The devil is in the details. A cliche, yes, but true — and potentially costly — when it comes to your auto loan agreement.
Car loans at dealerships are marked up over $1,700, on average, according to auto loan company Outside Financial’s 2018 Markup Index. Overcharges come from marked-up interest rates and extra products inserted into the loan contract, says Jon Friedland, the company’s co-founder.
What’s more, Oren Weintraub, president of car-buying concierge service Authority Auto in Tarzana, California, says he finds a mistake — either intentional or unintentional — about 3 times out of 10 when reviewing contracts for clients.
To avoid overpaying and protect yourself from a mix-up or sleight of hand, thoroughly review any auto loan agreement. Whether you’re financing your car through a dealer, or working with your bank or an online lender, follow these steps before you sign on the dotted line.
Verify vehicle and personal information
“As basic as it sounds, you want to make sure you’re buying the right car,” Weintraub says. Be particularly careful to check that the vehicle identification number (VIN) matches the car you’re buying, your name is spelled correctly and your address and driver’s license number are right.
Smoke out fees
Most auto lenders say they don’t charge fees. However, there may still be costs required to start the loan.
Outside Financial’s co-founder and president, Sonia Steinway, recommends saying to the lender: “‘Please help me understand exactly what I will have to pay to make this transaction happen, including any fees to you or to the [department of motor vehicles] and all taxes.’”
Another approach, recommended by car site Edmunds, is to ask for an “out-the-door” price early in the process at the dealership. In this way, Edmunds notes, “you will smoke out these extras and deal with them well before the contract phase.”
Separating legitimate fees from bogus fees, sometimes used to create extra profit for the dealer, can be tricky. Check Edmunds’ list of typical fees for each state.
Legitimate fees you can expect to pay
- State sales tax. This is typically a percentage of the cost of the car.
- Documentation fee. As crazy as it sounds, the dealership actually charges you for filling out the contract. This “doc fee” is capped by the laws of some states. However, in states where the doc fee isn’t regulated, such as in Florida, dealerships charge varying amounts, sometimes more than $700.
- Registration fees. A dealer will charge you for the state’s registration fees, which are usually a percentage of the car’s value. For new cars, this cost can easily exceed $350.
Watch out for add-ons
Some lenders might include other products in the loan agreement that you didn’t ask for, such as extended warranties or gap insurance. Or dealers may install extra equipment on the car that isn’t clearly disclosed — such as customized wheels, running boards or anti-theft devices.
Basically, they hope you sign the contract without spotting the addition and you are then committed to a higher monthly payment.
Once buyers get the contract and are hit with the extra cost, many just sign it because they think it’s too late to back out. But know that you can require the dealer to remove the extras and rewrite the contract at a lower cost.
“There is a grab bag of ancillary products that could be inserted,” Steinway says. “Some of these products provide value, but only if you understand them, and only if you purchase them at the right price.”
An easy way to spot these extra charges is to look for the section in the loan agreement where the lender or dealer can write in products or fees, Weintraub says.
- Extended warranties. The most common add-ons, both for dealers and independent lenders, are extended car warranties (sometimes abbreviated in contracts as VSC for “vehicle service contract”).
- Gap insurance. Another popular add-on sometimes inserted in contracts is gap insurance, which covers the difference between the value of your car at the time it’s totaled or stolen and the balance of your loan or lease.
- Dealership add-ons. Many dealers include anti-theft devices, wheel and tire warranties and — a longtime favorite — paint and fabric protection.
Make sure the numbers match
Often, consumers begin the loan process by discussing the terms with a loan officer or dealer. Therefore, when you review your auto loan agreement, it’s important to make sure the numbers written in the contract are what the lender verbally offered you, Steinway says.
You can put the figures into an auto loan calculator to see if the numbers roughly match what you thought you agreed to. If they don’t, there’s a problem. The lender or dealer may have extended the loan term, added extras or inflated the interest rate.
- The balance. This is how much you’re borrowing for your car. The balance is the price of the car (plus taxes and fees), minus any trade-in credit and the down payment.
- Sales tax and registration fees.
- The term of the loan. This is the number of months to repay it, and it’s especially important because dealers and lenders often extend the term to make the monthly payment seem more acceptable.
- The annual percentage rate (APR). This includes the interest rate and represents the cost of borrowing money. When dealers arrange loans on behalf of car buyers, they sometimes mark up the interest rate by several points as compensation for this service.
Flag any issues and talk to the lender
As you review your loan documents, get a pencil and circle any language you don’t understand and any fees or additions that were not discussed earlier.
Give the lender, or dealer, a chance to explain anything you’ve flagged in the contract, Steinway says. But make sure you get an explanation you fully understand, rather than just an evasive non-answer.
And whether you’re in the back room of a dealership or on the phone with an impatient loan officer, don’t let yourself get pressured into signing something you’re not comfortable with.
Although reviewing the loan agreement is important, Weintraub says it’s the numbers that make up the core of the deal. Make sure you understand every charge.
Get the best deal possible
Experts agree that getting preapproved for a good loan before you go car shopping can help you lock in a better interest rate. Understanding the loan process and knowing what to look for in an auto loan agreement are keys to ensuring you get what you bargained for — and the best deal possible.
If you’re shopping for an auto loan or refinancing your car, you’re probably reviewing multiple offers. To make this easier, get all quotes based on the same terms: the balance and loan length. Only by making direct comparisons can you see the differences — and find the best offer.
Friedland says the best defense at the dealership, or when reviewing loan offers, is knowledge. “Let’s face it, people are taken advantage of in this process in direct proportion to how prepared they are,” he says.