What’s in the Fine Print of an Auto Loan?

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It’s exciting buying a new car. It’s also laborious. First, you must find the ideal vehicle. Then there’s the negotiation. And, finally, a deal is struck, and the paperwork begins. Part of that paperwork is the financing.

Although each financial institution has its requirements, there are some standard restrictions regarding an auto loan. There are also numerous fees. Most people just sign their name without paying attention to the details. But what’s in the fine print, and what is it costing you?

Changing Interest Rates

Most people know how to compare several financial institutions’ interest rates. You want the lowest possible one to ultimately save money long-term.

But beware of an interest rate that seems too low to be good. It might not be low for long. Read the fine print when offered a low-interest rate. You might be offered a low one for the first six months, and then it increases to a higher number.

Watch for phrases like “X% introductory annual percentage rate (APR) for purchases then a variable for APR W%, Y%, Z% depending upon the review of your application and credit history.” In other words, you’re not going to pay that low-interest rate for long and might end up locked into a much higher one.

Auto Loan Commitment Fees

There are other expenses slipped into your auto loan agreement than just the interest rate. Various fees will be added to your total price, inflating the amount being financed.

One expense is the non-refundable auto loan commitment fee. This is a charge that lenders tack on to guarantee a loan that has yet to be funded. It’s a percentage of the loan. And it can range from 0.5 percent to 1 percent of the loan amount.

Think of the commitment fee as earnest for the bank. They want to ensure you’re serious about following the loan process through and purchasing the vehicle. The fee compensates the lender for the risk they take by guaranteeing a loan that has not yet been funded.

Although this fee is usually nonnegotiable, some lenders may be more flexible.

One way to avoid an auto loan commitment fee is to apply for pre-approval before committing to the loan. This is a process where the lender looks at your creditworthiness and provides a conditional offer. It doesn’t require a commitment on your part. It also allows you to see what types of loans are available.

Another option is to only work with lenders who don’t have a loan commitment fee.

Different Types of Lender Fees

There is an application fee charged when you submit your loan request. It covers the cost the lender incurs when processing the application. This includes credit checks, employment verification, and other administrative costs. It is nonrefundable.

The loan origination fee is charged when the lender approves the loan and disburses the funds. It is used to pay for preparing and funding the loan. It’s usually a percentage of the loan. There is also an underwriting fee, which pays for the lender’s cost when determining the creditworthiness. This is used to determine the risk of the loan.

Although the underwriting fee varies by financial institution, it is usually flat.

Zero-Percent Financing

The zero-percent financing deal implies that no interest is included in your financing. But, often, zero-percent financing contracts are loaded with hidden fees.

There are annual membership fees from a few dollars to several hundred dollars attached to these loans. Often, zero-percent offers have penalties for early repayment. This can include retroactive interest.

Reading the fine print is vital or you could end up paying as much as an interest loan.

Even if the zero-percent financing turns out to be a good deal, you probably won’t qualify for it. Only 10 percent of car buyers qualify.

Paying Off Your Loan Early

Many lenders charge pre-payment penalties. These apply if you decide to pay off your loan early. They are meant to compensate the lender because you would be paying less interest. A pre-payment penalty can be a flat rate or a percentage of the loan.

Always ask the lender about pre-payment fees before signing.

Watch Out for Car Loan Add-Ons

Car dealers make more money if they sell you additional features. Although the car dealer must go through these add-ons with you, it can be confusing as to what you need. Some add-ons include:

• GAP (guaranteed asset protection) insurance
• VIN (vehicle identification number) etching
• tire and wheel protection
• key protection
• extended warranties
• credit insurance

Although one or two may interest you, you will be inflating the financed price by purchasing them.

Car Loan Fine Print Can Cost

Don’t let a dealer rush you. It’s important you understand and question all the charges being levied against you. Have the dealer review all aspects of the contract.

Always have a pre-approved loan to save your loan commitment fees. Watch out for zero-percent financing; it might not always be the best deal.

Add-ons can drive up the financed cost of your car.

But by reading the fine print and understanding what you’re paying for, you'll save money in the long run.

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