Consumer Comeback Blog

5 Auto Financing Tricks You Should Avoid at the Dealership

Written by Jeffrey Trull

car-test-driveNo one likes feel ripped off, but everyone knows car salesmen are skilled at their profession. And as salespeople, they must sell cars to make money. Part of how they maximize profits is using a variety of tactics, many of which are related to your financing. These tricks range from deals that might cost you more all the way to flat-out scams.

Here are a few offers you may run into at dealers that you should be cautious of and potentially avoid altogether.

Yo-Yo Financing

Imagine this: You believe you’ve purchased a car with financing and you drive it home. Days or weeks later, you get a call from a dealer who’s demanding you either agree to more expensive financing terms or return the car. This horror story is called ”yo-yo financing.”

While this sort of deal is often unfair and may be a scam in some cases, according to NBC News there are laws in only about one-third of states that protect buyers from “conditional sales” where the deal isn’t finalized until after you drive away.

The best way to protect yourself from this kind of deal is to obtain financing from a source other than the dealer. Banks and credit unions offer loans at competitive rates that aren’t subject to this type of lending where you may fear getting this dreaded callback. Unfortunately, many victims of yo-yo deals have poor or no credit, so if you’re aware that your own credit isn’t great, realize that there may be an increased chance that you’ll become a victim.

Zero-Percent APR Instead of Rebates

Zero percent APR sounds like an awesome deal in all cases, and the salesperson might have you believing that, too. But if I asked you if it’s a better deal than a $2,000 rebate a $20,000 car purchase, would you know?

While paying no interest sounds fantastic, it’s actually the more expensive choice in this scenario that points out.

Before you get excited about paying no interest on your loan, make sure to compare against all options, especially when rebates are offered, too. Although the math is fairly straight-forward, using an auto loan incentives calculator can mean just filling in a few boxes.

Mixing Price Negotiations With Financing

Revealing the monthly payment you can afford on a new car is almost never a good move. Doing this gives the salesperson many ways to extract more money from you by manipulating different aspects of the deal, including the purchase price of the car and financing terms.

Make sure to negotiate financing separately from the purchase price of the car and the trade-in value of your old car. Once you drill down these two amounts, then you can talk financing and see where you’re at with monthly payments.

If you’re concerned about what the price of a car translates to in monthly payments, check out a monthly payment calculator to get a more solid understanding.

Rolling an Old Auto Loan Into a New One

Another promotion or offer that dealers often promise is to pay off your old loan by rolling the outstanding amount into your new financing package. This is perfectly legal, but considering this type of offer should raise red flags for the deal your making.

Before you agree to buy a new car when your old one isn’t paid off, ask some questions:

  • Can I sell the old car for more money myself? Private sales of cars will typically earn you more money than trading the car into a dealership since you’re eliminating a middleman that’s seeking to profit. If you haven’t done the work to figure out what you could get for selling of the car, consider a private sale, and you’ll often receive a greater return.
  • Am I underwater? If the balance on your current auto loan is higher than the car is worth, your loan is considered “underwater.” If this is the case, selling the car on your own means you’ll still owe your lender additional money before they’ll release the title. If you’re unsure if going through the trouble of a private sale is worth it, compare the cost of the increased interest from rolling your old loan into your new one versus the additional money you’ll owe on top of the proceeds from a private sale.
  • Do I need a new car? If you’re looking at a new car but dealing with a scenario where your old loan is unpaid, it’s the perfect time to assess your car-buying situation. Did you get a bad deal on your old loan that left you underwater? Or is there some other reason to blame? Since this isn’t a common car-buying scenario, stop to examine and determine how you can avoid repeating a past mistake.

Loan Terms That Cost You More Interest

Don’t forget to watch out for different terms of your auto loan that might end up costing you more money.

For example, “zero down payment” loans result in a higher amount financed and more interest charges as a result. You’ll hold on to your money up front, but you’ll pay for it in the long run. If you’re unable to afford a reasonable down payment on a car, like 20 percent, it may mean that you can’t afford this deal.

In terms of how interest is calculated, be careful of “Rule of 78″ loans. This form of assessing finance charges is actually illegal in 16 states. If you find yourself in somewhere this is still allowed, stay clear or you’ll end up owing more when paying your loan off early compared to a simple interest loan.

Don’t forget that you’ll typically pay more interest for loans with longer terms, too. Be cautious about accepting a loan with longer than a 36-month term. It’s very possible you’ll end up with an underwater loan that puts you in a tough spot when considering your next car purchase.