Basics of Predatory Auto Financing
Borrowers who finance their auto loan through a dealer are vulnerable to a litany of predatory practices. When a dealer arranges financing for a loan, they then assume a dual role: seller of the vehicle and broker of the vehicle financing. Without fairness and transparency about the process of buying and financing a vehicle, consumers are subject to manipulation that can add thousands to the cost of their car and even strip them of their basic rights.
Some common abuses include:
- Dealer reserve kickbacks: Similar to mortgage yield-spread premiums, the consumer qualifies for a buy rate APR from the lender, while the dealer brokering the loan arbitrarily adds points to the APR for additional profit.
- Loan packing: Overpriced and underused add-on products including GAP insurance, vehicle service contracts, credit life and disability insurance, and theft deterrent packages.
- Spot delivery “yo-yo” scams: After the consumer drives the vehicle home, the dealer claims to be unable find a lender to fund the loan, the consumer is required to return the car and renegotiate—often without the option of getting all of their downpayment and their trade-in back.
- Binding mandatory arbitration clauses: Arbitration clauses essentially waive the consumer’s right to sue and appeal in court, leaving them with an arbitration system that is potentially more expensive and biased toward the dealer.
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Use this tool: Auto Dealer Markup Calculator
Read our research: Car Trouble: Predatory Auto Loans Burden North Carolina Consumers