Auto loans are a part of life for the 80% of Americans who finance their automobile purchases. Buying and borrowing smart are key to your financial prosperity.
Help With Auto Loans
If you owe more on your car than you could sell it for, your car is upside-down, which is a fairly common situation. Understanding car depreciation, interest and fee costs are important when you purchase a vehicle.
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Is Your Car in Danger of Being Repossessed?
Yes, it is. Depending on the terms of your loan agreement, if you miss a payment, your car is in danger of being repossessed without any notice in some states.
Repossession is the result of defaulting on your auto loan. The number of missed payments that result in default depends on your loan contract, but it could be as few as one missed payment.
Lenders stipulate in the loan contract that car insurance is required. In some states, failing to get car insurance counts as defaulting on your loan and can lead to the repossession of your car.
Check with your lender and review the terms of your loan. It’s best to contact your lender before you miss a payment. The lender might be a bank, might be a “Buy Here Pay Here Dealership,” but they don’t want to repossess your car because they will lose money. They just want the money they’re owed so they should be willing to work with you
Most states don’t require any notice before a lender can repossess your car. One day you could walk out to your driveway, and your car is gone. It isn’t until after the repossession occurs, usually within five days, that they are required to inform you. They should provide information about the remaining balance of the loan and a deadline to redeem the loan. Your options are to pay off the loan in full or you may be able to work out a payment plan and reinstate your loan to get your car back.
Don’t waste time. The reason a bank or repo agency takes your car is to sell it at auction and recoup some of the money owed to them. They are required to notify you about any intention to sell your car, which may be included in the first notice of repossession. They’ll provide a time, date and location of the sale or auction.
The notice will explain how they will apply the money from the sale to the debt you owe, and inform you that you are liable for any outstanding debt after the sale. That is called a deficiency balance, and it includes any cost and fees associated with the repossession and sale of your car.
How to Pay the Deficiency on a Repossessed Vehicle?
The deficiency balance can be paid in full, or in a long-term payment plan or negotiated in a settlement.
The deficiency balance is the difference between how much the lender was still owed and how much the lender sold the car plus and fees incurred during the repossession. It can cost the lender anywhere from $200-$400 to repo your car, and that cost is passed on to you.
For example, let’s say you took out a $10,000 auto loan. You paid $2,000 on your car loan and then went into default, so the lender is owed $8,000.
The lender pays $300 to repossess the car, $500 in repairs and a $200 fee in order to sell the car at auction. Now the lender is owed $9,000.
They sell the car for $6,000, and you are liable for the remaining $3,000, the deficiency balance.
Can an Auto Lender Garnish My Wages for Missed Payments?
Yes, your wages are at risk of being garnished because you’re still on the hook for the deficiency balance. If you don’t pay that off, the lender can sue you in court themselves or sell your debt to a collection agency, who can also sue you in court. Either way, they can receive a judgement against you that allows them to garnish your wages to collect the deficiency balance.
That information goes on your credit report for seven years and is a major negative against your credit score.
Wage garnishment is illegal in four states (Texas, Pennsylvania, North Carolina and South Carolina) and has restrictions in others. But, the lender can pursue their money in other ways like taking money straight from your bank account or seizing and selling valuable property.
If you can’t make car payments or negotiate a better loan agreement, the most efficient exit might be to notify the lender, return the car (thus saving money on a repo) and ask them to accept whatever payment schedule you can afford.
If you’re looking for a new or used car and you’re going to use dealer-arranged financing, consumer groups have a message for you: Watch out. You may pay more for that loan than necessary, especially if you’re black or Hispanic.
This week, the Consumer Federation of America (CFA) released a report titled, “The Hidden Markup of Auto Loans.” In the report, CFA attacks a common practice in the auto-lending field in which dealers mark up interest rates on car loans.
These finance charges typically add at least $1,000 to the cost of an auto loan, and are costing consumers as much as $1 billion annually, said Stephen Brobeck, executive director of CFA, a nonprofit association of 300 consumer groups.
The higher-priced loans affect about one in four consumers who get their car financing through dealers, the report concludes.
In addition, the report says, the subjective nature of dealer markups has led to discrimination against African-Americans and Hispanics.
“Finance markup charges have amounted to a costly skin tax, burdening African-Americans with even higher costs on one of the largest purchases they are likely to make in their lifetimes,” Jesse Jackson, president and founder of the Rainbow/PUSH Coalition, said in a release.
What’s also aggravating about this practice is that blacks and Latinos with good credit records are paying more for dealer-arranged loans, said Brenda Y. Muniz, policy analyst for banking and financial services for the National Council of La Raza.
“I don’t think people know that this practice exists,” Muniz said. “And those who know it exists – regulators and legislators – should be doing something to curb this practice.”
You’re darn right they should. Auto loan markups are a devious way for car dealers to earn additional profit. And I make no apologies for using the word “devious,” because for the most part the markups are kept secret. Here’s how this practice plays out:
A consumer decides to let the dealership handle the financing on a car. The dealer contacts a lender. The lender, taking into account the potential buyer’s credit history and other information, such as the type of vehicle being purchased and length of the loan, approves the loan application for a certain annual percentage rate known as the “buy rate.”
Unbeknownst to many consumers, the dealership may decide to increase the buy rate for no other reason than it can. It’s a legal way to pick people’s pockets. So, for example, a person’s buy rate might be five percent, but the dealer might tell a consumer she’s been approved for a 10 percent loan.
Let me break it down to you this way. Suppose the car you want to buy costs $20,000. Interest charges on a 48-month loan at five percent would come to about $2,100. But kick the rate up to 10 percent and the interest charges jump to $4,300.
Recently, some auto lenders such as Ford Motor Credit Co. and General Motors Acceptance Corp. have capped the markups that dealers can charge to three percent.
I still can’t see how that’s reasonable. The auto loans are already priced to include a profit for the lender, so why should car purchasers pay one penny more?
Well, the industry argues, auto dealers should be paid for helping arrange financing for their customers.
“The rate provided by finance companies to dealers is a wholesale rate,” the National Automobile Dealers Association (NADA) said in a statement. “So, it is not accurate to say that car buyers pay extra for dealer-assisted financing since the wholesale rate is not available to the public. It’s the same as the difference between what McDonald’s pays for a hamburger and what we pay for it. The McDonald’s markup is undisclosed.”
Yeah, but we don’t have to sign a contract and take out a loan to buy a burger. There’s a lot more money at stake, and that should mean more disclosure.
But I do agree with NADA that dealers are providing a service when they act as finance middlemen.
How much should they get for their work?
“A fee of $100 to $200 is more than enough compensation for arranging financing,” Brobeck of CFA said. “And we want the fee disclosed.”
Brobeck and Muniz said the report is a precursor to a massive consumer education campaign to get the word out about auto finance markups.
“Our mission is to let every consumer know about this practice and what they can do to protect themselves and secondly, to persuade the auto finance companies and dealers to eliminate the markup,” Brobeck said.
Of course, ending markups in the industry as a whole won’t happen tomorrow. So if you are in the market for a car, go shopping for a loan too.
Before you go near a dealership, visit your bank or credit union and find out what interest rate you would qualify for given the car you want to buy. Get a pre-approved offer if you can (that’s what I always do). Even if you like the convenience of using dealer-arranged financing, at least get another rate quote so you’ll know if you are being marked up at the dealership. Do this even if you know you’ve got a checkered credit history.
Don’t be so desperate for a car that you put yourself in the position of being taken advantage of.