The end of the year is a good time to get a great deal on a car. Unfortunately, it’s also a time when many people stumble into car loans that can damage their credit and keep them underwater for years.
It’s no secret that car dealers scramble to sell as many vehicles as they can at the end of the year. High-volume sales are the key to profits. Plus, those dealers are under pressure to make space in their showrooms and on their lots for new models, so there are some amazing deals to be had. It is tempting, apparently, for buyers to stretch beyond their means so they can drive home in their dream cars — laden with a whole lot of debt.
The average loan amount for a new vehicle hit a record high of $30,621 in the fourth quarter of 2016, information company Experian reported, and the average loan for a used vehicle also reached a record $19,329. Many people are choosing an extended payment period in order to make the month-to-month payments manageable. According to Experian, the average U.S. auto loan now is 68 months — the highest the company has ever reported. The number of new-car buyers opting for 73 to 84 month loans increased 29 percent from fourth quarter 2015 to fourth quarter 2016, Experian reported.
But in many cases, car buyers are opting for even longer-term loans at high interest rates, working with dealers and lenders who encourage them to take on debt they cannot afford.
Examples of these offers are easy enough to find. If you search online for car loans, you’ll see a myriad of offers for 120-, 144- and 180-month loans.
There is also no shortage of sad car-loan stories. Check out The New York Times report on consumers who are stuck paying off loans long after their cars have been repossessed for a late payment, and the account by Business Insider about how disreputable dealers are willing to fudge the documentation to help secure a loan for a car buyer who otherwise would not qualify. To experts, it looks a lot like the subprime housing bubble that sparked the Great Recession.
Make sure you don’t become another cautionary tale. If you’re in the market for a car, and need to borrow, watch for these red flags:
1. ‘No credit, bad credit’ car sellers
Reputable auto dealers, banks, and credit unions want to ensure you have the means to repay your auto loan. That is why they base loan decisions on a variety of factors including credit history. A strong credit history is one indicator of an ability to repay the loan.
If you have poor credit history, or are just building your credit, you likely still can find a reputable car dealer who will help you connect with banks to underwrite your loan. But the amount will be capped — don’t expect to drive away with a fully tricked-out Mercedes — and your interest rate likely will be higher than if you had a solid credit history.
However, you should avoid — like the plague — “no credit, bad credit” dealers. Typically, these dealers help secure funding for high-risk loans with exorbitant interest rates. When the buyer misses a payment, their loans “roll over,” interest costs grow, and they sink deeper in debt. It’s a slippery slope.
2. Using the car’s title as collateral
When a seller suggest that you sign over the title of the car as “collateral,” it is your cue to walk out the door and go to a different dealership. Here’s why: Typically under this type of agreement, the buyer will receive the title only after payment is made in full. What often happens is that the buyer misses a payment and the car is repossessed. Not just that, but the car buyer must still pay back the loan, including exorbitant interest rates. (As in the New York Times report we mentioned earlier.)
3. Loan modification companies
If you are concerned that you won’t be able to make an auto payment, it’s best to talk directly to your lender, advises the Federal Trade Commission. Some car owners turn to storefront and online businesses that promise to negotiate with lenders to reduce payments. Frequently, the car owner ends up forking over hundreds of dollars for “loan modification services” that are never provided. Some car owners also stop making payments on their car loans, at the direction of these companies. The FTC, which has sued some of the scam operators for their fraudulent practices, warns consumers not to believe “guaranteed or your money refunded” claims or glowing customer testimonials. Call your lender and negotiate yourself.
4. Dealers who want to replace your signed contract
Auto dealers are heavily monitored and regulated and most are very ethical. There are some dealers, though, who take advantage of buyers, utilizing shady practices including “yo-yo” financing. Sage Automotive Group in Los Angeles agreed to pay $3.6 million this year to settle FTC charges that accused them of the practice. The FTC charges included claims that employees at the nine-store auto dealership group coerced buyers — who had signed contracts and taken possession of the cars — into accepting alternate deals that included “extra unauthorized charges for ‘add-ons’ or aftermarket products and services.” If you run into this practice, report the dealership to the FTC.
5. Details that don’t add up
Many car buyers are so enthusiastic about the purchase that they don’t fully analyze what they bought. The Federal Reserve Bank of San Francisco opened an investigation into the auto-loan practices of mega-bank Wells Fargo following complaints that borrowers who paid off their loans early were not getting refunds they were owed, reported Money. After an internal investigation, Wells Fargo also disclosed that about 800,000 auto-loan borrowers were billed for auto insurance they already had or didn’t need. Before you sign paperwork, understand what you are buying — ask questions until you are satisfied — and make sure you receive it.
Buying a car is one of the most costly purchases most of us ever make. Before you shop, get your credit score, evaluate your budget (what kind of payment can you handle?) and look at vehicles that suit your lifestyle and income. That’s the best way to protect yourself from unethical car sellers or lenders — and impulse buying that you will live to regret.
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