6 Key Signs You’re Being Offered a Risky Auto Loan and How To Avoid It

Buying a car can be exciting, but it can also get confusing—especially with all the paperwork, fees, and financing options involved.

Auto loans are often necessary for many buyers, but not all loans are good deals. Some can end up costing way more than expected or even trap you in debt.

To make sure you’re signing up for the right loan, it’s important to know how to spot risky deals. Here are six warning signs of a risky auto loan and how you can avoid them:
 

1. High Interest Rates

Interest rates can make or break your loan. If your credit score is low—below 620, for example—you might face higher rates.

But even then, watch out for rates that seem unusually high. Some sellers may offer subprime loans with excessive interest that could leave you struggling financially.

What to do: Check your credit score before shopping and know the interest rates you should expect. Use this knowledge to negotiate a fair rate and don’t accept a deal you can’t afford.
 

2. Changes in the Sale Price

Once you’ve agreed on the price of a car, it shouldn’t change. Some salespeople might claim mistakes in the quote, expired offers, or administrative fees—but these tactics are often used to boost their profits.

What to do: Stick to the initial agreed-upon price. If the dealer tries to add unexpected fees or change the price, don’t hesitate to walk away.
 

3. Prepayment Penalties

Paying off your car loan early sounds great—but some lenders include penalties to discourage this. Essentially, they want to keep earning interest from you for as long as possible.

What to do: Look for prepayment penalties in your loan contract before signing. If you spot one, negotiate to have it removed. Some states, like Alaska and Maryland, limit or even prohibit these penalties.
 

4. Conditional Sales Agreements

Conditional sales contracts allow dealerships to cancel the deal if loan terms don’t meet their requirements—even if you’ve already driven the car home. This puts them in control and leaves you vulnerable.

What to do: Carefully read your contract for terms that seem “conditional.” Ask for clarification from the lender or seek advice from a third party if something feels wrong.
 

5. Mandatory Arbitration Clauses

Some contracts include a clause that forces disputes to be resolved through arbitration, rather than in court. The arbitrator is often chosen by the dealer, which can limit your ability to seek a fair resolution.

What to do: If this clause concerns you, negotiate to have it removed. Be sure you’re comfortable with the terms before you sign.
 

6. Hidden Fees

Expect to pay certain fees like sales tax and documentation costs—but watch out for unnecessary charges like extended warranties, fabric protection, or VIN etching. These additional fees can quickly add up and are often hidden in the fine print.

What to do: Carefully review all fees in your agreement and ask questions about anything you don’t understand. Avoid paying for extras that aren’t essential.
 

Final Tips

The cost of owning a car is higher than ever, so it’s important to protect yourself during the buying process. Take time to research loans, check your credit, and set clear expectations for what you can afford. Don’t rush into signing a deal, and stay firm when negotiating.

Remember, your goal is to secure a loan that works for you—not just the dealership.

Read more: The True Costs of Owning a Car: Budgeting Tips and Crucial Expenses to Keep in Mind

-

Get the latest on auto loan relief and other tips by subscribing to our weekly newsletter here!