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Personal Finance
Beware of bad car loans
October 8, 1999: 11:12 a.m. ET

If you don't do your homework, you'll fall prey to dealers' tricks
By Lucy Lazarony
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NEW YORK - When it comes to auto financing, people often get so dazzled by the car or sports utility vehicle of their dreams that they skim over a lot of the more ho-hum details of the deal.
     That's exactly what the banks and auto dealers want you to do -- and it's a sure-fire way to end up paying more than you should. It could even turn that dream car into a four-wheel drain on your bank account.
     Here's a look at some of the little tricks that banks and auto dealers use to pad their profits when customers aren't looking. Most of them are the usual suspects, but the auto industry rolled out a few new tricks this year, too.

    
Leasing horrors

     Nowhere is a customer's ignorance more costly than in the world of leasing. People sign on without understanding the myriad terms of the contract or how those terms affect each other -- and end up paying through the nose.
     "People have to understand what all the numbers mean. And they have to know how to calculate their own payment. If they can't, they shouldn't lease," said Mark Eskeldson, an auto expert who runs CarInfo.com, a consumer information and advocacy Web site.
     "Do your homework. Understand what's going on. Verify everything they give you," he said.
     Unfortunately, too many people leave themselves wide open for a sucker punch.
     Of the more than 19,000 calls and letters that the Florida Attorney General's office has received from disgruntled leasing customers since 1993, 60 percent have turned out to be perfectly legal. They cost more than the customer would have liked.
     People are used to haggling for a car, but fail to do so on the lease.
     The first step to landing a good leasing deal is understanding the terms. A consumer brochure, which includes a sample leasing form, is available online from the Federal Reserve Board, or you could read the bankrate.com glossary of auto loan and leasing terms.
     Two terms give people more trouble than any other: "capitalized cost" and "residual value."
     In a lease, a person pays the difference between what a car is worth today and what it is expected to be worth at the lease's end, plus a monthly fee to the finance company. In leasing language, today's value is the capitalized cost. Tomorrow's value is the residual value.
     The lower the capitalized cost and the higher the residual value, the better deal it is for the consumer.
    
Avoid the sucker lease

     To avoid being a victim, be sure to crunch the numbers along with the dealer and understand just how they arrive at the monthly payment amount they keep raving about. We also offer a short worksheet that shows you how to figure and compare lease monthly payments, and a calculator that does it for you.
     Once you know the terms, the numbers should all make sense -- and they all must be plainly spelled out in your lease agreement.
     Dealers must detail their monthly payment calculations as well as costs and credits, such as trade-in allowances and rebates, at the beginning of the lease because of federal disclosure rules. End-of-the-lease charges and policies are also spelled out.
     All the disclosures are grouped together on a single form. In the past, disclosures were scattered throughout the leasing paperwork.
     Don't sign anything until the terms are crystal clear and your numbers match the dealer's. Don't be pressured into anything. Take the paperwork home with you. Sleep on it. You don't want any surprises later.

    
End-of-lease problems

     One of the biggest sticking points comes when the customer returns the car at the end of the lease. Lots of times, people sign on for a lease with lower mileage allowance, say 10,000 or 12,000 miles per year, because of the low monthly payment -- even though their driving needs are more suited to a lease with a 15,000-mile allowance. And it ends up costing them hundreds of dollars, sometimes more, in penalties for excessive mileage or wear and tear.
     You can see how it happens. After three or four hours at a dealership, lots of people just want to sign on the dotted line and get out of there. So they skim right by the disclosure detailing excess mileage penalties, which range from 10 cents to 25 cents a mile.
     "It's a terrible ordeal for some people. By the time they sign the contract, they're exhausted," said Terrence J. O'Loughlin, a lead investigator with the Florida Attorney General's office.
     It's easier to just focus on the low monthly payment that the dealer can't stop talking about than to wade through all the details.

    
The new tricks

     In addition to their tried-and-true lease tricks, those offering car financing have come up with some new twists as well.
     Longer-term loans can tempt car-buyers into bad deals. Dealers use the lure of a lower monthly payment when urging people to sign on for longer-term auto loans. A car that might break a person's budget in three years seems quite manageable when spread out over five years.
     The ploy's working. Almost 75 percent of new vehicle loans in 1998 had terms of 49 months or longer, according to the Consumer Bankers Association's 1999 Automobile Finance Study.
     The downside of stretching out that loan term is that you end up paying more money overall. It's also a great way to get caught "upside down" -- owing more on a car than it's worth. Because all cars depreciate rapidly in their first two years, it's not unusual for someone to be "upside down" a couple of years into a five- or six-year auto loan. And it can be quite a hole.
     Things could get quite ugly if midway through the loan, your driving needs change and you have to sell or trade the car. Lots of people end up rolling old car debt into a new loan. Before they know it, they're stuck in a cycle of auto debt.
     To avoid such a fate, never finance a car for more months than you think you want to own it and opt for the biggest down payment and shortest term possible. Stomaching a shorter-term loan with bigger monthly payments saves on interest and builds up equity.
     Finally, beware of odd-term auto leases, which carry lengths other than the traditional 24, 36 or 48 months. They're cropping up more and more often, making it hard for a consumer to make apples-to-apples comparisons when looking at a 29-month lease versus a 42-month lease.
     Car dealers use the odd-term leases to retrieve cars at times when it's convenient or more profitable for them. If you get offered an odd-term lease, make certain that the timing is convenient for you, too. Back to top
     -- by Bank Rate Monitor for CNNfn

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.