Car Financing

While most households find a car necessary, few people have enough money to buy one without taking out a car loan.  Car dealers will arrange car financing, but borrowing the money at the same place that you buy the car makes it much more difficult to get a fair deal on both the purchase itself and the financing.

What are common car financing abuses?

• Yo-yo car sales: In a yo-yo sale, the dealer sells you a car, has you sign a loan contract, and sends you merrily off the lot driving the car that you thought you just bought.  Then, they will call you back several days later and say (sometimes untruthfully) that car financing could not be arranged at the original terms, so you must sign new papers with a higher interest rate, or you need to add to your original down payment, or other loan features that you didn’t agree to must become part of the deal.

• Dealer Markups of the Interest Rate:  Often, dealers will have you enter into financing arrangements at a higher interest rate than you qualify for.  The lender and dealer then split the extra money that you are paying due to the higher interest charges.

• Junk Insurance Policies:  Sometimes dealers will insist that you buy “credit life insurance” (which promises to pay off the loan in case you die) or “GAP insurance” (which promises to pay the difference between what you owe and what your car insurance will pay if you total the car).  Other times dealers will just sneak one or both of these credit insurance policies into the pile of papers presented to you to sign when you close the deal.  Giving people the option to buy such insurance is not a bad idea in principle, but the actual policies sold are grossly overpriced and filled with loopholes; their real purpose is to add to the dealer’s profit rather than provide protection to the borrower.

• Failure to Pay Off Prior Liens: In troubled economic times, dealers may engage in illegal practices.  For example, they might fail to pay off existing loans on trade-in vehicles so that when you buy the car, you also take on the liens on its title.  They might also sell cars to consumers without first obtaining good title, making your ownership of the car questionable.  Dealers that engage in such practices will often have gone out of business by the time the consumer discovers that the trade-in has not been paid off, or that there is a dispute over the title.

• Self-Help Repossession: If a consumer defaults on a car loan, by failing to pay on the loan or maintain insurance, the lender may typically take the car from the consumer without any judicial oversight.  If the consumer is not in default, or if the consumer has some claim that would offset the missed payment, the consumer must file a court action to try to get the car back.  Lenders often use the threat of repossession as a cudgel to threaten consumers into paying, even if their may be issues with the loan or car.  When cars are repossessed they are taken by private repo companies and consumers and repossessers can be hurt or even killed in the process.

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