How to Protect Yourself: Car Financing

How to Protect Yourself: Car Financing
Source: The Florida Attorney General's Office

Many consumers prefer to finance their car purchase rather than paying cash. However, don't be misled by an auto dealer's computer-generated cost comparisons or other claims that you will save money by financing. Even if you were to invest each month's car payment in a certificate of deposit or other interest paying investment, you would not come out ahead, unless the interest rate of the investment exceeded the loan interest rate. When you pay cash, you have no monthly payments to make.

Under some circumstances, if you finance a car that develops serious problems, you may have recourse against the finance company as well as against the dealer or manufacturer.

Interest rates
The Federal Truth-in-Lending Law requires lenders to disclose the annual percentage rate (APR), which is the cost of your credit as a yearly rate. These rates may vary significantly. By comparing the APRs offered by various lenders, you can begin to compare deals. Check with your bank, credit union or even your insurance company or motor club and compare those rates to the APR offered by the dealer. Be aware that car sales agents may earn additional commissions if they can convince you to finance your car through their dealership. Besides comparing the APR in financing offers, you should determine the amount of any down payment or trade-in allowance, the number and amount of monthly payments, and the total of those payments.

Specially advertised low interest rates
Sometimes dealers seek to entice customers by offering very low financing rates, or even zero percent interest for a specified time period.

Beware of the following:
  • You may be required to make a large down payment to qualify;
  • You may be required to pay the sticker price, which is the manufacturer’s suggested retail price (MSRP) for your new car, rather than be able to negotiate a lower price;
  • You may be required to repay the loan in a shorter period of time, such as 24 months;
  • You may be required to purchase additional options such as undercoating, or you may be asked to sign over a manufacturer's rebate to the dealer; and
  • The zero percent offer may come with a very high APR which kicks in after the grace period, and you may forfeit the zero percent interest incentive and be required to pay a back-interest penalty if you fail to make your scheduled payments when due.