Financing often becomes blind spot for car buyers

NEW YORK – Car buyers are getting smarter about negotiating prices. Securing cheap financing is another matter.

It’s a common blind spot for consumers, who tend to fixate on the sticker price without giving much thought to the back end of the deal. Yet high interest rates and add-on services can sharply push up the cost of owning a car.

The problem is that consumers often get financing at the dealership without exploring their options. Since buyers don’t know the interest rates they’ll be offered until they’re far along in the process of making a purchase, they can end up feeling pressured to accept terms or services they don’t want.

This year, the Federal Trade Commission held a series of roundtable discussions to collect more information on the matter. The agency noted that dealer financing can be a “complicated, opaque process and potentially involve unfair or deceptive practices.”

The FTC is still gathering information and hasn’t decided on what actions, if any, it will take.

In the meantime, it should be noted that the loans provided by auto dealers are not overseen by the newly created Consumer Financial Protection Bureau. The watchdog agency is charged with policing the terms and disclosures associated with financial products like credit cards and mortgages. But auto dealers point out that they don’t underwrite the loans they provide and successfully lobbied to be exempt from its oversight. That’s despite the fact that auto loans are often the biggest debt obligations for households, after mortgages.

So if you want to trade in your car for a new model this fall – or take advantage of an incentive – here’s how you can act as your own watchdog:

Obtaining financing

Car buyers can get their loans from a variety of sources, including credit unions, local banks and online banks. But about 80 percent of borrowers get their loans from dealerships. This may be for the sake of convenience or because they want to take advantage of special financing offers.

Whatever the reason, consumers often don’t realize that the financing at a dealership – just like the car price – is negotiable.

This is because dealers get wholesale interest rates on loans from banks, which they often mark up. That means the rates initially offered aren’t always the lowest available option.

To negotiate the best rate, research the competing offers from outside sources. Keep in mind that the lowest advertised rates are usually only available for those with the top credit scores, so it’s a good idea to get preapproval from a bank so you can negotiate with confidence at the dealership.

As a point of reference, the average rate on a four-year new car loan last week was 5.4 percent, compared with 7.04 percent a year ago, according to Bankrate.com, which publishes financial information. The site also has an online calculator that lets consumers compare auto financing options at http://tinyurl.com/yc3tsxt.

If it turns out that the dealer offers cheaper financing than the offers you find at banks or credit unions, make sure that the interest rate is guaranteed in any contract you sign. In some cases, unscrupulous dealers may include a stipulation that the sale is on condition of the loan being approved, notes Anthony Giorgianni, associate finance editor of Consumer Reports. This could mean that the dealer later tells you that the interest rate you qualified for is actually much higher.

Finally, don’t feel forced to make any decisions on the spot. Dealers are required to spell out their loan terms in disclosure forms that buyers can take home and review, notes Andrew Koblenz, vice president of legal and regulatory affairs, of the National Automobile Dealers Association.

These forms should include key information, such as the interest rate, total financing charges and estimated monthly payments.

Navigating the extras

Once you’ve negotiated a fair car price and loan terms, don’t be derailed by add-on fees and services.

For example, it’s common to be offered an extended warranty beyond the typical 3- to 5-year warranty included with the purchase. Another common extra is credit insurance, which covers monthly payments if you become disabled or pass away.

If you’re convinced you need any such add-ons, make sure you understand the terms of service; the coverage may not be as extensive as you believe.

You also want to understand how much any extra service will cost over the life of the loan. A $15 monthly charge might not seem like a lot, but over four years that adds up to $720.

Before signing any contract, the Federal Trade Commission advises consumers to carefully review it to see that it reflects the terms negotiated with the dealer. Consumers should also check to see that the dealer didn’t add any fees for services they didn’t request, the agency says.

If you’re not sure what a fee is for, don’t be afraid to ask.

Some of the fees added to the contract – such as the title and registration fees – aren’t negotiable. But dealers sometimes add their own fees, such as a “conveyance fee” or “dealer prep fee,” notes Giorgianni of Consumer Reports. It’s always worth asking whether such fees can be reduced or removed.