A car loan is the second-largest loan you’ll probably ever make, after buying a home. Unfortunately, the ways dealers can rip you off are myriad and can end up costing you thousands. So Billshark offers these four tips to protect you when you head out to buy your dream car.
Here are some of the most common rip-offs you may encounter:
- Credit-rating scams, in which the dealer tells you your credit rating is lower than it actually is. They tell you that as a result you don’t qualify for a better interest rate. Afraid you won’t be able to buy a car, you agree to a higher interest rate. What has happened is that the dealer has an agreement with the lender in which the dealer receives a kickback from the lender if you agree to a higher interest rate. (And yes, this is—unbelievably—perfectly legal.)
- Loan packing, in which you focus only on the monthly payment versus the total cost of the car. They then pressure you to add in extras that will increase the payment by “only” $10-$20 a month, which can add up to $1,200 or more over the life of a 60-month loan.
- Yo-yo or spot delivery, in which you accept financing from the dealer, take the car home, then get a call in a day or two saying the financing fell through and you need to return the car or it will be repossessed. When you do, you get suckered into paying a higher interest rate or a larger down payment.
So what can you do to protect yourself?
- Pull your credit score the minute you start thinking about buying a car. Don’t wait until you get to the dealer. If your score is lower than you’d like, think about postponing the purchase until you can raise it.
- Buy a car based on total cost, not the monthly payment. Do your research ahead of time, know what the car cost the dealer, which options and add-ons you’ll accept, the value of your trade-in, if any, and come prepared with all the figures.
- Understand everything in the sales contract. Never take the car off the lot if the contract contains such language as “subject to” or “conditional upon.” The Consumer Financial Protection Bureau (CFPB) offers several articles on how to shop for an auto loan, exploring loan choices, negotiating, and closing the deal, as well as an auto loan worksheet to help you compare offers here https://www.consumerfinance.gov/consumer-tools/getting-an-auto-loan/.
- Finally, the best way to avoid car-loan rip-offs is to arrange your own financing before you even set foot in the dealership. At the very least, if you have pre-approval from a bank or credit union, you’ll know what you qualify for and can use that rate as a bargaining chip with the dealer. If they can beat the figure you already have in hand, so much the better.
Even so, be aware of the traps we’ve discussed, and be careful before signing anything.
One place you won’t get ripped off is here at Billshark. It costs you absolutely nothing to let us examine your bills and negotiate with your providers to lower them. You pay only if we save you money.