealer agreement before signing. You don’t want to be paying off two car loans.

5. Scam: The dealer is offering a cash incentive to be used as a down payment on a new car purchase but the dealer rolls the incentive amount into the loan without you knowing it. The dealer may also inflate the amount of the loan by telling the lender the car has more extras than you’re really getting.

Solution:

Again, be an informed consumer. Read all of the dealer and lender documents to know what you’re buying, what it should cost and what your loan amount and payments should be.

Buying a car is a big financial commitment whether you’re paying for it outright or taking out a loan. It is very important to do your homework and not be pressured by the car salesperson. Focus on the price of the car and the loan amounts and not the monthly payments, (although you must be able to handle the loan payments within your budget). A car loan is a secured loan. Once you sign the contracts you are the car owner, but if you don’t make the payments on time the dealer has the right to take back the car.

Contact the Federal Trade Commission and the Better Business Bureau if you have complaints regarding any fraudulent financing practices of a car dealer

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