Beware of Graduated Payment Plans That Promise Very Low Payments When You Buy Your Next Car
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Beware of Graduated Payment Plans That Promise Very Low Payments When You Buy Your Next Car

A low monthly payment with no money down may sound like a great deal, but that payment quickly goes up to very high amounts on these plans

July 31, 2025

If you’re shopping for a new vehicle, steer clear of dealers using graduated payment plans to lure you in. Late-night TV ads and flashy website banners promise no money down and payments as low as $189, but after just a few months, those payments can jump to $350 or more. Read on to learn how these plans work and how to protect yourself.

They Really Are Too Good to Be True

Graduated payment plans start with an artificially low installment amount that increases at set intervals. The teaser rate only applies for a handful of months before ballooning. Dealers count on you falling in love with the car and “kicking the can” by agreeing to the higher payments down the road.

Why Dealers Use This Tactic

Dealers want you in the showroom and behind the wheel. A low teaser payment gets you through the door. Once you’ve committed, they shift you to a high rate, often above 20% APR—to recoup profit. Fine print flashed on screen or buried in the contract shields them from liability.

How Graduated Plans Trap You

  • Payment shock: Your monthly bill spikes mid-contract, stretching your budget.
  • Negative equity: Low early payments mean you’re barely covering interest, so you owe more than the car’s value.
  • Refinance challenges: High balance and poor equity make it hard to refinance to a lower rate.
  • Early payoff penalties: Some plans impose fees if you pay off the loan or refinance early.

What You Should Do

  • Read the full amortization schedule: Insist on seeing each payment amount over the life of the loan before you sign.
  • Compare APRs: Ask for an annual percentage rate (APR) and calculate the true cost over the loan term.
  • Get financing preapproval: Secure a loan from a bank or credit union first, then negotiate the vehicle price separately.
  • Watch for caps and fees: Confirm there are no hidden prepayment penalties or mandatory add-on packages.
  • Calculate total cost: Multiply the monthly payment by the number of payments to see the full obligation.
  • Stay firm on your budget: If the payment jumps above what you can afford, walk away.

Additional Tips

  • Check dealer reputations: Read reviews and complaint histories with the Better Business Bureau.
  • Bring a friend or advisor: A second set of eyes can catch red flags in the contract.
  • Negotiate price separately: Focus first on the vehicle purchase price, then discuss financing terms.
  • Use secure payment methods: Avoid financing add-ons like extended warranties or GAP insurance until after you’ve finalized the loan.

North Carolina Consumer Resources