Monday, March 17, 2008

Great Car, Great Price…. but what about the Financing?

Auto dealers have a long history of using questionable sales tactics to bilk consumers in the market for a new car. Many people keep their eye on the sale price and neglect scams involving vehicle financing, which can add thousands of dollars to the price of a car.
Unscrupulous dealers often arrange financing for your vehicle, but studies show that the interest rates on these loans are often much higher than a consumer could obtain on their own. The arranged financing ends up costing a bundle, and dealerships often get a kickback from the lender on the overpriced loan.

These financing markups cost consumers an average of $1,000 per loan. Studies conducted on sales financed by Ford Motor Credit Company (FMCC), General Motors Acceptance Corporation (GMAC), and Nissan Motors Acceptance Corporation (NMAC) showed that between 26% and 50% of auto buyers have been victimized by auto financing schemes.

Although dealerships don’t have the authority to offer loans or act as bank agents, many dealers claim that they will negotiate with the bank for you to get the lowest payment schedule and interest rate. However, a dealer can only legitimately negotiate the retail price of a car and any items added on during the sale price.

The dealers often direct a lot of business to certain banks, and some of these banks offer the dealers a cut of the overpriced financing. The dealer cut usually comes from increasing the original percentage rate of the loan sold to the consumer. The consumer is unaware that they received a higher rate than they would have received from outside financing and ends up paying thousands more that goes to the dealership.

You should also double-check that the terms of the loan and the number of payments have not been altered from the initial agreement. Look out for “balloon” payments, which will mean a big final payment substantially larger than the monthly payments. Often these payments are not disclosed up front or are buried in the fine print.

So, what can you do to avoid falling prey to these shady financing schemes? Here are a few key tips that will help protect you from being victimized by shady dealers.

  • Don’t deal with any lending institutions (including credit unions) offered through the dealership. Find outside financing first, before you go into a dealership. Credit Unions usually offer the lowest auto loan price for which consumers qualify, and outside financing reduces the confusing paperwork shuffle that can conceal fraud at the time of purchase.
  • Shop for the best loan and loan terms as carefully as you shop for the best sticker price. Be sure of the exact number of payments, the total cost of your credit in dollars, the name, address, and contact info for the bank that holds the loan, and whether there is a balloon payment at the end.
  • Don’t give the dealership permission to pull your Auto Credit Loan information or your personal information (such as a Social Security number) until you’re ready to negotiate the sale of a vehicle.
  • Be willing to walk away. Slow down and read the fine print, ask lots of questions. Negotiate away extras and add-ons.
  • Stay away from spot deliveries. Dealers can take advantage of this by inserting writs of rescission in the purchase contract, allowing a customer to drive the vehicle off the lot, then change material terms of the contract later if, for example, the deal is refused by the lender.
  • After selecting a car model, call your bank or credit union for a rate quote. Then compare it to the dealer’s quote.
  • If the dealer offers zero percent financing, the dealer will not give consumers a rebate on the sale price. Ask the bank or credit union whether it makes sense to take the rebate and finance the purchase at the regular rate. Then compare those calculations with those of the dealer.
  • Don’t sign any contract with an auto dealer that includes a binding arbitration clause. More and more dealerships are adding binding arbitration agreements to contracts for new and used vehicles, as well as to financing contracts. By signing the contracts, the consumer is agreeing to binding arbitration to settle any future dispute and also waiving the right to sue or appeal – even if the dealership committed fraud. By agreeing to binding arbitration, you waive your right to sue, to participate in a class-action suit, or to appeal the arbitration decision. Dealerships use these agreements as a way to avoid costly court judgments and often pick the arbitration company.

A car buyer should also watch out for the shady practice of loan “packing” or “loading”. This starts with a salesperson or manager calculating an inflated estimate for a car loan. This creates "room" for the dealership to add in (or "pack") the sale with other products, such as credit insurance, service contracts, environmental protection packages, etc. Although the manager is adding these optional services to complete the over-calculation of the monthly estimate, he will often tell the consumer that the services are "included" in the monthly payment. What isn’t clear is that these are add-ons that you’re paying for. Not only is the consumer charged for something he or she was led to believe was free, but dealerships will often overcharge the consumer for those optional services.