Is it time for an auto loan? Many buyers walk into dealerships with only a vague idea of how auto loans and financing work. This is a dangerous setup. While the mortgage market has learned its lesson, many auto markets remain rife with predatory lending, illegal scams, and unwise deals that can trap the unwary consumer.
Prepare to buy your next car by learning the law. Years ago, the federal government dedicated a handful of laws to protecting your information and preventing fraud during the auto loan process. The more you know about these laws, the more ready you will be. So start reading, take a few notes, and walk into the dealership knowing exactly what you can do – and what lenders cannot.
Truth in Lending Act
The Truth in Lending Act keeps your financial information safe and gives you a right to all the details of the loan. If an auto lender offers you a deal, that lender is required to give you information about the APR (annual percentage rate), the monthly payment amount, all due dates associated with the loan, and any other relevant debt information. No word of mouth promises will do, the lender must present all this data in writing. If any loan information is missing, the lender is breaking the law and is probably trying to hide something.
Since the Act, Lenders typically give you a Truth in Lending Disclosure Statement. Watch for it, read it carefully, and ask any questions you may have. Disclosure Statements tend to follow a similar pattern no matter what lenders provide them.
Consumer Leasing Act
Leases are very common on the auto market, allowing you to purchase the right to use a car for years without buying the car outright. The Leasing Act is like the Truth in Lending Act, requiring dealers to give you all the dirty details before you actually sign anything. These details include all fees that will be charged (including taxes!), any down payment due at signing, and any annual mileage limits or charges for excessive miles. Curious if you can buy the car at the end of the lease or if any extra payment will be due for turning the car back in? The dealer is required to provide you with answers.
As you drive a car, it depreciates in value; especially during the first few years. This means that the dealer cannot sell it at full price afterward. Monthly lease costs are typically related to the rate of depreciation and vary based on model.
Credit Practices Rule
Think of this rule as protection for your friends and family. If your credit is a little tight or this is your first auto loan, you might need a cosigner to back up your credit. Lenders have to give written warnings to cosigners showing what they are liable for if they cannot make payments. It also stops auto lenders from extorting any additional late charges from cosigners if they were not warned beforehand. And in general, the rule promotes fairness in cosigning.
Equal Credit Opportunity Act
A consumer is a consumer, right? Not to all dealers. The EEOA makes any type of auto loan discrimination illegal. You cannot be refused credit because of your gender, race, age, religion, or nationality. The same is true of public assistance and credit protection – you can receive debt support and still qualify for an auto loan. But lenders can still make decisions regarding your monthly income and credit history, so show up with a steady cash flow and good record to get the best loan.
There are a lot of other discrimination details in the Act, many dealing with spouses. Essentially, the credit history of your spouse should not affect your own auto loan unless your are applying for an auto loan together. Read the full list for a complete view of what dealers cannot do when considering your application.
Fair Credit Reporting Act
This giant piece of legislation keeps your credit information in your hands. You can apply for and receive a free credit report from any of the big three credit bureaus (Experian, TransUnion, and Equifax). This act also got a boost in the digital era that made it easier to protect your finances in the face of mounting identity theft. If you think your identity information was stolen, you should notify all agencies and credit card companies about the issue at once. The Act also provides a process for you to sort out any mistakes on your credit report that may be preventing you from acquiring an auto loan.
Auto fraud is a continuing problem in the United States. Many unscrupulous lenders try to run fraudulent auto loan modification schemes that target people who have an auto loan but are struggling to make payments. In addition to helping out with identity fraud, the FCRA also helps protect your credit information and discourages these scam tactics.
Continue Learning, Borrow Wisely
After federal laws, there are a number of state laws that can provide you with additional rights. No state laws can take any federal protections away, but they may add benefits of their own. Visit your state website or search for the homepage of your state attorney general to learn more specifics. Education is a key step in preventing scams and encouraging a healthy auto industry. Prepare now, and avoid future credit trouble!