Don’t Pay More Than You Should for Auto-Financing
In 2013 the Consumer Financial Protection Bureau (CFPB) released a bulletin that was critical of the practice many lenders use of allowing car dealers to “mark up” the interest rate on financing offered to consumers. Yet, the practice still continues, and car buyers should take steps to avoid being ripped off.
The practice works like this: the dealer runs a customer’s credit report, and finds that the customer qualifies for, say, 4% APR financing. The third-party lender could approve the loan at that amount, but allows the dealer to charge, say, 7% APR, to the customer.
Doing this results in the customer paying hundreds – even thousands more over the term of the loan. Anticipating this outcome, the lender allows the dealer to pocket some of these future profits at the close of the deal.
To keep this from happening to you, you need to arm yourself with information, and options.
Information –You should know everything you can about your credit-worthiness before you set foot in a car dealership. You can get reports from all three major credit bureaus once-per-year for free HERE . But this will not give you the scores you need.
Many credit card issuers offer “free credit scores” these days. These are useful for tracking your credit, as are free services you can join like Credit Karma, Credit Sesame, Mint and Quizzle. However, these services provide only some of the scoring information that dealers use to get loan approvals.
A much more comprehensive picture of your scoring information is provided MyFico.com. This is FICO’s in-house consumer service, and it offers three different service level options. However, it’s not free.
Options – Get approved for auto financing before you go shopping for a car. It’s fairly easy to get pre-approved for loans these days, from credit unions, banks and third-party lenders.
We strongly urge you to try your credit union first. Credit unions are not-for-profit institutions, so they have no incentive to push you into a more expensive loan than the one you qualify for. You’ll get an honest assessment of your credit-worthiness, and a good idea of the types of loan and payment options you qualify for.
Arm yourself with information — and options — and you’ll be sure to get the best deal possible on new or used vehicle financing.
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