Taking out an online car loan involves no small amount of personal responsibility. One should always review loan terms carefully and assess one’s own financial situation before coming to a firm decision.
That being said, some auto loans actually are too good to be true. They may have requirements lurking in the fine print that are almost impossible to detect at a glance, or they may even be intentionally dishonest.
Spotting trouble lenders can help spare your credit and your personal sanity. Here are some red flags to help you avoid certain types of online car loans.
Ridiculous Interest Rates
A reasonable interest rate on a car loan will be between three and eight percent, on average. Some loans will try to stick you with sky-high rates as much as 30 percent. No matter how much incentive they give you, you should never agree to a loan with this rate.
Even if a high interest rate is not stated outright, it could still exist in a roundabout way. A common tactic for unscrupulous lenders is to offer zero or low interest for the first several months, but then hit you all at once with the back interest.
One of the biggest reasons online car loans became so popular is because they would offer interest rates far lower than most institutions. Read the fine print carefully and make sure that you are getting an interest rate that benefits you. Otherwise, you are better off going to a regular bank.
Overly Long Payment Plan
Even with low interest, a car loan that is drawn out over a long period of time will end up costing more than could be anticipated. Experts like Clark Howard recommend sticking to a loan that lasts 43 months or less. With a longer loan, you can end up with monthly payments that barely scratch the surface of the principle while piling on the interest.
This horrible scenario is referred to as an “upside down car loan,” which refers to a car that is worth less than what is owed on it.
Go ahead and plug in the numbers when you see any loan terms offered. Try to figure out the resale value of your car by the time you are done paying off the loan and see if you will still end up in the hole. Owing thousands of dollars on a car that is not worth as much can be quite a disheartening situation.
Weird Fees or Requirements
Some lenders will try to disguise the revenue they get by avoiding discussion of fees until the very last minute. Most loans should not cost much to arrange; the interest is how that company is getting paid. Avoid any sort of loan agreement that feels the need to tack on any unreasonable extra fees without a good explanation as to why.
Likewise, some lenders may try to include hefty penalties for delinquency as part of their loan terms. While one should always ensure that they can keep up with payments, having a company crossing their fingers so they can take you through the cleaners is another matter.
The bottom line is to not fall victim to enticing offers if the basic terms will not work out in your favor. Do the math to figure out which loans will benefit you the most from a purely financial standpoint, and ignore everything else. With enough hard work and careful assessment, you can find an online car loan that will work in your favor.