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Cheap Auto Loans from Dealers Often Prove Expensive

[Jan 31, 2010.]


Auto Loans and Dealer Kickbacks

Dealerships employ some of the slickest salespeople in the country. And, once they've persuaded you to buy a vehicle, they normally apply all their persuasive skills to sell you financing. And that's the time to pay most attention and to be most skeptical.

Even if you qualify for a lower rate from the lender who buys your loan from the dealership, some dealers charge you much more. The Center for Responsible Lending (CRL) calculates that, across the country, dealerships make $20 billion a year from these kickbacks on auto loans.

Meanwhile, those used car lots that finance purchases themselves (rather than selling them on to big lenders) tend to charge very high rates. This can mean that the buyer ends up paying much more than the vehicle is worth and that lot operator often makes more profit from interest payments than car sales.

Cheap Loans that Become Expensive

Sometimes a dealer claims that it takes a long time to complete all the finance paperwork and persuades the customer to drive home in the new car having signed a "spot delivery" or "conditional sale" agreement. This agreement may show an attractive loan rate, but it's not binding.

The customer is then called back--sometimes weeks later--and told that it wasn't possible to complete the sale on the original terms and that he or she must immediately pay the full balance, return the vehicle, or agree to a higher rate on a reworked auto loan. On occasion, the dealer may claim to already have sold the trade-in vehicle, ratcheting up the pressure on the buyer to agree to higher-rate finance.

This practice is known in the trade as the "Yo-Yo" scam. It occurs surprisingly often. And those who are less well off are its most frequent victims. When the CRL conducted a survey in North Carolina last year, 12 percent of respondents who earned less than $40,000 a year, and a quarter of those with an income below $25,000, reported having been "yo-yoed."

Loan Packing

It's after you've decided to buy the vehicle that the hard sell really starts. As the CRL puts it, you are pressured into buying: "Overpriced and underused add-on products including GAP insurance, vehicle service contracts, credit life and disability insurance, and theft deterrent packages." All of which go to inflate your purchase price and your finance payments.

Loan Conditions That Are Unfair

Many dealer auto loans contain binding mandatory arbitration clauses. These mean that you lose the right to sue the dealer or lender in court and have to submit any disputes to an arbitration process instead.

This may not sound unfair, but the CRL says that the arbitration system "is potentially more expensive and biased toward the dealer."

Shop Around for Auto Loans

Of course, not all dealerships are the same, and you may find one that offers honest, cheap auto loans without strings. But it's always wise to negotiate from a position of strength, and you're likely to get the best deal if you already have a loan offer in your pocket before you arrive at the lot.

Like all finance deals, the trick is to shop around. So get a cheap auto loan quote now.


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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