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"The single best advice I can give to people is to get preapproved for a car loan from your bank, a credit union or an online lender," says Philip Reed. He's the autos editor at the personal finance site NerdWallet. He also worked undercover at an auto dealership to learn the secrets of the business when he worked for the car-buying site Edmunds.com. So Reed is going to pull back the curtain on the car-buying game.
For one thing, he says, getting a loan from a lender outside the car dealership prompts buyers to think about a crucial question. "How much car can I afford? You want to do that before a salesperson has you falling in love with the limited model with the sunroof and leather seats. "
Van Alst says many people don't realize it, but the dealership is allowed to jack up the rate it offers you above what you actually qualify for. So with your credit score, "you might qualify for an interest rate of 6%," says Van Alst. But, he says, the dealership might not tell you that and offer you a 9% rate. If you take that bad deal, you could pay thousands of dollars more in interest. Van Alst says the dealership and its finance company, "they'll split that extra money."
So Reed says having that preapproval can be a valuable card to have in your hand in the car-buying game. It can help you negotiate a better rate. "The preapproval will act as a bargaining chip," he says. "If you're preapproved at 4.5%, the dealer says, 'Hey, you know, I can get you 3.5. Would you be interested?' And it's a good idea to take it, but make sure all of the terms, meaning the down payment and the length of the loan, remain the same."
So at the dealership, Reed and Van Alst both say, the first step is to start with the price of the vehicle you are buying. The salesperson at the dealership will often want to know if you're planning to trade in another car and whether you're also looking to get a loan through the dealership. Reed says don't answer those questions! That makes the game too complicated, and you're playing against pros. If you negotiate a really good purchase price on the car, they might jack up the interest rate to make extra money on you that way or lowball you on your trade-in. They can juggle all those factors in their head at once. You don't want to. Keep it simple. One thing at a time.
So he and Van Alst say don't be afraid to walk away or buy the car at a good price without the trade-in if you feel the dealership is lowballing you on your old car. You have plenty of other good options these days.
"You're led to this back office. They'll often refer to it as the box," says Van Alst. This is where the dealership will try to sell you extended warranties, tire protection plans, paint protection plans, something called gap insurance. Dealerships make a lot of money on this stuff. And Van Alst says it's often very overpriced and most people have no idea how to figure out a fair price.
"Concerning the extended factory warranty, you can always buy it later," says Reed. "So if you're buying a new car, you can buy it in three years from now, just before it goes out of warranty." At that point, if you want the extended warranty, he says, you should call several dealerships and ask for the best price each can offer. That way, he says, you're not rolling the cost into your car loan and paying interest on a service you wouldn't even use for three years because you're still covered by the new car's warranty.
Gap insurance promises to cover any gap between the purchase price of replacing your almost-new car with a brand-new car if your regular insurance doesn't pay for full replacement if your car gets totaled. Van Alst says gap insurance is often overpriced and is fundamentally problematic. If you still want the product, it's best to obtain it through your regular insurance company, not the dealer.
Reed says a colleague at NerdWallet actually bought a minivan recently and "when she got home, she looked at the contract." She had asked for a five-year loan but said the dealership instead stuck her with a seven-year loan. "And they included a factory warranty which she didn't request and she didn't want." Reed says she was able to cancel the entire contract, remove the extended warranty and get a rebate on it.
Darren and Courtney Johnson sit on the back of a truck outside their home in Center Hill, Fla. Three weeks after they bought a used SUV and took it home, they were told by a dealership manager that they needed to return and sign a new contract with different terms. Things went downhill from there. Octavio Jones for NPR hide caption
"I received a phone call from the finance manager of the dealership," Darren Johnson says. The manager told them the financing for the car had fallen through and if the couple wanted to keep it, they had to come back and sign a contract with different terms.
Most of us would be confused too. But odds are good that in the paperwork you signed when you bought your own car, there was some legal language saying the sale may not really be final. It often asserts that if the car dealer has trouble with the financing on its end after the sale, it can later cancel the deal, try to get you to agree to different terms, and take the car back if you refuse.
Documents from a later arbitration case show that the dealership wouldn't return their calls. And it didn't pay off the loan on their trade-in vehicle. So the Johnsons were stuck paying the loan, with no car, for nearly a year. They eventually used a chunk of their small retirement savings to pay the loan back.
The company also said "the communication in this situation around the trade-in ... was hindered by the impacts of the Covid-19 pandemic." The dealership did not explain how the pandemic stopped it from returning the Johnsons' car, which the dealership sold in October of 2019.
The Johnsons bought a car from Greenway Hyundai Orlando in Orlando, Fla. The dealership told them they needed to sign two other deals after their initial purchase. After the Johnsons refused to sign the third contract, the dealership repossessed the car. Octavio Jones for NPR hide caption
Usually, when you finance a car through the dealer, technically you owe the dealership the money for the car. But the dealer wants to quickly sell the credit contract you signed to, for example, the credit arm of Ford or Toyota or some other auto lender.
And to get you to buy the car, the sales person might agree to a monthly payment that's too low. Or for whatever reason, they can't find an auto lender willing to essentially buy your car loan, at least at a price the dealer is willing to take.
"'Oh, no,'" Van Alst says the dealer tells you. "'You're going to have to accept an 8% higher interest rate.'" And at that point, he says, "It's a whole lot more difficult for the consumer to walk away. The dealer might have already sold their trade-in."
Eighteen state attorneys general say yes. "The FTC can and should go farther to prevent this unfair and deceptive practice," the attorneys general wrote together in a letter to the agency. They urge the FTC to consider "an outright ban on the practice of allowing consumers to leave the dealership with a vehicle before the transaction's financing is finalized."
In 2015, a new state law in Maryland went into effect. It says dealers have just four days to cancel a sale or it becomes final. And dealers are banned from selling trade-in vehicles until the sale is final. So if need be, the car buyer can get their trade-in back.
"Absolutely the law has made a difference," says Karen Straughn, an assistant attorney general with the Maryland attorney general's Consumer Protection Division. She says it took a few years for some car dealers to change their practices. But now, she says, most have.
But Paul Metrey with the National Automobile Dealers Association says the FTC doesn't need to change the rules at the federal level. He says the vast majority of car sales go through with no incident. "You have tens of millions of transactions where this happens all the time," Metrey says, even when the sales contract gives the dealer the right to cancel it later.
So he says there's nothing wrong with contracts that give dealers the right to cancel after the fact. He says he doesn't have data on problems with yo-yo sales but that it seems to him that it's rare that the original terms don't work and a car buyer needs to be called back.
"That's a situation that you want to avoid," he says, because if the buyer walks away, the dealer gets stuck with a car with more mileage on it making it worth less. It's a headache for everybody involved.
The dealer association says car buyers like the current system and changing the rules would create unnecessary delays. Dealers call these contracts spot deliveries because they allow buyers to take the keys and drive off right away, on the spot, even if the dealer hasn't finalized the financing.
Kaitlyn Arland is an Army service member stationed at Fort Riley in Kansas. When she bought a car two years ago, she says the salesman didn't say anything about the sale not being final as she drove away. But then she received a call from the dealership. Arin Yoon for NPR hide caption
She says the salesman didn't say anything about the sale not being final as she drove away. But then, eight days later, came the yo-yo phone call. She says the dealer told her the financing didn't work out, she had to come back, sign a different contract, and make a $2,000 down payment. 041b061a72