SlashGear: Survey finds many U.S. car buyers are overpaying for their auto loans

Anyone who has ever bought a new or used car through a car dealership in the United States knows that while searching for a car and finding the best fit is often fun, most people dread the finance office, where car buyers are often asked to add a variety of ancillary warranties and services that can significantly increase the monthly price people pay for a new car.

Anyone who has ever sold a car is probably familiar with a tactic called "holding points" that occurs at a finance office, according to SlashGear. Holding points occur when someone's credit score qualifies for a 1.9% interest rate, for example. However, many dealerships and banks allow the finance office to add percentage points to that rate, which is where the term "holding points" comes from. If the buyer agrees, the buyer's interest rate can be significantly higher than their credit qualifications. So, instead of people's hard work and good credit getting them a 1.9% interest rate, they end up paying 3.9%, 4.9%, or even more, depending on the dealer and state. That extra money usually goes to the dealer.

Most dealers won't say they're doing this to buyers, and it's a common practice. However, the folks at Consumer Reports have investigated auto loans over the past year and confirmed that many car buyers are paying a lot of fees on their loans. Perhaps the most disturbing thing the investigation found is that in some cases, consumers with good credit who qualify for good rates are being put into subprime loans.

One example given in the survey was a Maryland resident who purchased a 2018 Toyota Camry two years ago at an interest rate of 19%, despite having excellent credit. Of course, in a situation like this, many people would place the blame on the buyer for agreeing to such a high interest rate and not understanding the car buying process and their credit before purchasing the vehicle. In comparison, the survey found that buyers with similar credit scores in similar transactions received interest rates of about 4.5%. This means that the buyer overpaid 14.5% in interest in the first instance, despite having excellent credit.

While it may be rare to hit someone who qualifies for a prime loan with such a high interest rate, the process of adding a few percentage points to the APR certainly isn't. At some dealerships, "holding points" is an extremely common practice that happens on every deal they think they can make.

Typically, the best way to combat something like this is to know the buyer's own credit score, and what the interest rate might be. Many of the credit scores provided by Credit Karma and banks and credit cards through their apps and websites are not based on the types of scores typically used by auto lenders. Buyers can find out their own score by using the services of a credit scoring agency directly.

Another interesting fact from the survey is that the average monthly car payment has gone up a lot compared to a decade ago. Today, the average buyer pays nearly $600 per month, which is a 25% increase compared to 10 years ago. The 25% increase in average monthly payments comes despite the fact that the average loan term has significantly lengthened.

Most automaker lenders will finance a car for up to 84 months, with many people often opting for 72-month loans. For those who plan to keep their car after the loan is paid off, such long loan terms may not be a problem. However, for many buyers who only plan to keep their car for a few years, longer loan terms mean paying more in interest and having more negative equity when they are ready to trade in their car.

From cnbeta