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I Got Ripped Off On My Car Loan — Now What?

Welcome to Taking Stock, a space where we can take a deep breath and try to figure out what the COVID-19 economy really means for our finances. Every month, personal finance expert Paco de Leon will answer your most difficult, emotionally charged questions about money. This last two years have forced many of us to reprioritize our finances, and there’s no clear road map for getting through the pandemic yet — but Taking Stock is here to help us figure it out together.
This month we're talking about refinancing your debt. How do you know if a loan is a good and safe loan, especially when it comes to car loans and more unstructured loans? And if you get a bad loan, how can you refinance it and pay it off ASAP?
If you'd like to share your own experience (good or bad) with loans, we'd love to hear from you.
Dear Paco,
I bought my car, a "certified pre-owned" 2016 Ford Focus in August 2019, one month before my 23rd birthday. I went to buy it by myself after spending a week looking it up on a car-buying website. It was listed as $10,000. I had a good credit score, but was only working part-time and had never made any real purchases before, so it took hours to get approved for a loan until a company finally offered one with 14% interest.
They tried to talk me into all sorts of add-ons, which I knew to decline, but I ended up agreeing to a two-year warranty. I was charged over $14,000 for the car and I still do not understand where it came from. So far, I've paid $4,919.75 toward it and have $9,910.70 remaining.
I don't really know much about finances to begin with; my parents lived more or less paycheck-to-paycheck so navigating loans and investments and such are something I was blind going into. After about a year or two, I tried to refinance my loan for a better interest rate and was told they don't do that for auto loans. My credit card company would offer me "free refinance quotes" but always denied me because "the loan amount does not match what the car is worth." (This was the biggest indicator that I'd been ripped off.) A few months ago, my insurance provider emailed suggesting I enter ANOTHER seven-year loan, but at half the monthly rate I currently pay. I stayed with the same loan and upped my monthly payment from $250 to $300 so I can finally close this chapter of my life.
I wish I had just taken a moment to really think over the purchase and brought someone experienced to negotiate a reasonable cost. No one in my family has ever bought a new car so I didn't even know what to look out for or how to negotiate. I stood no chance and it was very evident (with hindsight) how much I'd been taken advantage of.
Dear feeling duped,
Not to sound too harsh, but one of the biggest mistakes I see people make when borrowing money is not understanding the true cost of paying back borrowed money. If you’re planning to borrow money for big purchases, you must learn and understand how a loan works. Don’t expect the person selling you the loan to teach this to you. It is not their job to educate people on how loans work; it’s their job to sell you something. Never ask a barber if you need a haircut, is the adage that comes to mind. In other words, understanding the underlying incentives of others is one way you can protect yourself.
Does it suck that predatory lending exists? Yes. Does it suck that some people get taken advantage of? You bet your ass it does. The reality of our systems is that we are all up against huge institutions and industrial complexes that are ultimately trying to get us to part with our hard-earned dollars. And, we’re starting to see financial scams multiply in our world. In our current reality, the responsibility falls on the individual to cultivate discernment, seek out education, and find resources and tools to help you heal from your past traumas. Focusing on your agency in any situation is a way for you to take some of your power back. 
Based on what you’ve shared and my experience in the personal finance industry, I do think your inexperience may have been exploited, and your state of anxiety didn’t help matters. While you are a victim of our shitty system, that is the baseline for most of us. At the same time, I think you could have gone into this negotiation better prepared.
When you looked into refinancing, you might have been unaware of the mechanics of how a loan works. There’s nothing wrong with not knowing this stuff. It’s boring as hell, and instead of being taught this in school (which may or may not be beneficial to students), we learn to solve for the hypotenuse of a triangle — something I use in my day-to-day life (yeah, right). The lack of practical knowledge seems heightened by being triggered and in a state of financial stress and anxiety while making a big financial decision. Let’s start there.

Regulate your nervous system before making big financial decisions 

When you’re in a stressed or anxious state, there’s a high chance that your decision will be emotional rather than cognitive. It’s like going to the grocery store when we’re hungry. If you’ve ever done that, I bet you returned home with a lot more food than you anticipated buying because of the state you were in while making those purchases.
I’m not a mental health professional, but I learned about a concept from contemporary psychiatrist Daniel J. Siegel (MD), that will be helpful for future financial decision-making. Siegel is credited with creating the concept of the window of tolerance. It’s a way to understand and describe normal brain/body reactions. The concept states that when we are within our window of tolerance (a zone between 4 and 7 on a scale of 1 through 10), our nervous system is regulated and we can deal with life’s natural ups and downs, and our decision-making is more likely to be a result of cognitive reasoning. That also means your financial decisions are more likely to be made by examining your emotions, digging into your motivations, and using rational decision making, despite any triggers, stressors, or circumstances.
When we’re outside of our window, Siegel describes this as either hypo or hyperaroused. Hyperarousal, being pushed up the window of tolerance (7 through 10), is the fight or flight adrenal response. You might feel anxious, panicked, angry, overwhelmed, or out of control when you're in this state. If you’re hypoaroused, pushed down the window of tolerance (1 through 3), common feelings include being zoned out, numb or frozen.
Getting into your window of tolerance is something you should know how to access in your daily life so that when you’re pushed up against the edge of it, you can self-soothe and self-regulate in a healthy, productive way. I encourage you to do it before looking at your finances, calling a lender to negotiate, and especially before making big financial decisions.
Your method of getting in your window of tolerance will depend on whether you’re up or down the scale and what works for you personally. For example, when I’m lower on the scale, I might blast Lizzo’s latest single while fist-pumping violently into the air to get into my window. You might prefer something else, like going on a walk. The same is true for the other end of the spectrum. Taking three deep breaths might work for me, but maybe you prefer rubbing some essential oils on your temples.
The ability to self regulate is a really practical tool. At any moment, all you do is ask yourself where you are at on the scale, and then implement an action that can help move you into your window of tolerance. I know all of this sounds too simple to work and maybe even silly, but we’re emotional creatures that walk around pretending we’re being rational. Try using this simple and practically free tool, see how it makes you feel, and reflect on how it’s impacted your decision-making.
I would also encourage you to seek out counseling, therapy, or another type of mental health professional that can help you process your experiences to heal and move past them.

Understand the mechanics of a loan

Now that we’ve addressed some of the emotions, let’s get practical. Your credit score and credit history impact the kinds of loans available to you. I’m not entirely sure why your loan came with such a high interest rate. Could you have been duped? Sure, it’s possible. However, another culprit could be a short credit history and the fact that you mentioned you've never borrowed this much money before.
Consider that lenders have no idea your track record for paying back large sums of borrowed money. Another factor could be how much debt you currently have relative to how much credit you have available. This is called your credit utilization ratio, and it makes up 30% of your credit score. Now that you can start to see how a credit score and history impact your loan, let’s take a closer look at loans.
All loans have the following components:
- The amount you borrow is also called the principal
- The cost you pay to borrow the money, also known as the interest rate (or APR)
- The length of time you’ll take to pay back the loan or the term
- The monthly payment
All of these different components come together to make up your loan terms, and each component impacts one another. For example, the insurance company that offered you a seven-year loan at a reduced monthly payment. When you take the time to understand how loans work, you’ll realize how these factors are interrelated. If you reduce the monthly payment, to make the math work, you’ll likely need to increase the term; the opposite is also true. If you want to reduce your term (pay back the loan sooner), you could achieve that by increasing the monthly payment. One easy way to explore these relationships is to use a loan calculator to run different loan scenarios.
When you look at a loan as interrelated parts, you can understand how making additional payments towards the principal balance can reduce the overall term — in other words, you’ll get out of debt faster. Or how putting money down reduces the principal, impacting the monthly payment amount and term.

When refinancing makes sense

Refinancing usually only makes sense if you can accomplish one of two things: You either lower the amount of total interest you’d pay, or lower the monthly payment amount. Remember, other loan components come into play here. For example, if the value of the car is lower than what you borrowed, refinancing will likely not be a good option.
I think that what you’re doing right now, making additional payments each month, might be your best option. Make sure your extra payments are being applied directly to the principal balance to have the most impact on how quickly you’ll get out of debt. Principal-only payments should be reflected in your monthly statements and notated as principal only. If this isn’t happening, reach out to the lender to find out how to ensure extra payments get applied to the principal.

So what’s a not crappy loan?

In general, a secured, fully-amortized, fixed-rate loan will be the least crappy type of loan. When a loan is secured, your debt is collateralized. Meaning, if you can’t make payments, you can give up the car, and the lender will sell it and use the proceeds to pay back the loan. This helps reduce the risk for both you and the lender. The inherent trouble with an auto loan is the fact that automobiles lose their value over time, unlike, say, more traditional investments, which tend to appreciate. With a not-crappy loan, the amount you borrow should never exceed the car's value. In general, for auto loans, a term that doesn’t exceed five years is best.
“Fully amortized” means that with each payment you’re making, you pay both principal and interest, and after the final payment, you owe $0 (as opposed to a giant balloon payment). A fixed rate means that your interest rate will remain the same throughout the loan's entire life; it cannot fluctuate. Of course, a single-digit interest rate is always preferred — the lower, the better — but times change, and so do rates. For example, in January 1970, the average car loan carried an 11.5% interest rate. Fifteen years later, the average car loan carried a 12.2% interest rate. Compared to today’s average auto loan rate of 3.86% for new cars and 8.21% for used cars, those figures seem offensive.
Understanding the interest-rate climate and researching the car you’re buying is important when determining the best loan terms.

Shop before you buy. Understand the cost of borrowing

Next time you anticipate buying a car or refinancing, in addition to shopping around for the vehicle you want to buy, shop around for loans and try to get pre-approved in advance. Credit unions are excellent for this. If you don’t belong to one, consider banking with one now to build your relationship with them. Also, keep up the excellent work on maintaining a good credit score, and practice getting into your window of tolerance regularly so your financial decisions aren’t driven by your emotions.
Lastly, remember that we’ve all had situations like this. One day you may be able to reframe it to see that the cost of financial mistakes is like paying tuition. Sometimes you have to feel the pain to truly learn the lesson. I hope you can make peace with your current situation, and that in every moment, you can find and exercise your agency.
Your friend,
Paco (she/they)
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