Auto Loan Tips

How To Avoid Auto Financing Traps?

Eloan offers some great tips to avoid paying more than you need for auto financing.

Dealer rate markups

When shopping for a car, most people decide to obtain a loan through the car dealership itself. It's certainly the most convenient option, and dealerships promise you the best available rate.

However, don't assume they are providing all the information you need to make an informed decision. Dealers simply offer to "arrange" financing for you -- they are not actually putting up the money themselves.

Once they obtain a loan commitment from the automaker's financing company, many dealerships mark up the loan by adding two to three percentage points to your rate.

For instance, let's say you qualify for a loan at a five-percent interest rate. The dealer may tell you that you actually qualified for an eight-percent rate.

You pay the eight percent and the dealer pockets the extra three percentage points in the form of a lump-sum payment from the finance company.

This is an accepted practice among dealers -- and it's legal. In fact, many "finance guys" at auto dealerships get paid commissions that are based on the amount of the interest-rate markups they can add to their customers?loans.

The Consumer Federation of America released a report in January 2004 revealing that this practice costs consumers up to $1 billion annually, adding at least $1,000 to the cost of an individual's auto loan.