Cars are a necessity for nearly everybody. “Subprime” lenders and auto dealers may take advantage of that fact by convincing you to buy a car that you don’t really want, can’t afford, or both. Here are five ways to tell if that happened or is happening to you:
- The dealer doesn’t give you a choice of what car to purchase. Some dealers will tell buyers that they only “qualify” to buy one particular car, or will aggressively steer a buyer to a given car. There is a difference between suggesting that another car might be better for you, and restricting you to considering only one, or a small number of, cars. Did the dealer have you talk to a salesman or take credit information before you looked around or test drove a car? Did the dealer not let you test drive any vehicle but the one they suggested? Did the dealer say you wouldn’t qualify for a car without discussing why? Is the car you wanted to buy newer or less expensive than the one the dealer is trying to get you to buy? These are all factors that might show that the dealer is steering you to a particular car without considering whether that car is right for you.
- The dealer lets you take the car home before you have signed all the papers. Car dealers do this to create a sense of obligation in buyers; if they let you drive it for a day or two before signing the papers, they may use that to dissuade you from them not buying the car, saying that the car has been used by you, or similar claims.
- The dealer tells you that the payment can be lowered later on. Many dealers will try to convince buyers that even though the payment may seem high now, they can “refinance” the loan later on to reduce the monthly payment and make the car more affordable. This is largely a myth: while there may be lenders willing to refinance a car loan in the future, unless your credit score and income have improved substantially between the initial purchase and the refinance, the new loan is unlikely to be much better than the old one. And it takes a lot of reduction in interest rate to affect the payment. Let’s say you bought a car for $25,000 at 6% interest over 6 years. Your monthly payment would be $414 for that car. Refinancing to 3% interest – cutting the interest rate in half – only lowers the payment to $380, a “savings” of $34. If $414 is too expensive for you, $380 isn’t going to be much better. Even if you could refinance to a zero interest rate, the new payment would still be $347, so refinancing from 6% interest down to zero saves you $67 per month. The price of the car has a bigger impact on the monthly payment than the interest rate. A $25,000 car at 6% interest over 72 months has a $414 payment. A $20,000 car at that same 6% rate has a monthly payment of $331, nearly $100 less. So if you want to lower your monthly payment, buy a less expensive car. A lower price will likely result in lower insurance premiums and lower interest rate, as well.
- The dealer suggests that if you buy THIS car now, you can get the car you want a bit later on. Many people who come into a dealership wanting to buy a particular kind of car get talked into buying something else on the premise that if they make payments for a while they can improve their credit and get a better loan later on to get the car they want. Again, this is largely a myth. Let’s say you purchase a car for $25,000, and finance it at 6% interest, so your monthly payment is $414. At the beginning of a loan, not all of your payments go to pay down the purchase price, because of interest. So after 24 payments, you’ve paid $9,936; but nearly ¼ of that goes to interest, so you’ll still owe more than $17,000 on that car. If you want to trade it in, the dealership would have to give you at least $17,000 on your trade in, or you will have to pay off that loan somehow – usually by rolling it into your new loan. But that means that you’re paying for two cars on the new loan: the car you want to buy, and the car you bought to get there. That will make your payments more expensive and raise the interest rate on the loan, and it makes it less likely you’ll qualify for a loan on the new car.
And if you think a car you bought for $25,000 will get a $17,000+ trade in 24 months later, think again. Cars on average lose as much as 30% of their value in the first year, and generally about 18% in the second year – so your car will be worth less than $17,000 after 24 months, even if it is in mint condition. And a dealer won’t offer you market price, but trade-in value, which is even less.
- The dealer says that because you qualified for the loan, you MUST be able to afford it. Finally, many dealers convince buyers to take on an unaffordable payment by saying that the bank would not have lent you the money if you couldn’t make the payments. Don’t believe it. Subprime lenders charge high interest rates because they expect most people to default. That’s worth repeating: they expect you to miss payments and eventually lose the car. If you miss payments, they will repossess the car (and add the costs of repossession to what you owe), sell it, and then seek to get you to pay the balance – even filing lawsuits to be able to garnish your paycheck. Not only does the lender NOT think you can afford the car, but they will expect you to make the payments even after they take the car back.
So what can you do about it? When you go to buy a car, take stock of your finances first. Figure out what the maximum payment you can afford is, but figure that payment based on what is comfortable. Don’t stretch yourself to make payments, and remember that you will have to have insurance on the car, as well. If you have a bank account, apply for a loan at your bank first, and see what you can qualify for. Many banks can pre-qualify you and may be more willing to lend to an existing member. Have an idea what kind of car you want and stick to it. Don’t get talked into something you don’t want. Look at many dealerships to see the best price. Talk to friends or coworkers who have recently purchased a car and find out where they did so, and whether the dealership was good to work with, and then shop there.
And if you’ve already bought a car that’s too expensive? Give Lawton & Cates’ consumer protection lawyers a call for a free consultation on your options. Wisconsin law prohibits car dealers and lenders from engaging in unfair practices, and you may be able to get your money back and clear up your credit report.