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How To Tell If Your Car Loan is Predatory

Written by
Andrew Tavin, CFEI
Andrew Tavin is a personal finance writer who covered budgeting with expertise in building credit and saving for OppU. His work has been cited by Wikipedia, Crunchbase, and Hacker News, and he is a Certified Financial Education Instructor through the National Financial Educators Council.
Read time: 4 min
Updated on July 27, 2023
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For people who absolutely need a car, falling into the clutches of a predatory auto lender could spell true disaster.

Depending on where you live, a car may be a necessity, but dang it if the things aren't really expensive! Most people can’t just plop down a suitcase full of cash and purchase a car on the spot, even a used car. And that means if you want to get a new car, you’ll probably need a loan.

Unfortunately, many predatory lenders know that cars are vital and that people without great credit scores or financial histories won’t necessarily be able to access a proper loan to get the car they need.

So how can you tell if the car loan you’re considering is predatory? Buckle in and find out!

Double-decker interest rates.

If your credit rating is in the high 700s or beyond, you’re in a good position to get a “good” car loan. You can go to an established bank or credit union, apply for a secured installment loan and get your car purchase funded at an interest rate under 4%.

You’ll be able to pay that loan back in regular, manageable monthly payments, and those payments will be amortizing, so you’ll be paying off some of the principal and some of the interest with each payment. That means, barring disaster, you shouldn’t get stuck in a debt hole you can’t pay off.

If your credit score is not so hot, however, you'll have to get the auto loan equivalent of a bad credit loan, and that means going somewhere other than a bank: either a “Buy Here, Pay Here” dealership or from some other kind of sub-prime lender. And that’s where you need to be very careful because here there be many predatory loans!

“The simplest definition of predatory lending is financing that imposes high interest rates or overly restrictive loan conditions,” explained RJ Mansfield, consumer's rights advocate and author of Debt Assassin: A Black Ops Guide to Cleaning Up Your Credit. “For instance, uncommonly short repayment terms and interest rates over 10% on an auto loan.”

Read that contract very, very carefully.

Predatory lenders thrive on confusing contracts. And let’s face it, “confusing contracts” is a pretty redundant pair of words. Do you actually know what you’re agreeing to when you sign into iTunes? We don’t either.

But if you’re getting a car loan, it’s very important that you read that contract very carefully. Maybe even consider bringing in a friend who has some knowledge on loan contracts, if you have one.

“I advise consumers to take the time to read and understand their obligations under any contract,” Mansfield told us. “If they don't understand something, ask. If they don't get an answer they can live with, walk away.”

What sort of traps might be in that contract? Many predatory lenders will tack on as many “junk fees” as possible. You should be suspicious if you see things like “rust proofing” and “vehicle service contracts.” As Mansfield said, don’t be afraid to ask about anything and everything. If they’re trying to rush you into a deal, that’s a bad sign.

Beware of giant down payments.

Most car purchases require some kind of down payment. This is money you’re expected to pay upfront before receiving the car. If you have good credit and can get a proper car loan, you should probably expect to pay around 10 to 20% of the car’s total price as a down payment.

Of course, you could pay more if you’re able to and want to, and then you won’t have to pay as much interest in the long run.

But if you’re only given the option for a much higher down payment, that should be taken as a red flag. Predatory car lenders want to get as much money upfront as they can because their payment terms are so difficult to manage, they know it probably won’t be long before the borrower can’t make their payments and the car is repossessed.

A huge down payment allows them to get as much money as they can before seizing the car and selling it someone else, starting the process over again.

Make the best judgment you can.

If you have good credit, a lot of money saved up, or a potential co-signer, you’re in a good car buying situation.

If you don’t have any of those things and you need a car… well, unless you can win one for cheap at a police auction, you’re going to have to figure out what negative loan aspects you can manage within your budget.

You should try to avoid as many of these predatory aspects as you can, but you’ll probably have to make some concessions.

“If you have a credit score of under 660 you are either going to be declined, asked to make a substantially higher down-payment than normal or approved at an extremely high interest rate,” acknowledged RJ.

“If you must have a car is that predatory or helpful? The most important factor in an borrowing is, ‘Can I afford the monthly payment?’”

We’ve given you the warning signs to look out for, but at the end of the day, you have to take stock of your needs and make a decision. We get that owning a car might be a complete and total necessity. Hopefully, this advice will help you shop around to find best (or maybe just the least bad) car loan you can.

Article contributors
RJ Mansfield

RJ Mansfield is a consumer's rights advocate and author of Debt Assassin: A Black Ops Guide to Cleaning Up Your Credit

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