Unfortunately, not all car loan companies have your best interest in mind. Some lenders will intentionally mislead or “fail to disclose” important details about your car loan in order to make more money off the deal. These are predatory lending practices and you should know what the warning signs are before signing a contract.
Here are six ways to spot a bad car loan:
- The vehicle price isn’t what you agreed to
- The contract is packed with unnecessary add-ons
- The dealer has signed you up for conditional financing
- The loan terms are different than your pre-approval
- There’s a mandatory arbitration clause in the fine print
- The prepayment penalties are through the roof
1. The vehicle price isn’t what you agreed to
You’ve finally found a car the fits your lifestyle and falls within your budget. You come to an agreement with the salesperson out on the lot, but all that changes when you’re handed the final bill of sale.
The dealership might try and blame the price discrepancy on administrative fees or a salesperson making an unauthorized deal, but you should take it as a red flag. If you’re not comfortable with the final price, walk out. You’re not obligated to finance a car that’s more expensive than you expected.
Also, say no if the dealer trying to sell you a car for more than its advertised price. In Manitoba, a verbal or written vehicle price agreement is assumed to be the total price of the car including fees.
How to avoid this: Read the contract thoroughly before you sign and do some vehicle pricing research on Canadian Black Book before visiting a dealership.
2. The contract is packed with unnecessary add-ons
Some dealerships with in-house financing will try to increase the cost of a car loan by signing you up for expensive optional products. It’s okay to say no to rust-proofing, theft prevention services or an extended warranty. These items are optional for a reason and you shouldn’t feel pressured into paying for something you don’t need.
Some lenders will also try to get you to sign up for guaranteed auto protection or “GAP” insurance. This is designed to help cover the gap between how much your vehicle is worth and how much you owe on your loan if your vehicle is wrecked or stolen.
While it might be a good idea for some shoppers, GAP insurance can add a few thousand dollars to the cost of your loan and dealerships often charge more for this kind of coverage than an insurance broker.
How to avoid this: Stick to what you want and practice saying no. Prepare by reading our post on how to get the best deal on a new or used vehicle.
3. The dealer has signed you up for conditional financing
Conditional vehicle financing agreements only benefit one party: the dealer.
Also called “yo-yo sales,” conditional financing gives the dealer the ability to cancel the sale if the financing terms don’t meet their requirements — sometimes even after a customer has driven the car home.
In most of these situations, the customer believes they’ve gone through all of steps and finalized the purchase only to get a call from the dealer saying they can’t honour the sale agreement because the financing fell through. This usually results in the customer having to bring the car back to the dealership and getting stuck with a more expensive loan.
This is a highly unethical practice that should be reported to your local consumer protection office.
How to avoid this: Look for terms like “conditional financing,” “conditional delivery” or “spot delivery” in the contract and ask the dealer to clarify what the language means.
4. The loan terms are different than your pre-approval
You should know what your monthly payment, interest rate and loan term will be before you sign a financing agreement. And if you’ve been pre-approved for financing through the dealership they should honour that initial quote.
Across the board, customers with bad credit (a score less than 620) will end up paying higher interest rates for financing than those with excellent credit. This is because lenders want to make sure they’ll get their money back.
That said, some lenders will try to lock you into an interest rate that’s much higher than you should be paying — even with poor credit. Don’t fall for this.
5. There’s a mandatory arbitration clause in the fine print
A mandatory arbitration clause makes it impossible for the customer to take the dealership to court once the contract is signed. If you find out that the lender misrepresented facts or sold you a fraudulent loan you will have no legal recourse.
Instead, you will be forced to take the complaint to an arbitrator, which often means an uneven playing field for the customer. Closed-door meetings can lead to transparency issues and you could get stuck with an unfavourable “take-it-or-leave-it” decision.
How to avoid this: Lenders aren’t always up-front about the fine print. Ask if the contract includes an arbitration clause.
6. The prepayment penalties are through the roof
Paying off your loan early will save you money because it takes away from the interest charged. Lenders make their money on interest payments so it’s in their best interest to keep you locked into your loan for the entire term.
Prepayment penalties aren’t uncommon in the car loan world and are designed to deter you from settling up early. However, some lenders charge above and beyond what’s reasonable — especially if the customer has poor credit and is applying for a subprime or high interest loan.
How to avoid this: Get a second opinion by asking other dealerships and banks what their prepayment penalties are.
A great way to avoid getting stuck with a bad car loan is to shop for a loan before you start shopping for a car. Birchwood Credit Solutions has a quick and easy pre-approval process. All you have to do is fill out our online form and you’ll receive instant confirmation on your car loan pre-approval without having to step foot in a dealership.