Interest rate cuts at the federal level in late 2025 are projected to ease costs for borrowers this year. However, the average price of new vehicles reached new heights in December 2025, and used vehicle prices are on the rise, too.
Additionally, more than a quarter (29.3%) of trade-ins toward new-vehicle purchases were underwater in Q4 of 2025, meaning owners owed more on their vehicle than it was worth at the time of trade-in, according to Edmunds. The average amount owed on underwater trade-ins also hit new highs at $7,214 in Q4, according to Edmunds.
These realities – high vehicle costs and higher consumer debt – could increase the risk of predatory lending for borrowers in 2026. Predatory lending refers to unfair or unethical practices when it comes to providing loans. Victims are often borrowers with poor credit or those in less stable financial situations or with limited financial knowledge, like first-time borrowers.
These practices harm consumers by providing loans that are unrealistic, hard to repay, and financially damaging. Getting caught in this kind of loan can also damage your credit score when the inevitable default comes.
What is Predatory Lending in Auto Loans?
In auto loans, the most common predatory tactics include charging bad credit borrowers exorbitant interest rates, packing the loan with hidden fees and unnecessary add-ons, and yo-yo financing, where the lender tells the customer they're approved, giving them a vehicle, and then later telling them the financing fell through, so they have to sign a new contract, with worse terms in order to keep the car. This puts undue pressure on buyers.
Who is Most at Risk?
Those most at risk for predatory auto loans are borrowers with bad credit, first-time buyers, and those in poor financial situations. It's unfortunate, but unscrupulous lenders may prey upon people who make the easiest targets – that typically means people with the greatest need and fewest resources.
Common Signs of Predatory Auto Loans
There are many signs to be aware of when it comes to predatory lending, and the best way to recognize them is to educate yourself about auto loans and how they work. When you know what to expect, you can do your research and come away from your loan situation in the clear.
It's easier to spot a predatory loan when you know what you're looking for.
High APRs
When you have bad credit, you should expect a higher-than-average interest rate, but you should also know when an interest rate is too high.
The average interest rates for borrowers with bad credit are currently between 19% and 21%, according to Experian's State of the Automotive Finance Market for the third quarter of 2025. So, if you have a low credit score, something between 20% and 25% may not be out of the question.
However, if you encounter a lender or dealer telling you you can only get a loan for 32% APR and that you won't find a better deal due to your credit, you should walk away. A lender or dealer that tries to pressure you into taking a bad deal and uses your credit situation against you isn't to be trusted.
No Credit Check
Sometimes, consumers are looking to get approved for cars at all costs, including taking on a loan they can't truly afford. Most dealers that are on the up and up will look at your credit report and scores to see what you can realistically handle, based on how you've handled credit in the past.
When dealers skip this step and approve borrowers for a loan beyond their means, it only sets them up to default, allowing the dealership to repossess the vehicle and make more money by reselling it to someone else.
Prepayment penalties
Prepayment penalties may seem harmless, but when you're trying to make additional payments to bring down your debt, and you're constantly getting charged a fee, this is predatory. The only thing these fees serve is a profit for the lender.
Balloon payments
Again, this practice isn't predatory on its own, and many manufacturers offer balloon payment financing on vehicles. However, some lenders set up a balloon payment that seems like a good idea, since you're paying so little monthly at first.
But when the time comes, these small payments mean there's a very large lump sum payment that is due at the end of your loan. And, if you can't make it, you default on your contract, which leads to repossession.
Yo-Yo financing
Yo-yo financing is a scam practice where a dealership tells you you've been approved for a loan and lets you go home in your new vehicle. Then, a few days or a week later, they will contact you to say the financing has fallen through. You will have to bring the car back or sign a new contract with worse terms and conditions than the previous loan.
Sometimes, they do this several times to one customer, causing confusion and strife and ruining the consumer's credit in the process.
Loan packing
This is a practice where hidden fees and unexplained charges are "packed" into your loan. The dealers don't mention them, and then you're stuck paying a monthly fee for things you don't need, plus interest on said services.
Things that often get packed into loans are unwanted products and services like paint protection, documentation fees, credit insurance, processing fees, financing fees, extended warranties, and rustproofing or cloth protection. When these products are rolled into your loan, it's typically at a marked-up price, and you could save money by purchasing some of these services separately.
How Predatory Lending Affects Car Buyers
Car buyers are affected by predatory lending in several ways. The first thing that predatory loans cause is excessive debt. When you have an imbalanced debt-to-income ratio, you have more debt than you have the means to pay. This can lead to loan default, repossession, and bad credit.
You may also face a situation where your loan term is longer than necessary, making it impossible to pay off before the vehicle breaks down, especially when you're dealing with used cars. Longer terms also mean more interest collected, and you could be left paying for a vehicle that's not worth anything in the end.
There's also an increased risk of default in most predatory lending situations. This often leads to repo and destroys your credit.
How to Avoid Predatory Auto Loans?
To avoid predatory lending, your best course of action is to educate yourself about auto loans. This is especially true if you're a bad credit borrower.
Bad credit auto loans differ from traditional auto loans and often require more documents and proof that you have the ability, stability, and willingness to take on and repay a car loan.
Make sure you know where your credit score stands, what's on your credit reports, and what the average rates are for interest in your credit score range. Also, research vehicles and check for incentives before agreeing to the first deal you see.
If you can, rate shop to find the best interest rate you may qualify for, and don't take on a loan term that gives you a bunch of negative equity.
One final tip is to check customer reviews for a specific dealer or lender. There's no excuse for going into a car-buying situation blind – all the information you need is generally available at your fingertips.
What to Do If You’re a Victim of Predatory Lending?
If you feel like you've been a victim of predatory lending, you should go over your loan contract right away. Identify any excessive charges or unwarranted extras that were not explained to you.
Then, contact the dealership or lender and discuss your concerns. If possible, negotiate to have these excess charges removed. If you're unable to, refinancing may be the way to go.
Refinancing allows a borrower to get a new loan contract on an existing asset, such as a car, truck, or SUV. Refinancing can help you reduce financial stress and get more manageable terms for your loan. If you can't refinance, you may be able to consider trading in the vehicle for something more affordable.
Finally, when you recognize predatory lending practices, you should report the business to the Consumer Financial Protection Bureau, your State's Attorney General, or the Federal Trade Commission.
