Auto Loans: Test Drive the Financing Before You Go to the Dealership
For most consumers, an auto loan is their biggest monthly expense after their mortgage or rent payment. That's why, when you're thinking about buying a car, it's as important to research the loan as it is to check out sales prices and gas mileage. Here are some strategies to consider.
Before Going to the Dealership Review your credit reports from each of the three major credit bureaus long before you apply for a loan. Something as simple as fixing mistakes in your report — for example, correcting erroneous information that indicates you made late payments when you always paid on time — may qualify you for a smaller down payment or a lower interest rate.
Under federal law, consumers are entitled to a free credit report every 12 months from each of the three major bureaus — Equifax, Experian and TransUnion. Since the information can vary significantly among those three companies, obtain copies from all three. To order your free copies, go to www.AnnualCreditReport.com or call toll-free 1-877-322-8228.
Think carefully about how much you can afford to pay for a car. Your monthly payment will depend on the term (length) of your loan, the interest rate and the amount you borrow. In most cases, what you borrow will be the price you pay for the car plus any options you select minus your down payment and the value of any trade-in. In addition, consider the charges for car insurance, property and sales taxes, as well as registration, inspection and title fees.
An alternative to buying a car is leasing one for a few years. Monthly lease payments can be lower than monthly loan payments, but at the end of the lease you won’t own the car. And if you need a car just once in a while, consider using a service that rents for periods as short as an hour.
Shop for a loan at your bank and several other lenders. Find out about the types of loans and the Annual Percentage Rate (APR) for which you qualify. The APR is a required disclosure showing the total cost of the loan, including interest charges and many fees, expressed as a yearly rate.
Consider getting “pre-qualified” by a bank or credit union for a specific loan amount. “This doesn’t mean you have been approved for a loan,” explained Joni Creamean, Chief of the FDIC’s Consumer Response Center. “But it will help you know approximately how much you can afford to spend on a car and how much it will cost you in finance charges before you get to the dealership.”
If you are trading in a vehicle, research how much your car is worth. “The more you know about the car’s current value before you go into the dealership, the more likely you will be to get a good deal on the trade-in,” said Heather Gratton, an FDIC Senior Financial Analyst.
At the Dealership
If you have been pre-approved for a bank loan, consumer advocates suggest keeping the financing decision separate from the negotiations on the price of the car. If you negotiate the vehicle price with the dealer before discussing a possible trade-in and financing, it is easier to see if you are getting a good price on the car.
Be cautious about offers to “pay off” anything you owe on a car to be traded in. A car dealer might advertise that it will pay off the balance of the loan on your trade-in vehicle, no matter how much you owe. However, if you have “negative equity” — you owe more on the car being traded in than it is worth — the promise to pay off the entire loan may be misleading. Instead of being paid off, the amount you owe on your trade-in may be rolled into your new loan, deducted from your down payment, or both. The result would be an increase in your monthly payments and, most likely, a major jump in the total cost of the loan after factoring in the interest to be paid.
If you still owe money on a car that you plan to trade in, consider waiting to make the new auto purchase until you have paid off your existing loan. “Then, when you buy a new car you will not have to borrow as much money and you will pay less in interest over the life of the new loan,” explained Luke W. Reynolds, FDIC Acting Associate Director for Community Affairs.
Remember that, as with the price of the vehicle, the interest rate and other financing terms offered are typically negotiable. “Instead of relying solely on a dealer’s rate quote, you should speak with multiple lenders about the APRs they can offer you and let them know you are comparison shopping,” suggested Keith Ernst, an Associate Director of the FDIC’s Division of Depositor and Consumer Protection in charge of consumer research. He added, “Explore any opportunities to lower your financing cost with each lender by asking about options such as different repayment periods or discounts for setting up automatic payments.”
Many auto dealers offer discounted loans (such as zero-percent financing) or cash rebates on car purchases, but usually not both. You may sometimes find the dealership financing more advantageous than bank financing.
Make sure you understand what any additional products you agree to purchase will or won’t do, and how much they cost. The prices of those extras will be added to your original loan amount and will increase your total financing cost. Remember that products such as extended warranties or credit insurance (which could cover loan payments if you die, become ill or unemployed) are optional purchases. If you are interested, you don’t have to buy them at the dealership. You may be able to find a better or cheaper offer elsewhere.
Read the contract carefully before you sign it. Federal law requires lenders to tell you the terms of a loan, including the APR and the total cost. Federal and state laws also prohibit unfair, deceptive and/or abusive business practices. “Before signing any loan documents, you should fully understand all the aspects of the transaction,” said Ernst. “Verify that anything that was told to you is reflected in the agreement, including the treatment of a trade-in.”
Don’t rush into making a decision to buy a car or accept financing. Perhaps you’ve read in the news about reports from consumer groups that people sometimes mistakenly believed that a car purchase and dealer financing were final. The reports suggest that these consumers signed contracts or attachments (with titles such as “Special Delivery Agreement,” “Rescission Agreement,” or “Supplemental Agreement”), took the vehicle home, and then days or weeks later were asked to return to sign a new financing agreement with a higher interest rate or other less-favorable terms. Consumer groups refer to these as “yo-yo” scams.
The FTC has been seeking public comment to help evaluate the extent to which these concerns are found in the marketplace. To avoid falling for a scam — or just getting into a deal you don’t want or don’t understand — be careful to read through all the terms and conditions of any documents you are asked to sign.
“If you are unsure the loan is finalized, you may want to leave the car at the dealership and continue to comparison shop until the financing process is complete,” added Gratton. “This way you can be certain about the final financing terms.”
The new Consumer Financial Protection Bureau takes complaints about vehicle loans at www.consumerfinance.gov/complaint. You can also call the Bureau toll-free at 1-855-411-2372.
Your state’s Attorney General’s office (listed in your phone book or at www.naag.org/current-attorneys-general.php) can provide guidance about any consumer protections under state laws and direct you to other sources of assistance in your state.