Buying a car is an important step toward stability. Paperwork moves quickly after the numbers are presented on a screen, and you ask yourself if you can afford the monthly payment. For many buyers, the financial terms of the loan remain hidden until it is already too late. Investigations into the auto lending market have revealed a troubling pattern where certain lenders and dealerships structure deals that leave consumers owing far more than the vehicle is actually worth.
When the Loan Is Larger Than the Car’s Value
When a working parent who needed transportation for her job and other responsibilities went to buy a used 2014 Dodge Durango, the dealership required $2,000 down and monthly payments of $670 for five and a half years. At first, the numbers seemed manageable, but over time, the full cost became clear. When she checked the vehicle’s market value, she found that the Kelley Blue Book value for her Durango was somewhere between $6,000 and $13,000. This was a huge contrast to the total amount owed on the loan, which, including interest, reached $46,000.
This type of deal is known as an underwater auto loan, meaning the borrower owes much more than the car is worth from the very beginning. When mechanical problems start or financial hardship strikes, the consumer is still responsible for the inflated balance even if the vehicle isn’t usable anymore.
This type of deal is known as an underwater auto loan, meaning the borrower owes much more than the car is worth from the very beginning. When mechanical problems start or financial hardship strikes, the consumer is still responsible for the inflated balance even if the vehicle isn’t usable anymore.
The Role of Subprime Auto Lending
Some predatory lenders specialize in financing buyers who have lower credit scores or limited borrowing options. One large lender, Credit Acceptance Corporation, works with more than 12,000 used car dealers across the country. Financial counselors who assist struggling borrowers report seeing these loans repeatedly on consumer credit reports.
Subprime lending is not automatically unlawful, and there are many drivers who rely on it when traditional lenders decline their applications. Problems start to come up when the loan terms are designed to generate excessive profit.
According to internal documents reviewed in a federal investigation, the company used algorithms that estimated how much revenue could be generated from each loan. Those projections included payments, late fees, repossession charges, and collections. In fact, the company expected nearly 40% of the loans they issued to fail, yet continued issuing them.
Subprime lending is not automatically unlawful, and there are many drivers who rely on it when traditional lenders decline their applications. Problems start to come up when the loan terms are designed to generate excessive profit.
According to internal documents reviewed in a federal investigation, the company used algorithms that estimated how much revenue could be generated from each loan. Those projections included payments, late fees, repossession charges, and collections. In fact, the company expected nearly 40% of the loans they issued to fail, yet continued issuing them.
Inflated Vehicle Prices and Hidden Costs
The pricing structure of these deals usually starts at the dealership. When lenders pay dealers less for the vehicle upfront, dealers, in turn, increase the vehicle price so they can try to make up the difference. Sometimes, vehicles financed through certain lenders get marked up about 40% higher than the typical used car price. That markup allows the lender and dealer to recover costs through the loan while shifting the financial risk onto the buyer. If the borrower falls behind on payments, the lender can repossess the vehicle, sell it again, and potentially repeat the process with another borrower.
Protecting Yourself as a Car Buyer
Auto loans now make up $1.6 trillion in consumer debt in the United States, and the average new car payment has climbed to about $750 per month. So, it’s more important than ever to compare the vehicle’s market value and review the costs of the loan. Independent financing through a credit union or bank may also provide a clearer picture of fair loan terms.
If you believe you were misled about the price of a vehicle, the structure of the loan, or the condition of the car itself, consumer protection laws may apply. Steven Moskos works with South Carolina drivers facing unfair auto sales practices. Contact us so we can review your contract, explain your legal options, and help you determine the next step forward.
If you believe you were misled about the price of a vehicle, the structure of the loan, or the condition of the car itself, consumer protection laws may apply. Steven Moskos works with South Carolina drivers facing unfair auto sales practices. Contact us so we can review your contract, explain your legal options, and help you determine the next step forward.
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