Dealer Fraud

A lot of people get confused or excited when they see a car dealer advertise a $99 a month payment. Sometimes the dollar amount changes, dealers will use a $47 a month payment or some other low number. In fact if a car dealer advertises in this manner they should avoid doing business with them. The reason car dealers use this advertising method is because so many people are fixated on what their monthly payment ends up being and they never understand how that number was generated.

You must understand how a car dealer arrives at your monthly payment to determine whether your $385 monthly payment is a good price or a bad price. Many people don’t understand that two people can have the same $385 payment for the exact same car and one person got a good deal, the other a bad deal!

Your monthly payment is a combination of the following: an interest payment for your loan, a fraction of your actual loan (if your loan is 48 months you pay 1/48 of the loan each month) along with any other fees or taxes you might have rolled into the deal. These are the separate elements that make up your monthly payment. So you must have negotiated a good purchase price for your car or your monthly payments will never be a good deal. This is true whether you are buying or leasing your next car. No figure has a bigger impact on your car deal than the car’s purchase price - common sense when you think about it.

Now you must take the vehicle’s purchase price and subtract any down payment or trade-in allowance. So if you are buying a $25,000 car and you put $5,000 down or give the dealer a trade-in worth $5,000 your financing figure becomes $20,000. Now we take that $20,000 and add any additional fees you might have rolled into the deal to create the final amount of money you will be financing.

When you go to financing you need to determine how much interest you are paying on the money you are financing, in our example let’s use $20,000. The length of your loan determines the number of monthly payments you will make. A common rule of thumb is the longer the loan and the large amount of money you finance, the higher your finance rate will be. So do not be afraid to ask if your financing gets better if you shorten your loan term.

For instance, let’s say two people are financing the exact same car for the exact same amount of money, $20,000. One person got a rate of 7.9% financing for 60 months. This person will have a monthly car payment of $404.57. The other person got a rate of 4.9% for 48 months. This second person’s monthly payment will be $459.68. Now remember, they both are financing the exact same amount of money, so who has a better deal? You see, the first person is paying $404.57 per month for 60 months for a total of $24,274.20. The second person is paying $459.68 for 48 months for a total of $22,064.64. The person with the higher monthly payment ends up paying $2,209.56 less for the exact same car!

Car dealers advertise $99 a month payments because they know that any potential customer who walks in the door off that ad is fixated on their monthly payment. This allows the dealer to jack up the financing rate, spread the payments out (some dealers now push 72 month loans). By hiking your rate several points and stretching the payments out an extra year or two the car dealer and the bank will make additional thousands of dollars on every customer! Don’t let this dealer fraud happen to you! Buy smart, don’t be fooled into judging a car deal by the monthly payment, it’s the easiest way to get scammed by a car dealer!

There are several ways they get you here. The first is to tell you they are giving you a great price on your trade in and then on the contract it is much lower. This happens a lot when you owe money on you trade in and have equity in it. They will put in the contract the pay off which is added to your loan amount but somehow forget to credit you with the additional equity you are using for a down payment. Check your contract carefully and make sure they give you the equity you were promised.

Another common scam is to not pay off your trade in right away. You are still responsible for the payments until the car is paid off. If the dealer takes months to pay it off, the lender will come after you for the back payments. This could hurt your credit. Make sure you have it in writing that they will pay off your trade in no more then 10 days. Call your lender the following week to verify it was paid.

In an effort to finance everyone, some dealerships offer crazy loan packages. This might include zero down loans, extended loan terms, etc. While these options sound appealing, and they may help you afford a nicer car, keep in mind that car’s lose their value quickly. Thus, avoid long finance periods. If possible, attempt to have the car paid off within four years. Also, save money for a down payment.

Down payment is the amount paid by the customer that covers a significant part of the actual cost. This amount is deducted from the actual cost and loan is taken to pay the remaining cost. Interest rates on such loans are greatly influenced by the down payment. This situation is true even for cars. However, one needs to be wise while making a decision on how much down payment to be made while purchasing a car.

While buying a car, a customer is expected to shell down at least 20 percent of the vehicle cost towards down payment. This strategy is quite beneficial as it ensures that the buyer is not “upside down”, meaning that the buyer is not owing more than the actual value of the car. Being upside down is not financially beneficial as the buyer would end up paying an amount that is higher than the car worth. Also, the car would have a negative equity or fetch less value when one wants to trade in his old car to a new vehicle. When a customer makes a 20 percent down payment, he would be the one dictating financial terms. In these situations, buying or trade-in of an old car would always be at the discretion of the buyer.

While taking a car on lease, an entirely different strategy works out. “Cap cost reduction” is the term used when down payment is made while leasing out a car. With the intention of lowering monthly payments, many times people make a down payment of at least $3,000. In times of an accident, this down payment is taken as the coverage for the car damage and is not refunded. There is no chance of getting this money even if the customer has a collision and gap insurance. Hence, it is not advisable to put money on the car that is being leased out. Since, leasing does not require any down payment, the amount that was intended for such purpose could be saved in a bank account. Customer would be in a favorable situation if he is ready to make higher payments and roll the drive-off costs into monthly lease payments.

Often a customer will not qualify for financing upon the terms on the first contract. The customer may be required to increase a down payment, higher APR, etc. in order to qualify for a loan. The dealership has the customer come to sign a second contract with the different terms but backdates the second contract with the date of the first contract. This affects the finance disclosure laws in that the customer is being charged interest for a time period in which the contract is not yet in effect, etc. In addition to making a material misrepresentation regarding when the customer takes the obligation of the new contract, a backdated contract often also violates the single document rule  because another form (usually called Acknowledgment of Rewritten Contract) has the actual date when the contract was signed. Further, many customers are not told that they do not have to sign a second contract, instead they can choose to cancel the contract and return the new vehicle and have the down payment and trade in vehicle refunded. Finally, a dealership only has 10 days to tell you they want to make changes to the contract or cancel the contract. After the 10 days, the dealership cannot change the deal.

GAP Insurance, also referred to as GAP Waiver or GAP Addendum, is an abbreviation for Guaranteed Asset Protection. In the event your insurance company declares your vehicle a total loss from accident or theft GAP Insurance will pay the difference between the ACV (Actual Cash Value) your insurance company determines they will pay and what is owed to the bank on your vehicle. An easier way to explain this is that GAP Insurance will pay your negative equity (difference between your vehicles ACV and what is owed to the bank) so that you are not responsible to pay the bank, potentially thousands of dollars, on a vehicle you are no longer able to drive. Most GAP Insurance companies will also cover your insurance deductible and may give you additional money to use as a down payment on a new vehicle.

The well-informed buyer is the wisest, while customers who haven’t done any research frequently get confused by the seemingly endless stream of complex information that comes with buying a car. Car dealers often work around a method which bounces profit potential from one transaction to another. If a customer is set on getting a good deal on their trade-in, a car dealer may then choose to concentrate on inflating monthly payments or the down-payment.

Car dealers are also not legally obliged to offer you the lowest interest rate you qualify for. Once a rep has run your details on the credit check they’ll know your income, housing status and if or when you were late paying your rent or mortgage. Some new and used car dealerships obtain this information when the customer is taking a test drive, and the car dealer is already adding up just what price they think you’ll pay.

And if you sign up for a higher rate than the car dealership pays back for the car, you’ve just gifted them some more. Often this difference lies in fractions of percents on your rate. Find out which rate you qualify for first.

Royce says a confused or inattentive buyer can also lead to “slamming.” In this case, a car dealer may take charge and hurry them through every step: the test drive, into the office, the write-up, a quick negotiation, sign the papers and drive home. And then, a few days later, enter the infamous “buyer’s remorse.” Royce says that, unfortunately, this is more common than you might think.

But you, the smart buyer, have negotiated all these obstacles and just when you think you’re winning in negotiations, you’re introduced to a secondary sales rep that you are told is the car dealership manager. Surprise, he’s just another sales buddy brought in when closure on the deal appeared to be slipping. Often the sales team will split commission in this scenario. And they both know that additional options are a car dealer’s bread-and-butter, though the practice of “back-ending” a deal, or adding additional charges to option lists without the customer’s knowledge, is illegal in many states.

Here are some tricks dealers and leasing companies may try and play on unsuspecting vehicle buyers. Watch out for mileage limitations that get lowered when it comes time to sign the contract. Read each and every page carefully because unscrupulous car dealers have been known to “fan” the paperwork, exposing only the places they want you to sign! This essentially does not easily allow you to scrutinize what you are actually signing. Also, some car buyers have ended up leasing when they they thought they were buying! Sales managers and sales reps know how to create confusion when it is time to sign the contract.

Always note every option because you may get charged for optional equipment on the car that is not actually included in the final price you thought you negotiated. To be sure try and compare the description of the car in the lease agreement to the window sticker description of the car you think you are buying.

Never pay upfront for the full cost of optional equipment just to get a certain lease price. Options should always be added to the selling price and made part of the lease payments.

Always look beyond the monthly payment when considering leasing. The “gross capitalized cost” is a fancy term for the auto’s “purchase price“. This is always negotiable no matter what the dealer tells you and always ask for any possible rebates or dealer incentives available at the time of the purchase.

The “capitalized cost reduction” is really the “down payment“. Put down as little as possible on the front end of a lease.

The “money factor” or “lease rate” is the “interest paid”. To determine the real interest rate multiply the money factor by 2400 which converts your approximate annual percentage rate. For example, .00310 x 2400 is 7.4% interest annually. Make sure you include the taxes into your monthly payment to make sure you can afford the payments.

It is also wise to add in the capitalized-cost reduction, acquisition fees, all the monthly payments and any disposition charges due when you return the vehicle at the end of the lease to figure out exactly what you will really end up spending for the auto over the life of the lease!

Unfortunately you did not really read the small, fine print which states “subject to financing approval”. Now if you do not agree to pay a larger down payment and higher interest payments the car dealer may say “we will report the car as stolen!” Too much time has gone buy so you cannot cancel the deal and your trade-in has already been sold! A variation on this fraud is the dealer calls you a few days after you have driven the car off the lot without a signed finalized finance deal in hand and says he can lower your monthly payments if you sign a new contract but he actually ends up raising your annual percentage rate thus charging you more by spreading your payments over a longer period of time!

Some car dealers may possibly try and do anything to get your monthly payments as high as possible. Salespeople may too often misquote and inflate monthly payments. For example, they may say a $400 a month car payment for 5 years is a 9% interest rate, when, in fact, it is not and probably is higher than 9%! You would like to think you could trust the car dealers finance manager who computes the interest rate and monthly payments correctly but do not count on it. Moreover, make sure you see everything in writing, including the down payment, the correct amount of money you are borrowing and so forth. However, still the safest thing to do maybe is get an independent third party, like your bank, to correctly calculate your car dealer’s proposal before you sign on the dotted line.

Furthermore, beware of overpriced, costly options. They may significantly inflate your monthly car payments. If a salesperson says a particular option if free, odds are you cannot believe it.