Students Should Avoid Dealer Financing

The one reason to avoid dealer financing that stands head and shoulders above the rest is that the dealer may add an average of 2.47% to the loan. That means that the average borrower will pay an additional $714 over the life of the loan according to a study conducted by the Center for Responsible Lending and featured by Consumer Reports.

Dealers have been known to participate in a form of trickery called yo-yo financing. In this case, the dealer offer financing at a low rate and sends you home with the car. One or two days later, they call and say that the loan was denied and you have two choices: return the car, or agree to a higher rate, when in fact neither is actually true. The dealer is simply padding their profit margin by getting you to agree to pay a higher rate.

This is not an isolated incident. The study looked at data from 1.7 million accounts involving 25 auto finance companies. The markups that were found could take as much as $25.8 billion out of consumers pockets to fill the coffers of a banking industry that is a burden on the economy to begin with.

Of course, those seeking student car loans need to be extra careful, as their lack of credit and general inexperience in the field of car-shopping makes them easier targets for such markups.