Anyone who’s ever purchased a new or used car through an automotive dealership knows that while searching for cars and finding the one perfect for you is typically fun, most people dread the finance office. The finance office is where you’re often pressured to add on all sorts of ancillary warranties and services that can run the price per month for your new ride up significantly. However, a lot of people don’t know that the finance office is where you could also pay significantly more interest on your new purchase than your credit score and history qualify you for.
Anyone who’s sold cars may be familiar with the tactic that happens in the finance office called “holding points.” Holding points occurs when someone comes in with a credit score that qualifies them for a 1.9 percent interest rate, for example. However, many dealerships and banks allow the finance office to add percentage points, where the term holding points comes from, to that rate. If you agree, your interest rate can be significantly higher than what your credit qualifies you for. So rather than getting the 1.9 percent interest rate your hard work and good credit entitles you to, you could end up paying 3.9 percent, 4.9 percent, or more depending on the dealership and the state. That extra money typically goes to the dealership.
Most dealerships will never indicate they’re doing that to you, and it’s a common practice. However, the folks over at Consumer Reports have spent the last year investigating automotive loans and have confirmed that many car buyers are overpaying significantly for their loans. Perhaps the most disturbing thing the investigation found is that consumers with good credit qualifying them for prime rates are being put into subprime loans in some instances.
One example given in the investigation is a Maryland resident who purchased a 2018 Toyota Camry two years ago at a 19 percent interest rate despite having excellent credit. Certainly, many will put the onus in an instance like that on the buyer for agreeing to such a high-interest rate and not understanding the car buying process and their credit before going shopping. By comparison, the investigation found a buyer with a similar credit score in a similar transaction received an interest rate of around 4.5 percent. That means the buyer in the first instance paid 14.5 percent more interest despite their good credit.
While hitting someone with such a massive interest rate despite qualifying for prime loans may be rare, certainly the process of adding a few percentage points to the APR isn’t. Having worked for a major automotive brand in the past as a salesperson, I know that at some dealerships holding points is an extremely common practice that occurs on every single transaction where they believe it can be done.
Frequently, the best way to combat something like this is to know your credit score and what an interest rate for your score might be. Keep in mind Credit Karma and many credit scores offered by banks and credit cards via their apps and websites aren’t based on the type of scores automotive lenders typically use. There are multiple credit scores, and when buying a vehicle, typically, a credit score focused more on automotive creditworthiness is used. You can get a very good idea of your scores using services directly from credit scoring agencies, like Experian and others.
Another interesting factoid from the survey was how much the average monthly car payment has gone up compared to a decade ago. Today, the average monthly payment is nearly $600 per month, a 25 percent increase compared to 10 years ago. An increase in the average monthly payment of 25 percent comes even though average loan terms have lengthened significantly.
Most lending arms for automotive manufacturers will finance cars out to 84 months, with many people routinely opting for 72-month loans. Loans with such long terms may not be an issue for those who plan to keep their cars well past the end of the loan repayment. However, for many buyers who only plan to keep their car for a few years, long loan terms mean more interest paid and more negative equity when they’re ready to trade-in.