3 Auto Dealer Tactics To Avoid

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One of the big winners in the latest government regulation overhaul are auto dealers.

The auto industry was exempted from oversight by the new regulations. Since people apply for their car loans at an auto dealership about 80 percent of the time, according to J. D. Power & Associates, the shortsightedness of the government to oversee this requires potential auto buyers to be on the lookout for possible tactics by dealerships to ‘pad’ the profit margin within the financing arena.

Because of this, it’s worth examining some of the practices that might turn out to bite you in the wallet if caught unaware. Let’s take a look at three financing areas that are famous for such a situation.

THE YO-YO SALE

Even though this is rare, it can be truly insidious and would most likely escape oversight by the new customer because auto dealers, not banks, are the main perpetrator. Here’s how it works:

When closing the deal, customers sign contracts agreeing to an interest rate and price. They then drive away from a dealership thinking the deal is complete. However, shortly afterward, the dealership calls them, requesting they come back to the dealership. Once the customer returns (hence the phrase ‘yo-yo’), they are informed their financing has fallen through and they will need to sign a new contract that contains a higher interest rate.

Even though it is sometimes due to the customer not being honest when filling out the loan application, they might have innocently entered some incorrect information that could potentially change the terms of the loan. It can also be the result of the lending institution adjusting the loan to a higher rate after the fact. If this happens, the dealership will try and get the customer to absorb the adjusted rate through this tactic. There are times though when this is nothing less than a dealership trying to ‘renegotiate’ the contract in order to make a bigger profit on the sale.

It is advised that, in order to avoid this potential problem, the customer already have a pre-approved loan from a lending institution prior to negotiating a car sale with the dealer. Even though this could mean missing out on the dealership’s zero percent financing special, the alternative can turn into a nightmare.

If you do decide to finance through the dealership, firmly ask all pertinent questions before agreeing to the terms. For example, insist they tell you who has agreed to provide the loan and ask to know if the financing is, in fact, truly approved before driving off the lot. Another way of doing this is to refuse to sign if the sales contract states that the sale is conditioned upon financing approval. If this is the case, it could be a dead giveaway that the dealership is not on the up and up.

THE MARKUP PROBLEM

Our second dealership tactic to be on guard for is the markup game. It is often the case that the customer is unaware that it is the dealership, not the lending institution, which ultimately determines how much you’ll pay. The typical scenario goes something like this:

The lending institution quotes a wholesale rate to the dealer, but the dealer is free to mark it up by as much as 3 percentage points. The dealer’s ultimate profit on any deal depends in part on how much it marks up this rate.

Even though this has been the source of a number of lawsuits as recently as 2004, this hasn’t stopped this practice from continuing. Again, it is in your best interest to already have your financing in hand before setting foot on the dealership’s property. Aside from the obvious, you are now in the position to challenge the dealer to beat your pre-approved rate if they want you to finance through them.

THE ADD-ON PROBLEM

Third on the list is the issue of dealers adding onto the total price of the vehicle. Even if you have pre-approved financing or are in the enviable position of paying cash, dealers have been known to find ways of making extra money on the deal. ‘Extras’ such as window etchings, service contracts, or disability and other ‘insurance policies’ that promise to make your payments should you become injured and unable to work. They have even been known to charge extra for things by implying that the add-ons are necessary in order for you to get a loan or a good interest rate.

Even though this is clearly illegal, some dealers do it anyway. Keep a careful eye on your paperwork to see if these add-ons ended up on your final contract. Once again, it is in your best interest to have financing in hand before entering the dealership to avoid these potential add ons.

So, as you can clearly see, the age-old warning is still applicable today: “Buyer Beware”!