6 Signs You Have a Bad Car Loan

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Find out if you have a bad car loan and what you can do to get out of it.

In a perfect world, all car loan lenders would have your best interests in mind. Unfortunately, this is not the case. Some lenders will try to mislead you and engage in unfair lending practices so they can make as much money as possible.

Others will give you a bad deal because your credit isn’t the best or they feel like they can get away with it.  If you know what a bad car loan entails, you’ll be able to avoid lenders that cost you a great deal of time, money, and headaches.

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Here are six tell tale signs you have a bad car loan.

1. You Notice Extra Fees You Didn’t Agree To

Predatory lenders have a reputation for loan packing. This means they add a variety of additional fees and surcharges onto the sale of your vehicle without your consent. It’s important to note that some fees are legitimate and non-negotiable when you buy a car, such as; sales tax, documentation fees, title fees, and registration fees.

Other fees might be unnecessary add-ons and may be added to your loan just so the lender can maximize the amount of money they earn off you. Several examples of these fees include: extended warranties, fabric protection, rust proofing, security systems, paint sealant, and pinstriping.

Upgrades you never agreed to like alloy wheels and leather seats may be included in your contract, as well. If your contract contains any of these bogus fees, you could have a predatory car loan.

2. The Price Isn’t What You Were Told It Would Be

Let’s say you agreed to a $25,000 SUV. When it comes time to finance your purchase, you might assume that’s the price you’ll end up with. After all, it’s the one the salesperson promised you.

The reality is that some lenders will state they’re unable to offer you the loan amount you originally agreed to because of a deal that expired or a mistake the salesperson made. Their goal will be to convince you to sign a car loan that will enable them to make a higher profit off you. If you start the financing process and the price of the car is different than what you thought it would be, find a different lender.

3. Your Contract Is a Conditional Sales Agreement

In a traditional sales agreement, it’s the dealer’s job to approve you for financing. They sell their car to you with the assumption that they’ll finance it.  Also known as conditional financing, a conditional sales agreement means you’re responsible for securing your own financing.

The caveat with conditional financing, however, is that the dealer will have the final say and decide whether or not your loan works for them. They may cancel the sale, even after you’ve finalized the deal.

Often, the dealer will try to convince you to refinance your car at a higher interest rate or return it, while they keep your down payment. Read your contract carefully to determine  if you’re entering a conditional sales agreement, and ask your lender for clarity.

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4. There’s a Mandatory Arbitration Clause in the Fine Print

A mandatory arbitration clause takes away your right to sue the dealer and appeal in court. If you realize the dealer acted illegally, legal recourse won’t be an option with this clause in your contract.

You’ll be forced to go to an arbitrator, which may result in transparency problems and increase your risk of an unfavorable outcome. As a customer, you should have every right to resolve disputes about your loan contract in the courtroom if you wish, so mandatory arbitration clauses are no good.

5. There Are Exorbitant Prepayment Penalties

By paying off your car loan early, you can save thousands of dollars in interest. Since lenders make a lot of their money on interest payments, they want to keep you locked in your auto loan for the entire loan term. Some lenders may charge prepayment penalties to discourage borrowers from paying off  their loans early.

While prepayment penalties are legal and do exist, some lenders charge extremely high prepayment penalties that are beyond what’s reasonable. If you have plans to pay off your loan early and your lender’s prepayment penalties seem very high, you may be better off with a different loan.

6. Your Loan Is From a Buy Here-Pay Here Dealer

Buy-here, pay-here car dealers target borrowers who aren’t eligible for traditional loans. In most cases, they don’t require a credit check and instead verify through your income. Just like other financing options for individuals with no credit or bad credit, car loans from buy-here, pay-here car dealerships usually come with excessively high interest rates (often around 20%) and unfavorable terms.

If you accept a loan offer from one of these dealers, you may be on the hook for a high down payment and have to make payment in person. You might also be obligated to install a vehicle tracking device in your car so they can keep tabs on its location. The chances of landing a good car loan from a buy-here, pay-here dealer is low.

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How Can I Get Out of a Bad Car Loan?

If you’re stuck with a bad car loan, don’t worry. There are ways to get out of it and improve your situation. The ideal solution will depend on your goals. Maybe you’d like to secure a lower interest rate or lower your monthly payments. Or perhaps you want to avoid car payments altogether. Once you know what you hope to accomplish, consider these options.

Refinance 

Refinancing may be a good option if you’d like to land a new loan with a lower interest rate. If your credit score has increased or rates have gone down since you applied for your car loan, there’s a good chance you’ll be able to refinance to a better rate and reduce your monthly payment. You can also refinance to a longer loan term so that your payments are more affordable. Keep in mind that if you go this route, you’ll pay more in interest over the life of your loan. If you do decide to refinance, shop around to compare rates and fees so you can secure the best deal for your unique needs.

Renegotiate

If you’re dealing with a financial hurdle and have missed some payments, talk to your current lender. This is a particularly good option if your lender is reputable but you’re simply struggling financially or displeased with your terms. They may allow you to defer a few payments so you can catch up or extend the terms of your loan and lower your payments. While not all lenders are willing to negotiate, many are so it’s certainly worth a shot.

Pay it off

While paying off your car loan is easier said than done, it can allow you to get out of it without having to refinance or negotiate. If you have extra cash at your disposal and won’t have to put your emergency fund or other financial goals on the line, paying off your loan may make your life easier. If you don’t have the cash on hand to reach your personal finance goals, you might consider starting a side hustle, picking up a part time job, or working extra hours to pay off your debt faster with increased cash flow.

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Trade in your car

If you’re in the market for a new car, you can trade in your used vehicle and use the cash for a down payment on a new one. This can allow you to get out of your current car loan. Fortunately, dealers are almost always willing to pay you for your used car so you shouldn’t have much trouble trading it in. Stay away from this option if it will tempt you to trade up to a more expensive car that takes a toll on your budget. But if you do trade in your car, do some research beforehand so you know its fair market value.

Surrender your car

You can give up or surrender your car if you’re struggling financially and can’t make your payments. Only consider this if you’ve exhausted all other options as it will damage your credit, especially if you owe more on the car than it’s worth and are unable to pay the excess amount. Also, turning in your car voluntarily will be considered a repossession, which will hurt your credit even more and make it difficult to get approved for affordable car loans in the future.

File for bankruptcy

Bankruptcy, which is a legal process that can provide you with debt relief, should be a last resort. If you’re overwhelmed with debt, it may allow you to keep your car so you can continue to go to work and live your life. While filing for bankruptcy won’t get you out of a car loan, it may provide some relief from aggressive debt collectors and make it easier for you to make your car payments.

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A Bad Car Loan is Not Set In Stone

Fortunately, you don’t have to live with a bad car loan forever. If you realize that you have one, consider your options for getting out of it. Even if you bought your car weeks, months, or even years ago, you’re not necessarily locked in.

Once you find the ideal solution for your situation, be extra cautious the next time you take out an auto loan. Look for the signs above, and don’t sign on the dotted line until you’re confident the loan is fair and right for you.

About The Author


Anna Baluch

Anna has written for Credit Karma, LendingTree, Experian, Freedom Debt Relief, among many other publications. She is passionate about helping people from all walks of life make good financial decisions. Anna lives in a suburb of sunny Cleveland, OH and enjoys working out, trying new restaurants, and volunteering.


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