Dealer Fraud

Consumers who want to trade in their vehicle and who own more than what their vehicle is worth or what the dealership will actually give you for your vehicle most often become the victim of the negative equity scam. Usually if you have negative equity the dealership will try to add the negative equity into your new auto loan. When this scam happens you are paying taxes on the entire auto loan. Thus you are actually paying double the taxes on your trade in!

The best way to avoid negative equity scam is by keeping your car for the entire loan term. If you believe you have been a victim of this scam contact your dealer. If the dealer refuses to help you try to contact the dealership district manager. If this doesn’t work you should contact the Better Business Bureau and file a complaint, as well as contact the DMV in your state. It is also a good idea to contact a dealer fraud attorney in your state you will be able to review your case.

Sometimes when consumers purchase new vehicles they discover that they are “upside down” on loans for vehicles which they wish to trade in. In situations like this, dealerships are required to disclose how the negative equity is calculated on the face of the Retail Installment Sale Contract or Motor Vehicle Lease Agreement. Most of the time you can accomplish this disclosure if you properly complete the section of the contract, which is entitled “Itemization of the Amount Financed.” In this section you can find line items which refer to the agreed trade in value, “prior credit or lease balance” and “net trade-in.” In case you think that these items were completed incorrectly, you may have rights provided by the Automobile Sales Finance Act or the Vehicle Leasing Act.

The amount paid by the customer that covers a significant part of the actual cost of the vehicle is called down payment. 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. However, the decision about how much down payment should be made when you purchase a car should be very wise.

The expected down payment of the car should be at least 20 percent of the vehicle cost. 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.

GAP Insurance is also known to the public as GAP Waiver or GAP Addendum. It is an abbreviation for Guaranteed Asset Protection. In case 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.

Currently most consumers are ready to get longer-term auto financing car loans (48, 60 or even 72 months). This usually means that it will take longer to get into an equity position with your vehicle. Of course even if you get into a negative-equity situation with your car loan, it won’t necessarily affect your overall credit score. However it could affect your purchasing power and it could impact the auto loan rate you get for your next loan.

Extended-term financing could be a good option for those consumers who like to keep vehicles for extended period. If you’re a consumer who likes to purchase a new vehicle on a fairly accelerated frequency, say 24 to 36 months, then that extended financing may mean that you end up with negative equity when you go in to trade your vehicle.

In vehicular terms being upside down in your car is a financial problem. In car dealership slang, it simply means that at the end of your auto loan, you still owe more money to your car financing organization than the vehicle is now worth.

For example if you buy a $30,000 car with $2,500 down, finance it over a common 60-month term, but in three years you decide you want to sell it. Your payoff on the auto loan is $18,000, but your car is only worth $15,000 at this time. This means you are $3,000 upside-down, because in order to pay off your original auto loan, you would need to make up the difference between what your car is worth ($15,000) and what the car loan payoff is ($18,000).

Today it is not uncommon for consumers to be upside-down in an auto loan. According to Jim Moynes, who is the vice president, automotive marketing for Ford Motor Credit Company, one of the world’s largest auto finance companies, “negative equity,” or being upside-down, depends to a great extent on how you structured your purchase in the first place.

He says, “A large portion of the vehicle’s depreciation occurs in the first two to three years of ownership, regardless of make or model. Loans amortize over the term of the loan you took out, and typically there’s a period there where the depreciation outpaces the amortization. When you’re in that period, you’re in a position where you have negative equity. Once your amortization crosses over that line of the depreciation curve, which typically flattens out as the vehicle gets older, you get back to equity.”

Car dealers are aware that most of their customers buy cars based on price, but people also consider their budgets. That’s why when you go to the dealership to shop for a new car the dealer tries to focus the conversation not at the price of the car but the monthly payment you can afford.

The car dealer will typically start with a monthly payment that is two or three times what you told him you could afford. They can expect that you will be shocked when you learn that the payment is higher than you thought you would pay. They usually figure that as your monthly payment goes up, the loan length goes down, but watch out for the guy who does it both ways.

One of the dealer tricks used in cases like this is “the ether.” Salesperson tries to put the customer in the ether, the situation when the customer is excited, so they do not notice what is happening to them in the deal. And this is the best situation for the salesperson to make profit.

You can avoid this dealer fraud if you follow several simple steps. Most importantly make you budget and know exactly how much monthly payments you can afford before entering the dealer’s lot. If you want to have some “room” left over, then you should try to spend at least 10% less than your budgeted amount. Always stick to your number and never go above your budgeted number. Remember that you may get into trouble if you buy a vehicle that you can’t afford. Probably the next time you go shopping you’ll hear the salesperson inform you’ve got negative equity.
Before you sign the contract read the document carefully and make sure that everything you negotiated and agreed with the dealer is written down on the contract.
Another thing you should look for on the contract is any point regarding “arbitration” or a “jury waiver”. There should be nothing written about this on the contract. Remember that you don’t have to give up your legal rights just to buy a motor vehicle. If your contract includes an arbitration clause or jury waiver don’t sign it. You are probably dealing with a dishonest dealership and the best thing to do is just walk away from the deal.

Often car dealers tell consumers that their trade-in vehicle is worth less than it really is and a lot less than customers think it is. What’s even worse sometimes they fail to inform the customer that the car has a so called “negative equity“.
Negative equity is the term most car dealers use to explain why your car wasn’t worth what you owed on it when you wanted to trade it in.
“Upside down” or “in the bucket” are similar terms that car dealers use to trick car buyers in order to literally steal the trade-in vehicle. This happens when the dealer takes the car as trade-in but later adds the payoff amount to the price of the car that the customer is buying.

Avoid this scam: Know for sure the price of your trade-in and the amount of your loan payoff before going to the dealership. You may check trade-in values online. Look in newspapers to see what dealers are selling your kind of trade-in vehicle for. Remember, the more you are informed, the harder it will be for the dealer to scam you. Also, be careful for each step of the process.

This fraud occurs in a transaction that includes a trade-in vehicle when more is owed on the trade-in vehicle than the actual cash value of the vehicle. Car dealer makes the customer believe that the dealership is valuing the trade-in vehicle at the amount owed and makes sure the customer won’t owe anything on the trade-in. However, later the customer finds out that the value the dealership paid for the trade-in is less than the amount owed. The difference is added to the cash price of the new vehicle, which is called the capitalization costs of a leased vehicle. Thus, by inflating the cash price or cap costs of the vehicle, the customer is illegally paying more in sales tax and registration.
Keep in mind that the dealership may also be violating the laws related to selling a vehicle for the advertised price. According to the law the dealership may not sell the vehicle for more than advertised price. A similar illegal practice may occur when a lease balance is paid off. The above mentioned practices are still illegal and constitute dealer fraud even when the customer is told what is happening.

Below is a list of auto dealer activities which may signal possible auto fraud in your automobile purchase or lease transaction of a vehicle in California.

• Switching the consumer from a sale to a lease without full disclosure
• The sale of a vehicle which was previously repurchased from a prior owner as a lemon without full disclosure to the consumer
• The sale of a vehicle that was previously salvaged as a total wreck without full disclosure to the consumer
• The sale of the trade-in vehicle and then later undoing the transaction
• Failing to provide the consumer with a written contract in the language in which the consumer negotiated the transaction (in Spanish, Vietnamese or Tagalog as well as certain other languages)
• Improper calculation of the negative equity on the trade-in vehicle
• Failing to disclose to the consumer the vehicle history including records of all substantial accidents causing considerable damage
• The sale of a vehicle that was previously used as a rental vehicle without full disclosure to the consumer
• Charging more than the advertised price for the vehicle

The dealer may commit many other improper acts that may not constitute fraud by themselves. At all events, if one or more of these types of behaviors occur the dealer may indicate that there is something improper about the transaction. That’s why the consumer should be very wary about signing any documents without further review and understanding of the transaction.