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America’s auto loans are coming to a breaking point. Most people need a car to get to work, and not everyone can pay cash. According to Federal Reserve data, some 108 million financing packages already exist, Bloomberg reported, which is equal to half the number of licensed drivers in the U.S.
However, vehicle repossessions are nearing an all-time high. KAR Auctions told Bloomberg that auto lenders might repossess 2 million cars in 2017. That number is twice the worst figures from the Great Recession. Even though car loans won’t spark another financial crisis, consumers shouldn’t be gambling money on vehicles they can’t afford.
Not counting regulators asleep at the wheel, it takes two parties to make a bad auto loan: one lender and one buyer. To avoid losing your next car to the repo man, look out for red flags at the dealership before you buy.
Here are five auto loan traps to avoid.
- Getting locked into a bad rate: Do you know your credit score? If not, take the time to get it from one of the free online services before you go shopping for a car. This number directly affects what type of rate you will get in an auto loan — the higher your score, the lower the rate. Over the course of a five-year loan, buyers with a 620-credit score could pay over $4,300 more than buyers with a score of 720 or higher (based on a $25,000 loan). When you don’t know your score, a salesman could end up sticking you with a worse rate than you deserved.
- Longer loans equal more interest: If a salesman asks you, “What it will take to get you into this car?” beware of an offer with a lower payment coming next. Certainly, no one wants to pay more than you have to every month on a vehicle, but low payments only tack on more interest in the end. As the years tick by, you will find yourself a slave to your auto loan as the vehicle itself depreciates. (Some cars lose half their value in just three years.) If you’re struggling to pay off your loan five years later, you’ve made a huge mistake.
- The dream car out of your price range: Car salesmen work on commission, so they will look to sell you the most expensive car they can. Keep that in mind as you calculate your monthly payments, even when you get approval for a car you can barely afford. If millions of cars will be seized by banks this year, it means too many people accepted a loan they cannot afford. When a monthly payment is on the borderline of your finances — or your job is not entirely secure — go for a cheaper car or something on the used market.
- Auto loans that change after the fact: One of the biggest auto loan traps is called yo-yo financing. In this dealer scam, you drive off the lot in your new car without finalizing the terms of a loan. After a week or two, you hear from the salesman who says your loan application was rejected by the bank due to a credit problem or other issue. At this point, you have to go back in and renegotiate the terms, and the new rate will be higher than the one you thought you had. You can avoid this trap by refusing to accept the car before you have the loan paperwork. Tell them you’ll come back when it’s ready, and walk away.
- The co-signer trap: If your credit is less than stellar, you might need a co-signer to get the loan for your new car. This practice is normal enough, but make sure you and the person helping you read all the fine print. In the past, co-signers have ended up learning they were the owners of the car (rather than the person they thought they were helping). Not only does this mean you don’t own the car, it also means you risk damaging a personal relationship because of some shady car dealer. Be crystal clear on the terms of any co-signer contract.
Avoid these traps and you are set to make excellent choices in obtaining those loans that you seek. Subsequent tips will be provided in later articles,. Always visit LawsandLoans.com, we keep you updated!