No car buyer will know for sure if he or she is getting a predatory auto loan unless he or she knows what signs to look out for. If you don’t know these signs, we here at Houston Auto Approval Center will tell you. Listed below are what the Center for Responsible Lending considers as the five signs that indicate you are getting a bad car finance deal.
Financing from the dealership doesn’t come from the dealer itself; the dealer only arranges the transaction. A third-party financial institution grants the loan to the car buyer and obtains the credit contract. The car buyer is usually qualified to get a ‘buy rate,’ or a lower interest rate. Unfortunately, this is not what the consumer will get. Rather, he or she will get a rate inflated by the dealer. The dealer can raise the interest rate to earn more from the transaction, and the money earned serves as the kickback.
A predatory auto loan is made distinct by the inclusion of unnecessary expenses in the overall cost. The loan price is padded with the costs of overpriced additions which include gap insurance, life and disability insurance, extended warranty, as well as services like paint protection, rust proofing and window etching. Some of these are unnecessary, while some which may be needed can be purchased at a cheaper price somewhere else. The more additions there are, the more expensive the loan will be. The more expensive the loan, the more kickback the dealer receives.
Spot Delivery/Yo-Yo Financing
It is referred to as ‘spot delivery’ because the dealer will allow the consumer to bring home the vehicle on the spot. The catch? The consumer will be either persuaded or unknowingly forced into a conditional sale agreement (as opposed to a final sale). He or she may be asked to sign a document which states that the sale ‘is pending approval of financing’ and that the consumer should return the car if the loan is not approved.
A few days after the vehicle is driven home, the dealer will contact the buyer to say that the financing fell through. The buyer will then be asked to pay a bigger down payment and/or get a more expensive loan to keep the vehicle. To convince that the buyer has no other choice, the dealer will claim that the down payment is non-refundable and that the trade-in had been sold.
Buy Here Pay Here
Buy Here Pay Here dealers specialize in financing used auto loans to the least creditworthy of car buyers. Their average APR (annual percentage rate) is very high, and so are their repossession rate. They sell the same vehicles (most of which are lemons) over and over again—those that they repossess go back to the lot. They ask for a hefty down payment (an amount based on the vehicle’s exaggerated value) and further inflate the loan with unnecessary fees.
No Option for Legal Action
Predatory auto loan lenders leave consumers no option to sue through mandatory arbitration clauses. These basically waive the right of the car buyer to sue and appeal in court. In the event the consumer has a complaint against the dealer, he or she will not be able to take the complaint to court. The only option available is to handle the matter through an arbitrator, which is more likely to side with the dealer.