The Consumer Financial Protection Bureau (CFPB) is working to eliminate predatory auto loans, but a new scam seems to pop up every time one is stamped out. Your best protection is to know how to identify a predatory auto loan.
Signs of Predatory Lending
- The easiest sign to spot are the words “buy-here-pay-here.” All of these loans carry high interest rates, short repayment terms, and the vehicles are extremely over-priced.
- The second sign is that you are pressured into buying add-on products like: gap insurance, vehicle service contracts, credit life and disability insurance, rust proofing, theft deterrent packages, fabric protection, and window etching. The majority of these services are unnecessary and they can all be bought somewhere other than the dealership at a much lower price.
- Sign three is hidden until the paperwork is in front of you. You will be told you are approved for a loan at a certain interest rate. What you are not told is that your loan has not been approved yet, you are being offered ”conditional” credit and the dealership is hoping that one if its partner lenders will approve your loan at the rate quoted. Be sure to ask if the loan is conditional or finalized before signing anything.
- Another sign of a predatory loan is a ”mandatory arbitration” clause. This eliminates your ability to sue a lender or dealership and forces you to use an arbitrator instead.
- The final sign of a predatory lender is going to be hidden from you. Dealerships have the legal ability to add points to your interest rate in order to increase their profit. Lenders allow this as an incentive for a dealership to steer you their way. In order to avoid this, the CFPB recommends asking the dealer the “buy rate,” or the rate offered directly from the lender. Offer to pay this plus a flat fee, as opposed to the “contract rate,” which is the rate offered by the dealer, after they have tacked on a couple of extra percentage points. Typically, you will pay much less in a flat fee than you would over the life of a loan with a higher APR.
Arranging Your Own Financing
The best way to avoid all of these signs of a predatory auto loan is to arrange your own car loan. All you have to do is approach a lender. They will tell you everything that you need to have in hand for the loan process. Even if you have bad credit, you can arrange your own auto loan. Look online for specialty lenders that are willing to accept your credit score. The interest rate may be higher than you would like to pay, but at least you won’t have to worry about being scammed.