Ripoff Alert #8 – Car Spotting Edition

The Ripoff Alert is a new series appearing once each week on Fridays. It alerts you to the latest scams and ripoffs trying to get between you and your money, and gives you information you need to stay safe.

Car Spotting

What a despicable, slimy practice used by some of the nation’s car dealerships.

You’re at the new car dealership, test driving a few cars and weighing the pros and cons of each one. You make your decision and the negotiation begins. After a few rounds of the “grind,” as they call it in the industry, you settle on a price. Now it’s time to fill out the financing paperwork.

Does this sound familiar? If so, you’re among the 80% of Americans who finance their new vehicles at the dealership. “What’s wrong with this?” you ask. “Dealerships are one-stop shops for my car-buying needs.” Well, I’m about to tell you why the number one rule of car buying is to arrange your financing before you enter the dealership.

As part of their pitch, car salesmen love to tout the “ultra-low rates” they can get you for a car loan, “this week only!” They promise you unbelievable rates, and allow you to drive off in your new car with almost no money down. You leave thinking what a steal it was to get a new car so cheap.

A week or two later, you get a phone call from the dealer saying the financing didn’t go through. They need you to come back in to discuss more financing options. When you get there, they say that while your 0.9% loan didn’t go through, they can get you one for 8.9%!

Now, after having shown off the car to all your friends and family, who’s going to give the car back to the dealer? That’s embarrassing.

The problem is dealerships have no idea up front whether your loan will actually go through. The interest rate they quote you in the deal is at best their educated guess of an appropriate rate for your credit risk profile, and at worst a deceitful, unrealistic ploy to get you to buy a car.

There’s a clause in your contract that states the deal is subject to financing. A common misconception is that once the papers are signed it’s a done deal. Confronted with this situation, you could always hand back the keys and tell them to have a nice day. But you’re still responsible for the depreciation from mileage put on the car. This could easily be hundreds or thousands of dollars. And if you traded in your old car or made a hefty down payment, the situation can get complicated very quickly.

This scam most often targets people with below-average credit, who believe they’re at the mercy of the dealership for financing. Regardless of your credit score, the best option for financing a new vehicle is through a credit union or small community bank.

Buying a new car should be a fun experience. Arranging your financing in advance helps the process go smoothly and steers you clear of this common scam.

11 thoughts on “Ripoff Alert #8 – Car Spotting Edition

  1. Really great point!!! Lots of people fail to read the fine print of ANY contract. I work on contracts as part of my job at a billion dollar corporation and it is crazy what some clients just skim over OR expect US to agree to.

    Great idea for checking out a credit union though…wouldn’t have thought of that!

  2. That’s so messed up. I’d definitely go in with my bank’s quote, and if they couldn’t match it I’d turn it down…letting them know that if the financing didn’t go through I’d be going with my own financial institution.

    • It surprised me that 80% of people who finance car purchases do so at the dealership. I don’t think people realize how much dealerships make from their financing departments. In fact, margins on car sales have decreased so much over the years that dealers now make most of their profit from people financing with them.

  3. I think I may have been a victim to this once or twice. I usually know what interest rates generally are and I feel like the dealership is always higher. I refinanced my auto loan into …. a credit union! Next time I’ll get pre-approved before I go shopping.

    • I’m sorry to hear you were a victim. Dealerships make their money financing new cars. As you say, their rates are normally 1 or 2 percentage points higher than at a bank or credit union. Get that pre-approval!

  4. When I went car shopping 4 years ago, I started out at this big dealership. He tried talking me into buying cars I didn’t want and that were out of my comfort zone. Then he said lets get you preapproved. He offered me 21% interest. Making it sound like it was a good deal. (I seriously could have slapped this guy) We ended up taking our business elsewhere.

    • How can you be so unethical as to cram a loan with 21% interest down your customer’s throat? The guy you dealt with sounds pretty desperate to sell cars. People like that give car salesmen a bad rep.

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