Great Car, Great Price…. but what about the Financing?

Auto dealers have a long history of using questionable sales tactics to bilk consumers in the market for a new car. Many people keep their eye on the sale price and neglect scams involving vehicle financing, which can add thousands of dollars to the price of a car.

Unscrupulous dealers often arrange financing for your vehicle, but studies show that the interest rates on these loans are often much higher than a consumer could obtain on their own. The arranged financing ends up costing a bundle, and dealerships often get a kickback from the lender on the overpriced loan.

These financing markups cost consumers an average of $1,000 per loan. Studies conducted on sales financed by Ford Motor Credit Company (FMCC), General Motors Acceptance Corporation (GMAC), and Nissan Motors Acceptance Corporation (NMAC) showed that between 26% and 50% of auto buyers have been victimized by auto financing schemes.

Although dealerships don’t have the authority to offer loans or act as bank agents, many dealers claim that they will negotiate with the bank for you to get the lowest payment schedule and interest rate. However, a dealer can only legitimately negotiate the retail price of a car and any items added on during the sale price.

The dealers often direct a lot of business to certain banks, and some of these banks offer the dealers a cut of the overpriced financing. The dealer cut usually comes from increasing the original percentage rate of the loan sold to the consumer. The consumer is unaware that they received a higher rate than they would have received from outside financing and ends up paying thousands more that goes to the dealership.

Sometimes auto manufacturers offer special financing rates but may ask you to choose between the rate and an up-front rebate. Although it may seem a better deal to take the rebate, one should carefully compare the actual cost over the life of the loan. Sometimes unscrupulous dealers fail to mention the special manufacturer finance rate in order to steer you towards the more expensive loans where they get a kickback.

Another shady tactic is to encourage consumers to take “on-the-spot” delivery of a vehicle before the financing has been completed. Many sales of vehicles take place outside of normal banking hours, and dealers can ask the buyer to sign generic or blank forms, offering to “take care” of filling out the rest and dealing with the bank after the consumer leaves with the car.

This is called the ‘right of rescission.’ Abusive terms written into the fine print can allow dealers to alter the terms of the contract, including the number or payments and interest rate, without the customer's further consent -- if the customer receives spot delivery by driving it off the lot prior to receiving final approval from the bank. Customers should avoid spot delivery and should never sign a writ of rescission clause or contract.

You should also double-check that the terms of the loan and the number of payments have not been altered from the initial agreement. Look out for “balloon” payments, which will mean a big final payment substantially larger than the monthly payments. Often these payments are not disclosed up front or are buried in the fine print.

So, what can you do to avoid falling prey to these shady financing schemes? Here are a few key tips that will help protect you from being victimized by shady dealers.

• Don’t deal with any lending institutions (including credit unions) offered through the dealership. Find outside financing first, before you go into a dealership. Credit Unions usually offer the lowest auto loan price for which consumers qualify, and outside financing reduces the confusing paperwork shuffle that can conceal fraud at the time of purchase.
• Shop for the best loan and loan terms as carefully as you shop for the best sticker price. Be sure of the exact number of payments, the total cost of your credit in dollars, the name, address, and contact info for the bank that holds the loan, and whether there is a balloon payment at the end.
• Don’t give the dealership permission to pull your credit information or your personal information (such as a Social Security number) until you’re ready to negotiate the sale of a vehicle.
• Be willing to walk away. Slow down and read the fine print, ask lots of questions. Negotiate away extras and add-ons.
• Stay away from spot deliveries. Dealers can take advantage of this by inserting writs of rescission in the purchase contract, allowing a customer to drive the vehicle off the lot, then change material terms of the contract later if, for example, the deal is refused by the lender.
• After selecting a car model, call your bank or credit union for a rate quote. Then compare it to the dealer’s quote.
• If the dealer offers zero percent financing, the dealer will not give consumers a rebate on the sale price. Ask the bank or credit union whether it makes sense to take the rebate and finance the purchase at the regular rate. Then compare those calculations with those of the dealer.
• Don’t sign any contract with an auto dealer that includes a binding arbitration clause. More and more dealerships are adding binding arbitration agreements to contracts for new and used vehicles, as well as to financing contracts. By signing the contracts, the consumer is agreeing to binding arbitration to settle any future dispute and also waiving the right to sue or appeal – even if the dealership committed fraud. By agreeing to binding arbitration, you waive your right to sue, to participate in a class-action suit, or to appeal the arbitration decision. Dealerships use these agreements as a way to avoid costly court judgments and often pick the arbitration company.

A car buyer should also watch out for the shady practice of loan “packing” or “loading”. This starts with a salesperson or manager calculating an inflated estimate for a car loan. This creates "room" for the dealership to add in (or "pack") the sale with other products, such as credit insurance, service contracts, environmental protection packages, etc. Although the manager is adding these optional services to complete the over-calculation of the monthly estimate, he will often tell the consumer that the services are "included" in the monthly payment. What isn’t clear is that these are add-ons that you’re paying for. Not only is the consumer charged for something he or she was led to believe was free, but dealerships will often overcharge the consumer for those optional services.

Also watch for unauthorized pulling of your credit reports. Under the Fair Credit Reporting Act, dealerships are required by law to acquire a customer’s written permission to obtain a credit report, unless it is clear to both the consumer and dealer that the consumer is actually initiating the purchase or lease of a specific vehicle and the dealer has a legitimate business need for consumer report information.

However, whistleblower accounts reveal a widespread practice of pulling credit reports on consumers without the consumer’s permission or knowledge by obtaining information including name, address, phone number, date of birth, and Social Security number through a number of devious tactics.

Dealerships pull a customer’s credit history to get as much information as possible about the financial position of a customer in order to give the dealership the upper-hand in purchase negotiations. Armed with a potential buyer’s credit score, the dealer can compute the amount and a rate that banks will most likely offer the customer. This gives them a great advantage in negotiating payment options with the buyer.

Dealers also pull credit reports to see the consumer’s previous auto loans and the terms of those loans. Dealers often use these numbers as a baseline on which to add additional money and months when they begin payment negotiations.

The balances of a customer’s credit cards are also in credit reports, and this gives the dealership leverage in suggesting that a consumer use his or her credit card to make a larger down payment.

Also remember that the Truth in Lending Act (TILA) applies to auto financing and requires that the terms of the loan be clear and in a standard format. This is intended to facilitate comparisons between the lending terms of different financial institutions.

With regards to auto financing (or closed end loans where credit is advanced for a specified time period), the lender must disclose:

• The identity of the creditor
• Amount financed
• Itemization of amount financed
• Annual percentage rate, including applicable variable-rate disclosures
• Finance charge
• Total of payments
• Payment schedule
• Prepayment/late payment penalties
• If applicable to the transaction: (1) Total sales cost, (2) Demand feature, (3) Security interest, (4) Insurance, (5) Required deposit, and (6) Reference to contract

If a lender violates the Truth in Lending Act, a borrower has one year to sue and, if successful, can recover Attorney’s fees, court costs, and double the calculated finance charge (but not less than $100 or more than $1,000). Note that creditors have 60 days from the time of the discovery of the error to correct any errors made, and is not liable if the error was an honest mistake (i.e. a bona fide error).

Protect yourself by understanding your rights before you shop for a car. If something seems odd or suspicious, play it safe and walk away.

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