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Cheap Auto Loans Are Back But Will New Government Regulation Hurt or Help Borrowers?

[Mar 29, 2010.]


Cheap Auto Loans Return

For some months, cheap auto loans have been making a comeback, providing access to new and used vehicles for people with all sorts of credit scores. And that process is beginning to snowball.

Just this week, the Orange County Business Journal reported that two different auto financiers in its corner of California are gearing up to meet a newly anticipated rush in demand. Ray Thousand, CEO of Alliance Acceptance Corp., one of the two Irvine-based lenders, told the Journal: "It's a very good time to get back into the business. The number of competitors has thinned and there's a lot of pent-up demand in the market."

Meanwhile, Casey Thormahlen, a market analyst with IBISWorld Inc., commented in the paper: "We're expecting the market to show significant signals of a strong change in direction soon, and more companies to get into subprime auto lending."

Auto Loans and Abuses

But not everything in the auto loans garden is rosy. Last week, the Detroit Free Press quoted Tim Geithner, U.S. Treasury Secretary, as calling for tighter government regulation of car dealers who unreasonably exploit consumers. In particular, he was concerned about military personnel and their families, who are sometimes lured into bad auto loan deals.

The U.S. Department of the Treasury issued a press release that said:

Military Families Deserve a Consumer Agency that Will Crack Down on Abusive Auto Lending Practices

  • Wrong incentives: Like mortgage brokers, auto dealer-lenders are paid more to sell loans with higher rates and fees than borrowers qualify for. This gives dealers a perverse incentive to charge higher rates.
  • Bait and switch financing. Sometimes a dealer-lender sends the buyer home with a "purchased" car and calls a few days or weeks later to say that the financing "fell through." The borrower then is trapped into paying a higher interest rate
  • "Packing" loans. Dealers also receive commissions to sell expensive add-ons to the loans, such as extended warranties. Dealer-lenders frequently obscure the cost of add-ons, which can be thousands of dollars, by emphasizing that they only moderately increase the monthly loan payment

More Regulation for Auto Loans?

Of course, non-military consumers suffer from the same abuses, which is why some advocate that dealers should be regulated by the proposed Consumer Financial Protection Agency. The National Automobile Dealers Association disagrees, pointing out: "It's important to keep in mind that each of the practices cited...are prohibited by current law, so it is unclear what benefits service members would gain from the creation of a new bureaucracy."

Better Auto Loans

If you want to avoid being ripped off on your dealership lot, you can line up your credit in advance. Apply for a cheap auto loan online.


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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