If you’re looking for a fair auto finance deal, things can sometimes appear hopeless. Not only is it hard enough to find a dealer willing to loan you money at all. But it sometimes seems as though every single deal is a scam, tainted by fine print deceptions and open exploitation.
Admittedly, things are not as bad as they used to be. According to business magazine Forbes, “most car salespeople aren’t predatory sharks”. And even a Consumer Reports executive is quoted as saying: “The days of the plaid-jacketed guy who’s going to rip you off are gone for the most part.”
And yet, dealers are definitely “out to maximize their profit.”
If you’re looking for an auto financing deal, this is the article for you. We take a closer look at how sales people will try to use every trick up their sleeve to sell you a loan that is to their advantage, not yours.
Unfortunately, scams are still no exception
In fact, they appear to be on the rise. As the Financial Times have reported, many car dealers are pressured to sell potential buyers into expensive finance plans. Some of these are simply unaffordable according to the UK financial regulator.
This is all the more worrying as car finance is a growth sector. Over the past decade, the number of these deals has all but doubled. Today, almost two and a half million auto financing agreements are struck per year.
Combine this with the fact that credit card borrowing is also on the up, and you’ve got a recipe for a disaster in the making.
It’s not just dealers
If you’re afraid that you, too, might become the victim of scrupelous dealers, take heed, however. Buying a car from a private seller is equally dangerous and actually offers a lot less consumer protection.
Inan in-depth feature, express.co.uk hinted at some of the most typical ways in which private seller can try to scam you:
- They can sell you a car that is still not fully paid off. Even though they may promise to keep up the payments, it is by no means certain that they will – which can spell trouble for you as the new owner.
- They can sell you a car that isn’t even legally theirs. Either because they haven’t paid it off in full yet or because they are only renting it.
- They can show you the car and, if you’re interested, ask for a deposit. If things go wrong, that’s the last you’ll hear from them and your money.
As with dealers, most private sellers are perfectly honest. Just don’t fool yourself into believing you can stay clear of any problems simply by avoiding professional salespeople.
Time to look at some of the most typical auto financing scams …
Let’s begin, then, with an overview of some of the most common auto financing scams. Some of these are simply consist of a dealer giving you a bad price. Others are more problematic and can cost you thousands of Pounds over time.
Afterwards, we’ll explain how you can prepare and plan ahead to avoid falling prey to one of these black sheep. And, of course, we’ll show you how motor finance at Concept Car Credit is different from the unfair deals described below.
If you want to dive even deeper into the topic, Gregg from Realcartopics has collected what is probably the most exhaustive auto finance scam list of all times.
Auto Financing Scam #1: Packed Payments
Packed Payments are, strictly speaking, not a scam. What this amounts to is, simply, that a dealer sells you more than you came for. This could just be additional warranties and insurances that you don’t really need. But even if these don’t break the bank on a monthly basis, they can add up to a serious amount over the years.
You can avoid packed payments by making a list of all the things you want included in a finance deal. If the dealer offers you anything else, make sure at least never to decide on the spot. Sleep on it – and then make an informed choice.
Auto Financing Scam #2: Spot Delivery Scam
Compared to packed payments, a spot delivery scam is far more serious. Imagine this: You’ve signed the papers and already spent a few days with your new car. Suddenly, the dealer calls you up and tells you the financing has fallen through and you need to return the vehicle to the showroom. There, a new deal is negotiated – obviously, with far less advantageous conditions.
Spot Delivery Scams are usually made possible by some form of fine print clauses. Nonetheless, they are borderline criminal. Of course, you should read through the contract in detail. But if, for some reason, you nonetheless become a victim of this scam, at least make sure never to sign a new contract with this dealer ever again.
Bad Credit Score Scam / Finance Markup / Bad Selection
These three ‘scams’ are better referred to as unfair business practises. They are made possible by a financial climate that disproportionally puts anyone with a bad credit rating at a disadvantage.
This is how these ‘scams’ work in detail:
Bad Credit Score Scam
It is part of the routine for every dealer to request your credit rating. In fact, this number helps a salesperson to arrive at a sensible interest rate and to assess the risk for the transaction.
However, the dealer is not required to inform you about what makes for a good and what makes for a bad credit rating. This means he can claim that your credit rating isn’t good enough for a regular auto finance deal and sell you a higher interest loan.
Because most people’s credit ratings in the UK have been tarnished by the various financial crises over the last few years, this issue has become a lot more common: Most people simply expect their credit rating to be a lot worse than it actually is.
Here, too, the dealer makes use of an information deficit on your part. To secure financing for you, he will shop around with different potential lenders. However, he won’t just give the percentage rate that the lender offers. Instead, he will add a service charge to this – his ‘cut’ of the deal as it were.
This can make a reasonably good financing deal a lot less attractive. Imagine the following: a bank offers the dealer a loan at a rate of 4%. Then, the dealer adds another 3% on top of that. This means you’ll end up with an interest rate of 7%.
The dealer may also prioritise his own benefit in the search for a loan. Realcartips provides for a suitable example of this practise: http://www.realcartips.com/carloans/020-how-dealers-make-money-on-car-loans.shtml
“Your application may be approved by several lenders but each will have a different interest rate. Let’s say the lowest rate you qualify for is 5%, but the lender requires the dealer to pay a large acquisition fee, or maybe they have a finance markup limit of only 1%. Let’s now assume there’s another lender with a higher interest rate – say 6%. But this lender allows a 2% markup along with a lower acquisition fee for the dealer. Which one do you think the dealer is going to present to you?”
0% Interest Rate Scams
There is no free lunch. Certainly not in auto financing. So if you see an ad for a 0% interest rate deal, don’t expect any miracles. Although the offer may not be an outright scam, there’s always a caveat, as autocheatsheet point out.
For one, the 0% rate will typically only apply for a limited span of time. This could translate to a 0% rate for the first 12months and a higher rate, say 6%, for the remainder of the loan. Depending on the details of the contract, this may still be a good deal, but you will need to do the math.
In a different version, this kind of motor financing will only be available for very short loans. In practise, this means that monthly installments will be very high. Obviously, not many buyers will be able to actually pay these higher monthly rates.
In practise, therefore, 0% interest rate deals are usually just a tool to lure you into the showroom. Don’t expect too much from them.
The same goes for the next type of scam:
Bait and Switch
Thanks to the Internet, fresh new deals are advertised on a daily basis. In our digital showroom, too, you will find great cars at excellent prices. And whenever we get a new one, we almost instantly include it on our homepage.
However, with less decent dealers, this can be used as an instrument to get you to visit the dealership. For example, you visit the site and see a beautiful Volkswagen Up! You rush over to the showroom only to be told that it is no longer available. But would you like to see a few of the other models on offer?
Unless any of these deals comes close to what the original ad promised, it’s best to accept defeat and simply return home
Business Insider have pointed out another potential car deal scam, which involves a number called the ‘money factor’. What sounds like the name of a great new game show is, in fact, simply a differrent way to express the interest rate.
The Money Factor is your interest rate as a fraction. So, an interest rate of 6% equals a money factor of 0.0025.
Why someone would use the money factor instead of the interest rates is beyond us. The only reason we can come up with is that it confuses you into believing you’ve made a better deal than you actually have. As Business Insider write:
“An unscrupulous dealer may tell you the interest rate is 2.5 percent, hoping you get confused between 2.5 percent and .0025. A true 2.5 percent interest rate would equal a money factor of .00104 – but in the agreement the dealer will put down .0025.”
How to avoid auto financing scams
Thankfully, you can take a few simple steps to improve your situation. We’ll probably dedicate an entire blog entry to this in the future at some point. But for the moment, here are a few simple tips:
- Make sure to look at just two things to establish whether a deal is good for you. Firstly, the APR. This tells you how much interest you will have to pay – ie the cost of the loan.
- Secondly, the monthly rate. The monthly rate determines whether you can afford the loan. Anything else, including the money factor, should not play a part in your considerations, as it will only confuse you.
- Try to find the sweet spot between the overall cost benefits of a short term loan and the lower monthly rate of a long term one. Don’t let the dealer pressure you into a longer term loan which may get you into trouble.
- Know your credit rating. This is perhaps the most important piece of advice we can give you. After all, this knowledge is vital in determining whether the deal on offer is a scam or a fair offer.
Car Finance at Concept Car Credit
We take great pride in working with customers who may not be treated fairly at other places. Not only do we offer a great selection of models from the best brands in the business. We also make the entire financing process extremely transparent. This means you’ll stay informed every step of the way.
Things are really simple:
- Take a look in our digital showroom.
- Send us an email asking for financing and possibly also mentioning which car you’re interested in.
- We’ll check your proposal and you’ll get a response within hours.
- Once you’ve laid the foundation, you can drop by our showroom in person.
At CCC, a car finance deposit is not always required.
We know things can sometimes seem hopeless – that’s exactly why we focus on building trust and giving you back some of that lost hope.