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Will dealerships' auto loan scams finally be ended?

[Jul 11, 2011.]


This blog has for some time been highlighting the shabby scams that many car dealers practice when they're arranging auto loans. Last June, Congress finally had an opportunity to regulate the sector, but dealerships are powerful local businesses that often make significant campaign contributions, and legislators backed down.

Auto loans can be unfair or deceptive, says FTC

However, that failure to legislate didn't mean that dealers had cleaned up their acts. So next month the Federal Trade Commission (FTC) is due to host in San Antonio, Texas its second round-table event aimed at gathering "information on consumers' experiences in the sale and financing of motor vehicles at dealerships." The FTC's press release sums up the position well:

Buying or leasing a car is among the most expensive transactions that many consumers make. Financing obtained at a dealership may provide benefits for many consumers, such as convenience, special manufacturer-sponsored programs, access to a variety of banks and financial entities, or access to credit otherwise unavailable to a buyer. Dealer-arranged financing, however, can be a complicated, opaque process and could potentially involve unfair or deceptive practices. [Blogger's emphasis.]

Auto loans and dealer scams

The Center for Responsible Lending (CRL) has long campaigned for dealers to be regulated over auto loans. It has published a fact sheet that details five of the most common dealer scams:

  1. Dealer kickbacks: This is when a buyer qualifies for a lower interest rate on an auto loan. However, the dealer bumps up that rate to whatever he or she thinks the buyer can afford (that's why you're often asked what monthly payments you want to make), and keeps most of the difference between the lower and higher rates. The CRL says this "dealer rate markup" costs American consumers "over $25.8 billion in added, hidden interest."

  2. Junk fees and inflated extras: Dealers try to maximize their profits by selling you extras at inflated prices. These range from credit and "GAP" insurance, through service contracts, to rust-proofing and anti-theft packages. Just check the difference between what your dealer would charge for window etching and the cost of a do-it-yourself etching kit at your local store.

  3. Yo-Yo sales: You sign the paperwork, and drive away in your new car. Deal done. But no. Days or weeks later, the dealer calls to say the finance has fallen through, and you have to take a more expensive loan. You want to call off the deal? Sorry, but your trade-in has been sold, or your down payment can't be refunded.

  4. If you have lemons ... churn them: Some dealers specialize in selling cars (often "lemons," according to the CRL) with unaffordably expensive auto loans to people with poor credit. The idea is to repossess them and sell them again and again to other vulnerable buyers. In the trade, this is known as "churning."

  5. "So sue me. Oh, you can't": Read the small print in many agreements for auto loans and you are likely to find a "mandatory arbitration" clause. This means you can't take a complaint to court. You have to rely on an arbitration process, which often can favor the dealer.

Auto loans that avoid dealer scams

Of course, it may be that your local dealership is a model of honesty and integrity. But how can you tell? In reality, you often can't. Perhaps the safest way of avoiding many of these scams is to seek out your own financing. By all means talk to your bank or credit union, but why not start here on this site, where you can find competitive quotes for auto loans?


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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