America’s auto loans are coming to a breaking point. Most people need a car to get to work, and not everyone can pay cash. According to Federal Reserve data, some 108 million financing packages already exist, Bloomberg reported, which is equal to half the number of licensed drivers in the U.S.
However, vehicle repossessions are nearing an all-time high. KAR Auctions told Bloomberg that auto lenders might repossess 2 million cars in 2017. That number is twice the worst figures from the Great Recession. Even though car loans won’t spark another financial crisis, consumers shouldn’t be gambling money on vehicles they can’t afford.
Not counting regulators asleep at the wheel, it takes two parties to make a bad auto loan: one lender and one buyer. To avoid losing your next car to the repo man, look out for red flags at the dealership before you buy. Here are eight auto loan traps to avoid.
1. Getting locked into a bad rate
Do you know your credit score? If not, take the time to get it from one of the free online services before you go shopping for a car. This number directly affects what type of rate you will get in an auto loan — the higher your score, the lower the rate. Over the course of a five-year loan, buyers with a 620 credit score could pay over $4,300 more than buyers with a score of 720 or higher (based on a $25,000 loan). When you don’t know your score, a salesman could end up sticking you with a worse rate than you deserved.
Next: Lower payments aren’t always a good thing.
2. Longer loans equals more interest
If a salesman asks you, “What it will take to get you into this car?” beware of an offer with a lower payment coming next. Certainly, no one wants to pay more than you have to every month on a vehicle, but low payments only tack on more interest in the end. As the years tick by, you will find yourself a slave to your auto loan as the vehicle itself depreciates. (Some cars lose half their value in just three years.) If you’re struggling to pay off your loan five years later, you’ve made a huge mistake.
Next: Your dream car might not be in the budget.
3. The dream car out of your price range
Car salesmen work on commission, so they will look to sell you the most expensive car they can. Keep that in mind as you calculate your monthly payments, even when you get approval for a car you can barely afford. If millions of cars will be seized by banks this year, it means too many people accepted a loan they cannot afford. When a monthly payment is on the borderline of your finances — or your job is not entirely secure — go for a cheaper car or something on the used market.
Next: The yo-yo financing trap
4. Auto loans that change after the fact
One of the biggest auto loan traps is called yo-yo financing. In this dealer scam, you drive off the lot in your new car without finalizing the terms of a loan. After a week or two, you hear from the salesman who says your loan application was rejected by the bank due to a credit problem or other issue. At this point, you have to go back in and renegotiate the terms, and the new rate will be higher than the one you thought you had. You can avoid this trap by refusing to accept the car before you have the loan paperwork. Tell them you’ll come back when it’s ready, and walk away.
Next: Getting insurance you don’t need with a loan
5. The loan comes with insurance you don’t need
In July 2017, Wells Fargo admitted to adding extra insurance onto 490,000 car loans. Financing terms said customers would need to take out an insurance policy. And if there was no evidence of one, then the bank would provide one at an additional expense. However, hundreds of thousands of customers had insurance but were charged anyway. In some cases, vehicle owners woke up one day to find their cars repossessed even though they made every payment on time. If you see a clause in a financing contract about alternate insurance, start asking questions.
Next: Why use automaker financing at all?
6. See every financing option
A car salesman will make a higher commission if you take out a loan at the dealership to pay for the vehicle. However, you never have to accept the automaker’s terms if you find a better package elsewhere. Before you go into the dealership, check on available car loans through your bank or an online lender. You can pre-qualify or get approved for a certain amount before you begin shopping. Once you find the car you like, you have no obligation to take the salesman’s offer if you already have a better financing package. Any salesman who says you have to take their loan is lying.
Next: See every part of the payment in black and white.
7. Hidden fees inside a monthly payment
Consumer Reports came up with nine dealership fees you shouldn’t pay that often end up on a new car invoice. Overpriced fabric protection, VIN etching, and “pinstriping” are a few things on this list. While that’s bad enough, these charges become more offensive when dealers roll them into your monthly payment. Because you never should have been charged for unnecessary things in the first place, you definitely don’t want interest charges tacked onto them for the life of the loan. Make sure every aspect of the payment — from principal to interest and fees — appear in black and white on your statement.
Next: When a co-signer becomes the owner
8. The co-signer trap
If your credit is less than stellar, you might need a co-signer to get the loan for your new car. This practice is normal enough, but make sure you and the person helping you read all the fine print. In the past, co-signers have ended up learning they were the owners of the car (rather than the person they thought they were helping). Not only does this mean you don’t own the car, it also means you risk damaging a personal relationship because of some shady car dealer. Be crystal clear on the terms of any co-signer contract.