6 Key Signs You’re Being Offered a Risky Auto Loan and How To Avoid It

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Before tariffs potentially affect the prices of new cars at dealerships, now might be a great time to purchase a car. According to Kelley Blue Book, March saw no rise in the price of new cars when compared with the previous month and year. Prices for used cars decreased from the previous year but increased little from the previous month.

Regardless of price dips in the average price of new and used cars, the overall cost of owning a car is more expensive than ever. Interest rates alone have added hundreds of dollars to a driver’s costs every month.

But drivers can’t be choosers. Sometimes owning a vehicle is an absolute necessity, and depending on your credit score, paying off an auto loan can be a financial struggle. Not helping matters is the vehicle purchase agreement, which is designed to confuse buyers on selling price, fees, taxes, trade-ins and more.

Before you sign on the dotted line, there are things you should look out for that will signal a risky deal, and there are things you need to do to prepare for when you’re offered one. First and foremost, do your research and be firm with what you’re willing to spend and the term you are comfortable with.

This is a rare opportunity to show that you know as much as your salesperson and are willing to go the distance to secure an auto deal that benefits you, not the dealership. Here are six signs you’re being offered a risky auto loan — and how to avoid one.

Also see the pros and cons of financing a car through a dealership.

A High Interest Rate

No one is naïve enough to think they will get a great interest rate loan when they head out to buy a car. But there’s the going rate, and then there are exorbitant subprime loans that can financially ruin a buyer permanently.  

According to myAutoloan, if your credit rating is less than 620, you will likely be paying a higher rate than those with stronger credit. However, sellers are trying to make money and lock you into an interest rate that will benefit them. Even if you have bad credit, don’t get duped into a bad deal. Know your credit score and what you can afford, and don’t budge an inch.

A Different Sales Price

Nothing says “risky” more than an actual price change on the car you’ve agreed to buy from a dealer. Salespeople are trying to make a profit from you, so beware of those who speak of expired deals, a mistake in the price quote or administrative fees.

If you’re faced with such a situation, simply state that agreeing to buy the car was based on the initial price. If there’s pushback, start walking out.   

Prepayment Penalties

It’s every car buyer’s goal to pay off their auto loan early and every lender’s goal to have you forking over money to them in payments, fees and interest for as long as possible.

According to Source Capital, some states — Alaska, Iowa, Maryland, Virginia and several others — prohibit prepayment penalties or have limitations on their use. Everything is negotiable when it comes to buying a car, so check your contract thoroughly before you sign, and if you see a prepayment penalty, arrange to have it removed.   

Conditional Sales Agreement

Although a conditional sales contract is signed under the pretense that it will protect both the car buyer and the dealership, the dealership always has the upper hand.

“Also known as yo-yo sales, conditional car financing allows the dealership to cancel the sale if the loan terms don’t meet their requirements,” per myAutoloan. “This can even happen when you have driven the car home.”

In your contract, anything “conditional” should raise suspicion. Ask your lender for clarification after carefully reading your contract to see if you’re going into a conditional sales agreement. If anything seems fishy or downright unethical, take action by seeking a third-party opinion.

Mandatory Arbitration Clause

Another thing you need to look for in your loan contract is a mandatory binding arbitration that stipulates that “the dealer or lender can seek to resolve any disputes about the contract with an arbitrator, who is usually chosen by the dealer or lender,” according to the Consumer Financial Protection Bureau.

Not having recourse through the courts might make you uncomfortable, and you would be justified to negotiate this clause from your contract if possible.

Additional ‘Hidden’ Fees   

As myAutoloan noted, you should expect to pay sales tax and documentation fees when you buy a car. You shouldn’t have to shell out for other fees, like extended warranties, fabric protection, VIN etching and other extras.

Be on the lookout for these load packing surcharges, as they can be sneaky and predatory.

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