Dealer Fraud

Here we look at some of these common scams and how to avoid them

Artificially low interest rates:
Some dealers quote a lower interest rate when in reality it’s much higher. They do this by either purposefully quoting the money factor as the interest rate or calculating the loan without amortizing some closing fees, like the security deposit, into the loan lease. Take the money factor for example: this is typically expressed as a four decimal digit, something like 0.004. Some dealers quote this as a 4% interest rate when in fact you need to multiply it by 24 to get a rough idea of the interest rate on your loan. In this example, the interest rate is a much higher 9.6% than the “quoted” rate of 4%. Make sure you crunch the numbers and understand the formula they use to calculate their interest rate. Look out for any fees not factored into the calculation. If you are not satisfied, do not enter into the lease agreement.

Terminate your lease early for a low penalty
This is an all-time leasing scam. You ask your dealer how much you will pay if you want to terminate your lease and he tells you: “You want to get out early? Sure thing, you only pay an early termination fee of $300”. What he is quoting is only the small administrative penalty of early termination, there is a much stiffer penalty called early termination fee and this runs into thousands of dollars.
Do not confuse the early termination administrative penalty with the termination fee. Read the small print carefully and know exactly how much you will get charged should you terminate your lease before its scheduled end.

Pay for an extended warranty you don’t need
This is another shell game to inflate the dealer’s profit at your expense. The dealer slides an extended-warranty into the deal whilst it’s already factored into the monthly payments, or he tricks you into buying a 36-month warranty on a 24-month lease.
You do not have to pay extra money for a warranty already built into your payments or for one that goes well beyond your lease term. They might slip an extended warranty in. Don’t be fooled, the warranty is already factored in.

No security deposit
Any dealer who advertises a $0 security deposit is not telling you the whole story. A security deposit is always factored in the lease under the provision for disposition fees.

1. Warranty Facts
You can sometimes get a car that is still under warranty. If this is the case, check with the warranty (perhaps call the number in the warranty book) to ask if there is anything that you need to do to keep the warranty when you buy the car. This often just involves sending out a letter with the purchase information to the dealership.
If you buy from a car dealership, you can often get warranties on used cars. If you want peace of mind when purchasing, consider this option for sure.

2. Warning Signs
If the odometer reading doesn’t match the wear and tear of the car, then you should definitely ask for some records.
If there is any vagueness about getting the service records for the car, you might want to walk away.

3. Getting a Good Price
Because the cost of new cars is going up, there is more of a demand for used cars. This means that some dealerships believe that they can take more money than the car is worth. There are a few things that you need to do to get a good price.
Do your research; check online and in used car guides to find out what the prices of cars listed online to sell are. If you are uncertain about buying a car online, then don’t. Often purchasing a car online means that it will come from a long distance, and as such, you will have to pay exorbitant shipping or delivery costs, which will not be worth the money that you are saving off the sticker price.

4. Making the Payments
Instead of getting a car loan from the dealership and paying the dealer or the seller monthly payments, consider taking out a loan from the bank. You will often get better interest (or financing, as it is called with cars) rates. Go to a bank or credit union before you go shopping for your car. Salespeople will try to talk you into going with the dealership’s rates; you will be better off if you already have your financing set up. Credit unions can sometimes offer even better rates than banks on loans and are an often-overlooked choice.

5. The Information to Get
In some states, you can ask to get the used vehicle information package. This will have the details of the previous maintenance and ownership history of the car.
Always do a complete visual inspection of a car. Even if you are buying a car from the internet, buy one from your province or state so that you can go and check it out first. Alternatively, agree with the seller that you have the right to return the car for a full refund (including shipping) if it does not meet your standards.

6. What not to Trust
Don’t judge the use of a car by it’s brakes; a dealer can buy new brake pads for less than $10, which is often an easy fix for a car.
If a car has rear-door-hinges that are very worn, it might have been used as a taxi, and you should probably find another one. Check the roof of the car to see if there have been any holes filled in; this could have been a sign for a delivery vehicle. They also often have been used a lot.
Be careful if a car looks like it has been freshly painted. This could mean that it has been in an accident that is trying to be covered up.

7. And finally…
Buying a used car can be a great deal for you. You can save money on the car itself, and you can get a safe means to travel. Remember, the condition of the car is more important than if it has had multiple owners, or even the odometer reading. Good luck shopping!

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.

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.

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!

You just bought a new car and have had it a week, you get a courtesy call from your dealer and they mention that they have just got a better deal for you on your finance loan that you took out. You go back to the car dealer sign some new paperwork showing lower monthly payments and later on you notice that the payments have been extended by a long period of time.

What has happened here is the dealer has extended the monthly payments by many more months making it look like the repayments have dropped and by increasing the months it increases the APR interest rates.

How to avoid this scam: If you get a call like this just simply tell them you are happy with you current loan and don’t wish to change.

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.

One of the first questions a car salesman will ask you is, “How much can you afford to pay each month?” This sly question, if you answer it, will determine how much the car ends up costing you. If a car would have cost $300 a month but you let them know you can afford as much as $350, you can bet they’ll find a way to arrange things so that it ends up costing you $350 a month. This is one reason why it’s so important to enter into negotiations with your car loan pre-approved.

There’s nothing illegal or even deceptive about dealers offering loan periods extending out six or seven years. After all, many cars last longer than they used to, and longer loan terms mean your monthly payments are lower than they otherwise would be.
Still, there’s a danger. “These loans take forever to pay off,” says Mark Perleberg, lead automotive expert with NADAGuides.com. You’re likely to continually owe more on your car than it’s worth, because your car is depreciating faster than you’re paying it off. If you’re considering a long loan period, you may want to consider a less expensive car better suited to your budget.
Similarly, some dealers will encourage you to purchase a car for unrealistically low monthly payments now, but with a balloon (inflated or much larger) payment at the end of the loan period. In a few cases, this can be a legitimate way to finance a car. For instance, you may just have graduated and can realistically assume that your income will rise by the time the balloon payment comes due.
Be wary, however. “Make sure you know what you’re doing,” says Wiesenfelder. “If you’re only paying $198 a month on a $35,000 car, there’s a reason. Eventually, you have to pay the principal.”
How can you avoid all of these come-ons? Educate yourself. “Many dealers are good and honest, but there are some that you need to be more careful of,” says Reed of Capital One. “Know what you want to buy and know your alternatives to dealer financing. Then, be careful of the dealer selling you things you don’t want.”

One of the auto industry’s dirty little tricks is the practice of lenders giving kickbacks to dealers for charging high interest rates for the car loans. A good example of this would be when a buyer has been qualified for an 8% loan rate, the dealer can, and will in most cases, attempt to charge a higher rate.

Many dealers will tell you they have a 12% rate available (a lot of consumers do not know better) and will jump at the deal just to get credit and drive away in a new or used car. Your $20,000.00 automobile over a 60 month period would have had a $433.56 payment at an 8% rate but now because you signed your loan agreement for a 12% rate you payment will be $475.64. Guess who get the extra $42.09 per month? You guessed right, the dealer who suckered you into the additional rate of interest.

To get the best possible deal on a new or used car or truck, knowledge and information is your best bet. Knowledge is always power in these cases. Dealer scams such as the increased interest rate, packed payments and other common little tricks can quickly remove any savings that you thought you were receiving. Learn how to calculate you own monthly payments, use the internet to your advantage and learn how to negotiate with dealers.