Savvy Shopper: Dealers are Honest. Really, they are. No, Really!
Dealers are basically honest and can regulate themselves. True or false?
I'd love to know your opinion on this question and I bring it up for two reasons. This week I read a news item that said the government was considering creating an oversight agency that would, among other things, prevent fraudulent lending practices of dealers. Apparently, this is the number one ranked complaint from consumers, according to an annual survey by the Consumer Federation of America and other consumer groups.
What caught my eye was the list of shenanigans that goes on in the finance and insurance room (F&I). When I got done reading the list I felt sick to my stomach.
Here are just a few of the predatory lending practices that agency would have prevented:
- Bait-and-switch financing, also known as "yo-yo" financing.
- "Loan packing" -- misrepresenting the costs to finance over-priced add-ons.
- Forging loan documents and/or signatures.
- Failing to pay off outstanding liens on traded-in vehicles, as promised, a.k.a. "car kiting."
- Charging excessive, hidden dealer "markups" of interest rates.
- Price gouging by Buy-Here-Pay-Here lots, where dealers carry their own finance paper.
The second part that caught my eye is that later in the week Rep. John Campbell (R-Calif.) -- who worked in the auto industry for almost 25 years -- introduced an amendment that took the dealers out of equation. His amendment passed the house prompting the National Automobile Dealers Association (NADA) to comment, "It makes sense to exclude dealers. Dealers had absolutely nothing to do with the credit crisis."
Does that make sense to you? Have dealers participated in any of the above lending practices? Yes. Absolutely. In Confessions of an Auto Finance Manager, Nick James, my source, who spent six years as an F&I guy described "packing payments" as a common practice in the F&I room.
"We'll say that (the dealer) could actually sell the car for $450 a month but they got the customer to agree to an extra $50 on the payment," James said. "That $50 a month 'bump,' extended over a five-year contract, is an extra $3,000.
"Now, when I got the deal in the F&I room, I knew all I needed to do was find products and services to fill up that extra $50. In a way, the customer had already bought the things I was selling. All I needed to do was justify the extra expense. This was easy since I could sell them an extended warranty, inflate the interest rate or juggle the numbers to add up to the total payment."
While it makes me sick to think of trusting car buyers being duped in the F&I room, the solution for the consumer is relatively simple. If you get pre-approved financing before you go to the dealership, you will avoid agreeing to become a "monthly payment buyer."
What about the other predatory lending practices on the list? Don't worry, dealers don't do those things. Just call Representative Campbell and ask him. His web page tells us that he "spent a majority of his career representing several automobile franchises, including Nissan, Mazda, Ford, Saturn, and Saab." So he knows what he's talking about. Dealers would never do those things. Honest they wouldn't.
The longer I'm in this business the more I feel that you should work your car deal backwards -- start with financing and let that lead you to the right car at the right price. There are some great finance deals out there, if you can get that rate and those terms into the contract. Don't go near the lot until you have a firm grasp of all the numbers. Here's an overview of financing which should be required reading for anyone buying a car.
- Posted by
- Philip Reed October 26, 2009, 12:26 AM
- Permalink
- Categories:
- Car Buying, Car Loans and Financing, The Savvy Shopper
They are not 'basically' honest, and no, I don't think they can regulate themselves, but, I also don't think that gov't intervention is needed. As witnessed in the last year or so, those shady dealers or those dealers that did not win over customers and their loyalty have mostly been shutdown.
What a dealer has to realize is that if they win the customer, treat the customer right, and the customer leaves happy without later regret, they have that customer locked in for life, especially those dealers that carry multiple brands.
I've seen too many dealers in the news that are shutdown by DMV for not paying taxes, not paying off the old car loans, being sued for bate & switch, etc.
I think in this instance, capitalism works, but, the customer is ultimately responsible. The banks should audit the dealer and the records of proof of income, and if they find falsified documents, pull out of the dealer and don't service them.
If the customer walks in with lust over a car, or completely illiterate to the car buying world, most likely they'll get preyed upon. If you walk in, know exactly what you are going to pay (within reason), have pre-approval for the loan with a check in hand, then you are much better off. The dealer will still try and funnel you through the finance department and sell you all the add-ons, just refuse and tell them to stop wasting time. If they don't want to cooperate and accept your cash/check, threaten to walk out. After all...it's business.
Lemon laws seem largely ineffective, but some states don't even have them.
Connecticut has some weird law that everyone HAS to be offered the same crap at the F&I department, and all of the dealers have cameras in the office.
Not sure how effective it is, but you never hear anything as bad as what comes out of Kentucky or whatnot (read an article a ways back about them not really selling a vehicle to someone, then repo-ing it after payments were made . . .)
Easiest thing to do would be to analyze current state laws and put national versions of the "good" ones in place. Any Monkey-business that isn't associated with sales (Finance, Service, Parts) should be done away with.
The sales part is just the free-market system and your mileage will vary. There should be no surprises after you get a set number (yes, they're going to pester you about the extended warranty, but that is expected).
I drive a lot of miles and have bought a lot of cars over the years. One thing I have learned is that every dealership employee believes they are "honest," the difference is interpretation. What the consumer sees as a shady rip-off, the dealer sees as exercising his legitimate right and responsibility to maximize profit on every business transaction. If you remember that going in (no hard feelings - they are just doing their job), DO YOUR HOMEWORK, stay on top of the numbers, and are cordial but not afraid to walk, you'll get a good deal and the whole experience will be pleasant.
Seriously, you have to ask? Does the sun come out in the morning? There are of course honest dealers and sales people out there. There are some terrorists with a heart too.
I've had good and bad experiences buying cars, and more specifically in and out of the Finance department. I think you can usually tell if someone is being honest, or if they are sly, although you don't meet the finance guy until the end! But if you are not getting the right impression with the salesman, walk out, you will be glad you did. By they way, if you need practice on walking out on dealers, just go looking at cars on the weekend, when you are truly not in the market, it is so much easier to say "no" when you dont want a car. Once you do it a few times, it is easy to say "no" to the shady salesman when you do want a car.