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Americans are carrying a record amount of auto credit debt, and many are taking on bad debt, either because they don’t see the red flags or because they feel they have no other option. .
Americans owe a record $ 839.1 billion in overdue auto loan balances at the end of the second quarter of this year, up from $ 751.1 billion in the same period a year ago, according to Experian Automotive. The number of loans also rose to 61.6 million from 57.8 million a year earlier.
But while consumers tend to be educated on how to find the right price for a car, many remain ignorant of how to get the best auto loan, said Ira Rheingold, Executive Director of the National Association of Consumer Advocates.
âPeople don’t realize that dealers are making more profit these days on finance,â he said. “You really have to shop around for the loan before you shop for the car.”
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One approach recommended by financial advisers is the 4/20/10 rule: deposit at least 20% in cash or exchange value; keep the life of your loan at four years or less; and keep your monthly payment below 10% of your monthly income.
But before you even set foot in a dealership, make sure you know your credit rating and try to get financing from a bank or credit union. (The Federal Trade Commission provides a comprehensive guide to understanding vehicle financing, which includes worksheets to help consumers determine how much they can afford to borrow and what to consider when choosing a creditor. .)
Without a loan on hand, you’re more likely to end up with an auto loan markup, which allows the car seller to inflate the rate offered by a third-party lender. “This practice alone adds $ 25.8 billion in hidden interest over the life of many auto loans,” according to the Center for Responsible Lending.
Yo-yo sales can also trap a buyer. That’s when a dealership calls after someone has already signed the paperwork and brought the car home to announce that something was wrong with the âconditionalâ sale. Sometimes the dealership will demand that the car be returned and the buyer will either sign a more expensive loan or suffer the consequences.
“Usually it’s a lie” Rheingold said.
If a consumer receives a call from a car dealership saying the contract was not really a contract, they should report the incident to the state attorney general and the FTC. Corn maybe the best bet is to just return the car and go somewhere else, Rheingold said.
Other red flags to look for include charges you don’t understand or charges for items you haven’t agreed to like credit insurance.
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As the total number of auto loans increases, the tactics of lenders are increasingly scrutinized. The Consumer Financial Protection Bureau, a watchdog agency established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, seeks to expand its oversight role to non-bank auto lenders (called captive lenders) like Toyota FS , Ford MCC and Honda Finance. The proposed plan, which was announced on September 17, is currently under public comment.
“Non-bank auto finance companies extend hundreds of billions of dollars in credit to American consumers, but they have never been subject to federal prudential supervision,” CFPB director Richard Cordray said in September, when he proposed additional surveillance.
âThese companies have also played an important role in the growth of subprime auto loans by providing loans to consumers with lower credit scores. In this market, as in others, subprime borrowers may be more vulnerable to predatory practices, so direct monitoring of their practices is essential. “
Currently, banks hold the largest share, 34.9%, of the total auto loan market, according to Experian’s mid-year report. But âcaptiveâ lenders represent 27.2%. They are followed by credit unions with 16.7%, finance companies with 13.6% and dealers buy-here, pay-here with 7.6% of all auto loans.
Increasingly, consumer agencies are trying to help buyers figure out how to get the best car loan, regardless of where they get it or their credit rating.
But the best thing consumers can do is educate themselves, Rheingold said. âIt has improved,â he said, but there is still âa lot of fraudâ.