Drawbacks to Auto Dealership Financing

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January 27, 2012

Those who have looked closely at the auto loan process know that there are some pitfalls in securing financing from a lender, especially in direct auto dealership financing situations. The dealership is often not the actual lender, but they provide financing as one of their "dealer services," and some are better at compassionate lending practices than others. Here are some "red flags" that buyers should avoid when getting auto dealer financing.

Inflated Rates

The practice of marking up car dealership interest and financing rates from a lender is often called "dealer reserve" and, according to many of those inside the industry, it's not really necessary. When a prospective buyer goes to the lots, there may be dealers willing to "approve" a loan that they may claim is questionable, at a high interest rate. Some buyers don't even question interest rates of up to 20% or higher, and they'll be paying a lot of additional cash on top of their principal (the original selling price of the car). The main thing to do to avoid excessive interest rates is to negotiate with the dealer and ask specifically what factors have led to their quoted rates.

Unsealed Deals

It's also important make sure that the dealer has secured approval from the original lender before inking a deal. Otherwise, the dealer can always call back later and say a loan has "fallen through," requesting higher interest rates or other conditions. Don't settle for a "maybe" in terms of what you negotiate on the lot. Get written documentation of the rates and payments initially agreed upon, and let the dealer know you will wait to make the deal until the loan is secured from a solid lender. An alternative is to go to another lender (such as your bank) directly and get your own loan.

Lien Confusion

It is common process for a dealer to hold a lien on the title of a vehicle until the last dime has been paid off by the buyer. But, if you don't fully understand what this means, talk it out with the dealer, and arrange for a specified "end-process" release of that lien when you have paid up.

Repos and Electronic Locks

Another thing to avoid is aggressive repossession tactics. Some dealers will finance your vehicle, wait until you have missed a payment, and pounce without warning, sending staffers to "steal" your vehicle right out of the driveway and back into their inventory! Be up front at signing time about the repossession policies of your dealer. Also, in today's high-tech world, dealers can use electronic locks to simply shut down your engine as soon as a payment is missed. The solution? Get the facts about your dealer's policies at signing to prevent unpleasant surprises down the road.

Shop Around

The biggest factor in avoiding unscrupulous auto dealer financing is to shop around, talking to various dealers about how they can help you get a solidly financed deal on the car you want, whether you're looking to buy a new car or looking for used car dealership financing. Settling for the first agreement that comes along is generally going to land you in hot water.

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