Auto Refinance: Who Protects the Consumer?

Auto financing isn't well understood by many car buyers, and dealerships have been taking advantage of this fact for a long time. Many who have paid too much for loans could benefit from an auto refinance.

Among the "dirty tricks" borrowers need to avoid are prepayment penalties. A prepayment penalty requires consumers to pay a large fee if they retire their loans early, and lenders can also add provisions that prohibit consumers from collecting any refunds for overpayment. Other abuses include dealer-installed "interrupt devices" which disable the engine if the borrower's payment is even a few days late. There are protections for car buyers, however, if they choose to use them.

Truth in Lending Act to the Rescue

LendingTree consistently urges loan shoppers to examine all the small print on new or refinance auto loans, especially when it comes to provisions for a prepayment penalty. The Truth in Lending Act (TILA), passed by Congress in 1968, was created to protect Americans from unfair credit billing practices. Under the act, lenders are required to inform auto refinance consumers in writing of the terms of the loan, the annual percentage rate (APR), all finance charges, the monthly payment amount and due dates, the full amount to be financed, the length of the agreement, and any prepayment and late payment charges.

Protection in Credit Reporting

Enacted in 1970, The Fair Credit Reporting Act (FCRA) allows consumers access to the credit reports compiled by Experian, TransUnion, and Equifax credit reporting agencies. Of importance to anyone seeking an auto refinance loan, the FCRA grants individuals the opportunity to report errors on the credit reports and request corrections. Under the provisions of the law, any lender rejecting a loan application for an auto refinance based on credit scores is required to provide the consumer a copy of the report from which they made their determination. It's the borrower's responsibility to scrutinize the report, obtain scores from the credit agencies, and request corrections if any erroneous data contributes to a poor score. (FYI: LendingTree offers a 100 percent free credit score.)

Buyer Beware

Government regulations might have taken some of the worst practices off the table, but consumers need to protect themselves. One practice that's popular among dealerships is promising a certain interest rate, letting the buyer take the car, then calling back a few days later with the news that the only financing they could secure has a higher rate. Many people accept this bait-and-switch because by then they have shown the car off to their friends or can't be inconvenienced by having to return the vehicle.

Closely-related to this trick is telling the buyers that their credit isn't up to snuff and then marking up the interest rate on the loan.

3 Steps for Self-protection

There is no reason for car buyers to overpay for their car loans. Knowledge is power, and there is a wealth of information available to anyone willing to take five minutes to find it. Those who already have bad loans from dealers should look into refinancing.

  1. Buyers should check their credit report before shopping for vehicles or refinancing. This allows them to clear up any errors and know their credit scores, so they can't be bullied into accepting bad loans.
  2. The Center for Responsible Lending has published a sample TILA document to show consumers where the oft sneaky prepayment penalty and refund waiver sections are on a Truth in Lending Disclosure Form. Typically, the form has a "notice to borrowers" section at the top, followed by a declaration of the APR by the lender and monthly principal and interest, and then a version of the checkboxes indicating if the loan comes with a prepayment penalty and/or refund denial. Borrowers should avoid refinance loans or auto loans with these provisions.
  3. Consumers should compare auto loan interest rates from non-dealer sources before they buy, and they should arrange their financing in advance. This lets them see competitive rates and terms and allows them to focus the negotiations on the vehicle price without being diverted into discussions about monthly payments. Comparing loans is easy to do at LendingTree Autos.

The Center for American Progress and other advocates have called for additional consumer safeguards. More help may be on the way, but the first line of defense from bad financing deals may be an Internet connection and a good pair of reading glasses.

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