With So Many Loan Options Available, “Caveat Emptor” Has Never Been More Appropriate

The consumer credit industry is booming, and there have never been so many options available, particularly for those with a good credit history. Whatever your funding need may be, there’s a financial product to meet it. But there are times when having an abundance (or over-abundance) of choices can be as problematic as having too few. This is particularly true for the borrower who doesn’t enter into every transaction with his or her eyes wide open. Failure to do research, and a lack of awareness of potential pitfalls, can cost consumers dearly.

Don’t get taken for a ride

One area of consumer credit that has come under a lot of fire – though not nearly enough, in the view of some consumers and advocacy organisations – is car financing. Granted, it is perhaps the height of naivete to purchase a car with the belief that either the seller or the finance company has the consumer’s best interest in mind. Even so, many car buyers will accept by default the financing deal offered by the sales person.

The first mistake many car buyers make is to let their emotions take the lead once they enter the showroom. They see the car they like, and take it for a spin so brief that all they can realistically evaluate is how attractive the car is and how nice it smells. They return to the dealership and begin the process of negotiating for the best deal. As the salesman points out all of the car’s wonderful features, he is also likely to present them with what he claims will be the best deal for them, when all too often he knows nothing about them beyond their desire to purchase a car.

Very likely he will offer the buyers a Personal Contract Purchase, or PCP. The way the PCP works is that the buyer pays the suggested deposit, adds in his or her deposit contribution, and then pays the remainder off over the course of many months. Simple as can be, right? What the salesman may likely not tell the customers is that his commission will be figured not only on the sale amount, but upon the profit from financing as well. He may also fail to tell them that if they put down a larger deposit, the profit off the financing – and the salesman’s commission – is reduced.

Alternatively, if it doesn’t look as if the buyer can afford the monthly payments, or it appears that their credit score might rule out their qualifying for a PCP, there is always the Hire Purchase Agreement to fall back on. With these agreements, the buyer puts down a smaller deposit, then pays a significant percentage of the car’s price, spread out over a number of months. At the end of that period, the buyer can pay a large “balloon” payment and own the car outright, use a portion of the payments made as deposit on another car, or turn the car back in to the dealership and walk away empty-handed.

In none of these scenarios does the buyer get full value for the money invested, and in cases where the car is returned, the dealer has a used car to sell whose actual cost has in many cases been almost completely paid by the original customer. It is all too easy for unsuspecting customers to get talked into signing on for deals that can be very costly. Although car sales staff supposedly receive financial training, this doesn’t stop them from misguiding consumers. And even though regulators have stepped in to oversee the car finance industry, and dealers can be fined or imprisoned for deliberately misleading customers, more needs to be done to protect consumers.

Obviously, the more closely you look at the deal you are being offered, and the more you know about the conditions that influence lenders in structuring the deals they offer, the better the likelihood that the deal you get will be a good one for you.

Car financing isn’t the only pothole to watch out for

Lest it seem that we are unfairly singling out the auto financing industry, that’s not the intention. In truth other loan products can be just as tricky to shop for, with lenders being just as motivated by self-interest as are the car-finance firms. This means that you can get in trouble if you don’t know what you’re doing.

Given the above-mentioned plethora of financial products, determining the right type of loan for your particular circumstance isn’t always a straightforward undertaking. And even though competition amongst lenders in recent years has pushed interest rates lower, finding the lender who offers the best deal can be challenging, particularly if your credit history is spotty. But if you need a loan you do have choices, even if you have bad or no credit; a conventional loan is not your only funding option. As with choosing car financing, however, it’s very important that you research and comparison-shop.

What to do when you think you’ve been taken

If at any point you feel that you’ve been treated unfairly, the first necessary step is to try to work something out with the lender and/or seller. Even if you think you’ve been swindled by a lender or seller who is operating in bad faith, it is essential that you make a good-faith effort to reach a mutually satisfactory resolution. However, if all else fails, you needn’t feel like you are waging war alone against a giant, because there is help available. A good place to start seeking information is the Financial Ombudsman Service (FOS), which exists specifically to ensure that consumers are being treated fairly and legally by financial institutions. Don’t be afraid to seek assistance, because there are more people seeking help than you would think. And don’t wait until things reach a critical stage before asking for help, because it is easier to fix problems that are addressed sooner than those that are put off until later.

Of course, the best solution is to avoid getting caught up in credit problems in the first place. If you’re buying a car, for instance, shop at least as carefully for financing as you do for the car itself, because the problems caused by making the wrong financing decisions will stay with you far longer than even the biggest lemon of a car ever could. And always keep in mind that the laws that are meant to protect you from being exploited are often written with significant input and influence from the dealers or lenders who stand to make more money when the laws allow them some leeway. They will use every bit of that leeway. So as things stand now, “buyer beware” is still a good maxim to keep in mind.