Can a Car Dealer Change My Interest Rate?
Is your car loan interest rate truly fixed? Understand the process and your rights when financing a vehicle purchase.
When financing a vehicle, the interest rate offered by a car dealership may not be the final one. Securing an auto loan involves several stages. Understanding how auto financing works is key to navigating the purchase process and ensuring the terms you agree to are the ones that ultimately apply. This article explains the various aspects of car financing that can influence your interest rate.
Understanding Conditional Financing Offers
A significant factor contributing to potential interest rate changes is conditional financing approval. Dealers often allow customers to take possession of a vehicle through “spot delivery” or a “bailment agreement” before final financing approval from a third-party lender. This practice enables customers to drive their new car home immediately, especially when banks are closed. The initial agreement signed is typically a conditional sales contract, meaning the sale is contingent upon a lender approving the loan at the specified terms.
This preliminary agreement is not a final, binding contract for the loan itself. The dealer acts as an intermediary, submitting the customer’s credit application to various financial institutions to secure the loan. The interest rate quoted on these initial documents is often provisional, pending the lender’s review and acceptance of the loan terms. Until a lender fully commits to funding the loan, the financing is conditional. The dealer retains the right to cancel the agreement if suitable financing cannot be secured. This mechanism is sometimes exploited in “yo-yo financing,” where a customer drives off with a car only to be called back later for renegotiation under less favorable terms.
Circumstances Leading to a Rate Change
A conditionally approved interest rate can change for several reasons after a customer has taken possession of the vehicle. Following spot delivery, the dealer might find that the initial financing terms cannot be secured from a third-party lender. This can occur if the customer’s credit score was miscalculated, if there were recent changes to their credit history, or if the dealer simply cannot find a lender willing to approve the loan at the initially offered rate. The dealer may then contact the customer, claiming the financing fell through, and present a new offer with a higher interest rate or different terms.
The original lender might decline the loan or approve it with revised conditions due to their internal credit policies or a more thorough review of the borrower’s financial profile. For example, a lender might request additional documentation, such as proof of income or employment, to finalize the approval. If these conditions are not met, or if the customer’s financial situation does not align with the lender’s risk assessment, the initial terms become invalid. In such cases, the dealer may try to secure financing from another lender, which could result in a higher interest rate or a demand for a larger down payment to offset the increased risk perceived by the new lender.
When Your Interest Rate Becomes Final
An interest rate becomes legally binding once a final, non-conditional Retail Installment Sales Contract (RISC) or loan agreement has been executed. This contract details the financing terms, including the annual percentage rate (APR), the amount financed, the total finance charges, and the payment schedule. All parties, including the buyer, the dealer, and the financing institution, must sign this document.
Once this comprehensive contract is in place, it supersedes any preliminary agreements or conditional approvals. The Truth in Lending Act (TILA) requires lenders to provide clear disclosures of credit terms before a borrower signs a loan contract, ensuring transparency about the loan’s cost. Consumers should carefully review this final contract, as it represents the definitive agreement. Unless specific, agreed-upon conditions for modification are explicitly stated within this final contract, the interest rate cannot be unilaterally altered by the dealer.
Consumer Protections and Actions
Consumers have protections and recourse if a dealer attempts to change an interest rate after an initial agreement. It is important to understand the terms of any conditional delivery agreement or spot delivery contract before driving off the lot. These agreements often outline the conditions under which the vehicle must be returned if financing is not finalized. Keeping all documentation, including preliminary agreements, credit applications, and any conditional sales contracts, is an important step.
If a dealer contacts you claiming the financing fell through and demanding a higher rate, consumers can negotiate for better terms or return the vehicle without penalty if the conditional agreement allows it. The Truth in Lending Act (TILA) mandates that lenders disclose information, such as the annual percentage rate (APR), finance charges, and total payments, before the contract is signed. If a dealer fails to provide these disclosures or misrepresents terms, it could be a violation of federal law. Consumers who believe they have been subjected to unfair practices can contact their state attorney general’s office or consumer protection agencies for guidance.