By Tom Holgate
Car prices have soared to record highs; gas prices, too. Now a half-percent interest rate hike by the Federal Reserve seems certain to add misery to your auto buying experience.
But peek under the hood, and all is not nearly as bad as it seems. You can navigate these financial speed bumps with less pain by taking a buyer beware approach – and scrutinizing your auto loan as closely as you research your new vehicle.
The reality is that the Fed interest rate hike will tack on perhaps $10 a month to many auto loan payments, but that extra charge pales in comparison to all the other ways dealers steer you toward unnecessarily high financing costs that can add hundreds of dollars to your monthly payments.
Based on my years of experience in the lending business, I estimate one-third of all car loans are overpriced by at least two percentage points.
These woes often begin at the dealer with payment shopping — telling a salesperson what you need for a monthly payment, rather than concentrating on the total cost of the loan to you, including interest. If you say you need a $600 payment, a dealer can deliver that price in a way that best benefits the dealer, even though you may have been eligible for a much better payment of only $450 a month.
You may also encounter aggressive sales tactics to pressure you into dealer financing, which may not be your best deal. If you ask for time to double-check loan rates with your bank, then too many dealers respond by claiming another buyer is waiting, and that any delay will cost you the vehicle you just test-drove.
This kind of pressure is designed to make you overlook high financing costs that will add hundreds or thousands of dollars of extra payments over time.
Then there is the possibility of active deception. Some dealers may reap back-channel incentives and bonuses by steering you to loans that are more lucrative for the lender than you. It’s almost always better to shop around outside the dealer for the cheapest financing package.
Still, there’s no doubt the Fed’s recent action on rates will increase your borrowing costs. The burden will be felt least by people with the highest credit ratings.
At the top (people with credit scores of 700 and above), buyers are still being funded at rates of 3.7% to 5.5%. A year ago, that could have been as low as 2.1%. Yet this still falls within the average U.S. interest rate over the last 50 years.
People with scores from 640-700 are looking at the 6% to 9% percent range. Anyone below that will face 12% to 36% and beyond, depending upon their job history and the thickness of their credit file.
As lenders seek to eliminate higher risks, some may also push for larger down payments. Then come those “market adjustment fees.” In this current hot auto market, where vehicles are in short supply and some dealers are demanding $8,000 over MSRP, banks can balk at financing a vehicle purchased for well above its stated value. That “adjustment” might have to come from your own pocket.
Still, today’s setbacks need not be permanent. Rates fluctuate, meaning loans can be refinanced if they fall back to previous lows. As conditions improve, you can refinance with better terms for your family budget.
Let’s say you may have felt bullied by the dealer. Perhaps you had a recent job change that dinged your credit score or a medical emergency that caused a missed payment, getting you stuck with an abnormally high rate. But if you’re back on track six months later, a new lender could look more favorably on your credit worthiness.
The key is to not assume your current predicament must last forever. Start with deciding what you hope to accomplish. If you received your loan from a dealer, you may be able to save thousands of dollars right now by simply shopping from a wider range of lenders.
If you’re satisfied with your rate, but need a temporary reprieve due to unexpected trouble, you can also refinance in order to skip a payment to buy time to get your finances back in line.
While the economy may be churning against consumers at the moment, it doesn’t mean there isn’t any room to maneuver.
About the Author: Tom Holgate
Tom Holgate is the CEO of iLending. Prior to joining iLending, he served as COO of BFS Capital, where he implemented strategies that resulted in drastic improvement in loan request response time and drove significant revenue growth. Before BFS Capital, Tom worked for such notable companies as Southern Auto Finance Company, American Credit Acceptance, Freedom Financial Group, Wells Fargo Financial, and American General Financial Group.