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Auto loans more available as FTC tackles yet another dealer scam

[Apr 4, 2012.]


Regular readers should already be aware of the numerous scams that all too many unscrupulous car dealers use to milk money from unwary consumers through rip-off auto loans. Details of some of them can be found on the Center for Responsible Lending's website. But on Mar. 14, the Federal Trade Commission (FTC) uncovered a new one that has been costing some people thousands of dollars.

Auto loans that dealers pay down. Or not

Both The Washington Post and The Washington Times reported on the FTC's initiative concerning what the latter describes as "car-loan flimflams." Here's how the Post described this latest scam:

Using dollar figures, the FTC explains how this practice works. Say you want to trade in your car for a newer model. But you still owe $18,000 on your loan. Your car is only worth $15,000. This means you are upside-down, or have negative equity, of $3,000, which has to be paid if you want to trade your vehicle. Although some dealers might promise to pay off the $3,000, they will add the amount to the loan for your new car, deduct it from your down payment or do both.

Of course, cars depreciate, which makes upside-down auto loans a pretty common phenomenon. So it's no surprise that many cash-strapped buyers respond eagerly to advertisements that appear to offer a dealer incentive that wipes the slate clean. In a press release, the FTC quoted a number of misleading ads that it has now banned, including:

  • Uncle Frank wants to pay [your trade] off in full, no matter how much you owe.

  • I want your trade no matter how much you owe or what you're driving. In fact I'll pay off your trade when you upgrade to a nicer, newer vehicle.

Auto loans and shopping around

Perhaps the best way of avoiding most dealer scams is to shop around for auto loans, finding competitive quotes online and through your bank or credit union before you set foot on the lot. That way you can directly compare what the salesperson offers you with what's more widely available.

Oddly, many consumers are pessimistic about their chances of being approved for auto loans. On Mar. 16, FreeScore.com published the results of a February survey that found that: "Nearly 66 percent of U.S. consumers think it will be just as difficult, or even harder, to obtain an auto loan in 2012 versus 2011." Amazingly, twice as many respondents thought that it would be harder to get approved this year than thought it would be easier.

Easier to find auto loans

Of course, generally speaking, the reverse is true. Also on Mar. 16, Fitch, a ratings agency, reported that originations of auto loans and leases have been increasing, not least because "most auto lenders ended 2011 by reporting their lowest delinquency and charge-offs in a decade." And the company went on to predict:

  1. A stable outlook for the auto finance industry.

  2. A rise in the volume of loans.

  3. "Credit performance to outperform historical levels in 2012."

So by all means go ahead and make your loan application. Just be sure to do your comparison shopping first, and not to trust your dealer further than you can throw the vehicle he or she is trying to sell you.


About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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