Get a Better Car Loan

Liz Weston is author of Your Credit Score: Your Money and What's at Stake. — Art Streiber

En español | Dear Liz: We need a new car, and some dealers are offering really tempting interest rates — like 0.9 percent. Are these for real?

They might not be. Congress blew a chance to beef up consumer protections last summer when the embattled auto industry won an exemption from the new financial reform law. So although mortgage brokers will be subject to new rules, car dealers — who brokered about 80 percent of U.S. consumers' $850 billion in auto loans — may keep on gouging us. If you must borrow (it's better to pay cash for a depreciating asset), don't assume dealerships will give you the best loan. There are simply too many ways for them to rip you off (see "Dealers Disguise Profits," below) or seduce you with easy payments on a longer loan.

A better move is to get preapproved for a loan from a local bank or credit union before you set foot on the lot. That can help you set a realistic budget. You'd be wise to put down at least 20 percent, choose a loan of four years or less, and make sure the monthly payment is no more than 10 percent of your gross income. A big down payment helps ensure you'll never owe more on the car than it's worth. Limiting your loan also makes room for the costs of insurance, maintenance, and fuel.

If the dealership offers you better terms, you can always drop the bank loan. But you'll walk in knowing you have a deal that you can afford.

Dealers Disguise Profits: Duck These Fees

The Center for Responsible Lending says car buyers pay an extra $20 billion a year because dealers routinely mark up the interest rate of loans they broker. And dealers pad profits with such contract concoctions as preparation fees for cleaning your vehicle (which automakers often pay), advertising charges (if these show up at closing, balk), and even life insurance to pay off your loan should you die. As always: Buyer beware.

Liz Weston, author of Your Credit Score: Your Money and What's at Stake, blogs at asklizweston.com.