Questionable sales techniques over the years have left some car dealerships with a bit of a tarnished image. While most dealerships are on the up-and-up, an unscrupulous few still engage in what is known as predatory lending, or fraudulent business practices.

These dealers bait you with an offer that sounds good, but once you sign the loan papers, you may discover that you’re on the hook for completely different loan terms, including higher interest and payments. You may be cheated out of promised benefits or car accessories. Even worse, you may have unwittingly signed away your right to sue the dealership for these deceitful practices.

Predatory Lending

Car dealerships aren’t always going to fess up when they act unethically, and it’s not easy to tell when you’re being hoodwinked. When you’re working with a dealership to finance a car loan, be on the lookout for these red flags:

  • Dealer kickbacks: If a dealer seems overly eager for you to use a particular lender, be leery. The lender may “kick back” money to the dealer for the referral and then inflate your interest rate to recoup this expense.
  • Yo-yo sales: In this ploy, the dealer calls after you’ve signed papers and driven your car home. You think everything is set, but the dealer says that you signed a conditional sales agreement. This means the car sale isn’t final. To keep the car, you need to return to the dealership and sign a different, usually costlier, loan agreement.
  • Hidden fees: Read the fine print on your loan carefully for hidden fees that increase the price of the car and your loan. These may include unnecessary insurance policies, rust proofing, theft deterrent packages and window etching that you didn’t request or agree to. 
  • Fluctuating interest rates: A typical predatory lending practice is to offer low initial interest rates that skyrocket after a period of time. Lenders are required to disclose the interest rate, or annual percentage rate (APR), and loan terms. Review the terms carefully and shop around to ensure you get the best deal.

Staying Safe

Fortunately, you can take steps to lower your risk of becoming a victim of unscrupulous lending practices:

  • Work with a reputable lender. Even if you ultimately decide to finance through a dealership, it’s a good idea to get a few quotes for loans from your credit unions or banks. In addition to ensuring that you get a fair deal with your dealer, it also may help you negotiate better loan terms.
  • Research dealerships. Before you enter into a loan agreement with a dealership, check with the local Better Business Bureau to see whether the company receives a lot of complaints or has been named in lawsuits for bad business practices. Take a look at a dealership’s online consumer reviews and ratings.
  • Know the value of your credit score. Before you shop for a car or talk to a lender, find out what your FICO credit score is and then do some online research to learn what rates you might be able to get. You’re less likely to be overcharged for your loan when you're armed with knowledge about how your credit score affects loan rate offerings. 
  • Listen to your gut. The adage holds true: if a deal seems too good to be true, it probably is. Borrowing money is a big decision that requires time and careful consideration. Walk away from a dealership that seems impatient with your questions, focuses on meeting your monthly budget at the expense of extremely long loans or is pressuring you to sign a contract that you don’t understand or has wording that is overly confusing or vague.
  • Read carefully before signing. Make sure the sales and loan information matches what you and the salesperson discussed. 

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