Reghan Winkler: Car finance scams to watch out for

With the possible exception of setting up a new cell phone account, obtaining car financing is one of the most confusing and frustrating transactions most of us do in our lives.

While there are many reputable and caring car dealerships and lenders out there, there are also plenty that have no problem making a quick buck at the expense of the customer. Their tactics, while not necessarily illegal, can be downright shady and end up costing you dearly.

Let’s take a look at some of the most common car financing scams:

Payment Packaging – This is when a dealer adds high-margin products such as extended warranties, padding protection, or credit life insurance to your loan, increasing your monthly payment without you realizing you are being charged.

Most car buyers focus on how much they pay for the car they like and assume that the monthly payment only covers the cost of the vehicle. However, most lenders will allow additional items to be included in the loan. Dealers often take advantage of this. For example, depending on the interest rate, $2,000 for extras could add $30-40 per month to your payment.

Before signing anything, you must receive, in writing, the exact selling price of the car, the total amount financed, the term of the loan and the interest rate. By knowing these numbers, you will know if something has been “wrapped at your payment”.

Financing Yo-Yo – This type of scam normally targets those with less than perfect credit, as they have fewer options.

In this scheme, you apply for finance and leave the dealership with the car, thinking everything is fine. Soon the dealership calls and says the financing didn’t go through. The dealer then urges you to sign a new finance contract, most likely with less favorable terms, or return the car. The dealership will often threaten to charge you wear and tear on the car or even daily lease charges for the time you’ve had it if you choose not to refinance.

We recommend that, if possible, you go to a dealership with financing already secured. You will most likely get a better interest rate from a bank or credit union where you already have an account.

Loan modification – Consumers facing possible repossession due to late payments are targeted in this scam. The borrower responds to an advertisement in which a company agrees to reduce the borrower’s repayments by renegotiating the terms of the loan or by finding new financing. The company charges a fee of $100 to $200 or more for the service and asks the borrower to stop making payments. The problem is that the company does nothing, the borrower’s car is seized and he no longer has the money he paid the scammer.

Avoid anyone claiming to be able to modify your loan. If you are having trouble making your payments, contact your lender directly. Explain your situation. Often, lenders will be willing to defer payments or extend the term of your loan.

Guaranteed approval – Avoid dealerships that offer guaranteed approval. This scam falls under the “If it sounds too good to be true, it probably is” category.

With this promise, many dealerships attract customers who have less than perfect or even just terrible credit to their lot. Chances are these borrowers will be approved, but at eye-popping interest rates and terms, possibly including hefty upfront fees. Some buyers have relatively decent credit and qualify for a moderately higher but affordable rate. Other borrowers, however, agree to the outrageous terms simply because they desperately need a car.

It’s always best to educate yourself and avoid a scam altogether. If you think you’ve been scammed, call the Better Business Bureau at 419-223-7010. We can explain the options that may be available to you.

Reghan Winkler is Executive Director of the Better Business Bureau serving West Central Ohio. The BBB can be found on the Internet at bbb.org/us/oh/lima.

Michael J. Birnbaum