Dealer Fraud

There are several important things you should do before you enter a dealership and start shopping for a new car. One of the most important things to do is determine your budget. Come up with a maximum monthly payment allowance, and a maximum down payment that you will not go over. When you know exactly how much you can afford to pay for a vehicle you will look only at vehicles that are in your budget. Think ahead! You may be financing for 3-4 years and you probably don’t want not be able to pay other bills because of your car payments.

Also consider your trade-in. If you still owe money on your old vehicle then you should contact your bank and get your pay off. Also find out what the fair market value is for your trade-in vehicle. Remember that the dealership will never pay the fair market value for your vehicle. Make sure you are not upside down on your car loan.

If you can’t afford a new vehicle, then you should consider a good used one.

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.

This is one of the common scams car dealers use to trick individuals that may be upside down in their car payments, i.e. own more money than the car is worth. If the buyer can’t seem to get out of their old car because they owe too much money and can’t get a new loan, the dealership would coach them to stop making payments and to have their car repossessed. The dealer informs the buyer that if their old car is repossessed the dealership will just take the car and cancel the debt. However, this is not true. In fact, this can destroy the buyer’s credit and make it difficult for other purchases they may need to make later.

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.

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.”

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.

Sometimes car buyers decide to trade up the car they are driving to a more expensive car even before they have finished paying off for that car. The most common way to do this is “rolling over” the remaining payments on the current car into a new car loan or lease.

Though this is not illegal, it can be risky, because the car buyer may end up owing more on the second car than it’s worth. In the terms of the automobile world, the car buyer will be “upside down” in the vehicle. In case the vehicle is totaled in an accident, or in case the car buyer decides to trade the vehicle in, the car buyer will have to write out a big check to cover the remaining amount of the loan.

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