Dealer Fraud

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.

Make sure you ask for the drive away price, which is the final cost to you including all fees, taxes and options. However, there are other ways to get the best deals on a new car. For example, call the car manufacturer directly and ask about cash back programs because local dealers may be unaware of them. Or if you are in college or are a recent graduate within the past few years, you may qualify for a manufacturers rebate up to $500. In addition, ask the manufacturer for a factory-to-consumer direct incentive. Tell the automaker the type of car you want and they may offer you a cash rebate or low financing. However, check around concerning financing because you may be able to find a lower interest rate from another source entirely, like from a credit union. Or better yet, ask your local car dealer about a customer loyalty rebate which can be worth a few hundred dollars if you already own or lease a car from a particular dealer you are seeking to buy a new car from. Also, if you plan on having future repairs or general services performed at the dealership, let the dealer know this upfront. It may warrant a few hundred dollar rebate since dealers make much of their profits on parts and repair services.

In addition, dealership salespeople may have a secret code you may want to break! The code tries to hide the real value of the car you are trading in and/or the profit the dealer is making on your particular car deal. The code is not standardized throughout the industry, so you may have to put your thinking cap on. Here is how it may work. Look for handwritten notes at the top of the paperwork you are asked to fill out. If you see alphabet letters scribbled on your trade-in appraisal, like for example, FJJJ, this may mean the dealer thinks your car is worth $6000. The F stands for the 6th letter in the alphabet and the Js stand for zeros, which equals $6000. The idea here is if you see notations like this, you may safely assume the dealer thinks your trade-in is worth something different from what is being offered to you. Be subtle, but this is your cue to try and get more for your trade-in. Always get your trade-in appraisal in writing. This keeps the dealer from offering you much less for it when your new car arrives if the new car you want is not on the lot when you make your final deal with the dealer.

Furthermore, consider ordering your new car direct from the factory instead going to a dealership car lot. This way you can possibly avoid costly options that too many dealership cars come loaded with. A dealership may likely accept a small profit from a factory order because it is a quick and easy sale, plus the dealer then does not have to pay the automaker for storing the new car on the dealers lot!

However, the flip side to this is if the dealer thinks you may opt to order from the factory, he may be willing to significantly cut the price of the cars on the lot more so than usual. Also, any rebates and incentives you get deducted from the price of a new car, always make sure they do not expire before you take delivery!

You find the car you are interested in buying and have pre-arranged a banker’s check with a reputable online lender or credit union. When you go to pay the dealer explains that they cannot accept the bankers check as they have had trouble with them cancelling the checks in the past or they always seem to bounce. The car dealer then offers you a loan to sort this problem out as you are eager to buy your new car but the interest rate on the finance is higher than what you had previously arranged.

If your bankers check was with a well known company then there should never be such issues as the car dealer is explaining as if would be well known news.

If the dealer offers you a better rate of interest then there is nothing wrong here.

How to avoid this scam: The best thing to do here is work out if the loan has a higher interest rate than you are currently paying and if not then tell them you are on to their scam and walk out the door.

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.

Dealerships too often “markup” their car loans interest rates which are initially approved by the banks or money lenders that the dealership goes to on behalf of car buyers who are looking for the lowest possible interest rate! For example, the “deal” may go down something like this:
You go into a dealership to buy a car and eventually you will meet the dealership’s finance manager. His job is to make as much money for the dealership as he can!
He tells you that your car loan has been “shopped around” to different lenders and the best possible interest rate for your particular car loan is, for example, let’s say, 14%. However, the lender may have actually approved your car loan at an interest rate as low as 11%! This means he effectively is “marking up” your interest rate by 3%, thus overcharging you probably thousands of dollars!
Making matters worse, the dealership and lender may end up splitting the profit they make when overcharging you! The 3% you are overcharged in this case may add thousands of dollars to the cost of your car over the course of the loan!
Possibly consider not even going through the dealership for a car loan and shop around on your own for lenders. Or, when the car dealer’s finance manager offers you his “so-called” best possible interest rate, tell him it is too high and if he cannot lower it you may have to shop for a car elsewhere!

Most dealerships that arrange financing do not provide the credit themselves. These dealerships assign the contract to a finance company, and receive a markup (often called a “dealer reserve”) if the interest rate on the contract is above the bank’s “buy rate.” What customers don’t often realize, however, is that the interest rate quote they receive is discretionary. Dealerships can, and often do, quote interest rates significantly higher than the bank’s “buy rate.” The markup is their profit.

Some dealerships, however, take advantage of customers by misrepresenting (or implying) that the interest rates they quote come directly from the bank and are non-negotiable. This is misleading because dealerships generally have discretion to quote any interest rate up to 3 percentage points above the bank’s “buy rate.”

The lesson for consumers is that financing rates are always negotiable. Dealerships that imply their hands are tied on a particular financing rate are probably not being honest with you.

Another form of auto fraud is the practice of quoting a lower interest rate than the rate that is ultimately included in the contract. This tactic is intended to make the customer believe that they are getting a better interest rate than they really are. A higher interest rate by even one point could end up costing the customer hundreds, even thousands, of dollars over the life of the loan.

To avoid this practice, make sure the ANNUAL PERCENTAGE (APR) box on the contract accurately reflects what the dealer quoted you. You may also wish to ask the dealer what the Buy Rate is. The Buy Rate is the rate at which the dealer can get a vehicle financed. Any rate above the Buy Rate means that the dealer can make more on the sale. Most reputable finance companies do not allow the dealerships to impose an APR that is more than 3 percentage points over their buy rate.

Your options are not as limited as you may think in this situation.  This situation is created when a dealer performs a “spot delivery,” which is a sometimes risky venture on everyone’s part.  Essentially, the dealer obtains your credit report (with your permission), and you and the dealer agree to terms for a vehicle that you want to purchase.  The dealer, wanting desperately to sell you a car, will often just delivery the vehicle and “guess” at the finance rate.  If the dealer gets it wrong and the lender requires different terms (which might include more money down, a higher interest rate, and/or a shorter term loan), then they guessed wrong and have to give you the bad news.  The letter you received in the mail is referred to in the industry as a “10-day letter,” because a provision in the letter allows the dealer to rescind the contract within 10 days if they are unable to obtain financing on your behalf.  When you receive this letter or phone call, you may be getting set up for the “yo-yo contract,” which is a type fraud where the dealer delivered the vehicle at terms that you thought were favorable but the dealer acted in bad faith.  In this instance, the dealer may have already sold the vehicle you traded in., and then you get the call telling you they need another $1,000 or more down in order to get you financed.  Now you are stuck - either agree to whatever the dealer offers or return the car and be without transportation because they sold the car you traded in.  This type of fraud can be difficult to prove and will most likely require professional or experienced assistance, and the worst part is that it is very inconvenient for you because of the transportation situation.  Your best defense is to act quickly to get this resolved.

It never ceases to amaze us how cunning some car dealers are — they seem to constantly think of new ways to take advantage of car buyers. One of the most recent car dealer ploys is Spot Delivery.

Spot Delivery: You’ve chosen the car you want, filled out all the paperwork (including the car loan application with the car dealer’s finance department). The car dealer tells you that although your loan hasn’t been “officially” approved yet, you can drive the car home anyway.

Don’t.

Here’s what can happen if you do: A few days later, you’ll get a call from the car dealership saying your loan wasn’t approved at the interest rate you discussed. However, you were approved at a higher rate.

This means that you’ll likely pay thousands of dollars more than you expected.

Further, if you try to call off the deal, the car dealer will either tell you that they already sold your trade-in so you have no options, or they simply will say they’ll sue you if you don’t agree to the new terms.

The worst part is that you probably are stuck, because the loan agreement included a “writ of rescission,” which means that you agreed to pay a higher interest rate if you did not qualify for the loan at the original, agreed-upon rate.

Be careful. And don’t take your new car home from the car dealer until all the i’s are dotted and the t’s are crossed.

Now, the Dealer has to sell “the paper”. That means the Dealer has to get the Bank or some other lender to buy the retail instalment sales contract or the lease agreement, if they haven’t already. Most of the time, the Dealer has gotten a tentative (or even final) loan approval on the deal before the car is actually delivered to the customer.

One thing also to be aware of when you finance the purchase of a car through a dealer is that dealers receive a kickback from the lenders for the privilege of faxing your credit application to the lender. The dealer and lender share in an undisclosed “yield spread premium” as it’s called in the industry. Yield spread premiums are a dirty little secret, the auto lending industry has not owned up to. Car dealers do not do the actual money lending, but they send the buyer’s application to lenders, who tell them what interest rate the buyer would qualify for. That rate is called the “buy rate”. However, if the dealer already got the buyer to sign onto a loan with a higher interest rate, the dealer and lender split this extra “yield spread premium” which can result in thousand to several hundred dollars difference.

In those cases where financed has not yet been approved, the car is “spot delivered” to the customer. In California, a dealer has 10 days to get the financing approved. The forms Dealers use in California state that the customer agrees to either get their own financing or to bring the car back if the Dealer is unable to assign the loan within 10 days of the contract. The Dealer is required to refund any down payment or the trade in vehicle’s allowance, less some small charge for the customer’s use of the vehicle, often based on mileage driven.