Car Dealer Scams
Here are the top twelve ways a new car dealer scams you and basically vacuums your wallet when you buy a car from them.
- Sell New Car at the Highest Possible Profit
- Lowball Your Trade-In
- Add 2% to 4% to Your Car Loan
- Fleece You with Fees ($1100 on Average Car)
- Charge Exorbitant Markups on Extras
- Force You to Buy Unnecessary Items
- Confuse You on Terms & Paperwork
- Jack Up the Price You Already Agreed to
- Extort Extra Money from Bad Credit Buyers
- Push Unsuspecting Buyers Into Bad Leases
- Sell Overpriced Extended Warranties
- Overcharge for Service
When you buy a car, the car dealer immediately makes an incredible amount of
money, usually 30% of the sales price and oftentimes even more than that.
How do they do it?
By using techniques perfected over the last hundred years - seducing buyers with
test drives, distracting them, and charging them extra in every possible way
during every stage of the process.
There’s no reason you should become their next victim. They’ve probably
surgically removed tens of thousands of dollars from you already on your
previous new car purchases.
Let’s take a quick look at the car dealers’ arsenal of remarkably perfected
tactics.
#1 - Sell You a New Car at the Highest Possible Profit
At first glance, many people would say that’s just smart business for the car
dealer.
Well I’ve got news for you. It isn’t just “smart business.” Not if they use
deceptive practices, devious strategies, and outright trickery to obtain that
end result.
What exactly am I talking about?
I’m talking about tactics that border on consumer fraud and misrepresentation.
That’s right. Chances are you’ve already been badly cheated on every previous
new car you purchased. The odds are heavily stacked against you any time you set
foot in a car dealer’s showroom.
They ought to call it a “snowroom” for all the snow jobs that take place there.
First, there’s the deceptive advertising. Why the various State Attorney
General’s offices don’t crack down on this type of misrepresentation is beyond
me.
A full-page ad trumpets extremely low monthly payments with “no money down.” The
fine print is so tiny that you need a magnifying glass to read it.
Turns out it’s a 72-month loan at 4.75% and the “fees” total over $1100 at
closing. You need a credit score of 740+ to qualify. That’s the top 5% of the
population only.
Oh, and one more small thing – the fine print says the dealer keeps all rebates
and incentives, even those specifically designated as factory to consumer
rebates!
Second, there’s the salesman switching all price discussions to monthly
payments. By pushing the negotiation to a monthly amount, the true cost of the
car is hidden from the buyer in an overly lengthy car loan that adds thousands
in extra interest charges.
For more examples, read the Appendix entitled “101 Worst Car Dealer Scams”. It’s
a real eye opener, to say the least.
#2 - Lowball Your Trade-In
Another way that car dealers scam you is to give you $500-$1500 under the
wholesale price for your trade-in.
Note that I’m talking $1500 under wholesale, not $1500 under retail or street
price.
They’ll play games with you and sometimes even try to deceive you into thinking
that they’re giving you a higher price than they really are by showing it as a
big deduction from the new car sticker price.
However, the bottom line is that you can’t get a good price for your trade-in
from a new car dealer.
Unless you can afford to throw away $500-$1500, you are far better off selling
your used car to another dealer or selling it yourself.
Always keep discussion of your trade-in value separate from any discussions
about the price of the new car, the new car financing, rebates, etc.
Read our Section on Maximizing Your Trade-In for more information on getting the
best price for your trade-in.
#3 - Add 2%-3% to Your Financing Bill
Every dealership has a finance office to supposedly assist customers with
obtaining the best financing. The dealer’s business office is actually a
“LIEnance” department.
They’ll say and do anything to maximize the amount the dealership rakes in from
arranging your car loan.
The average loan produces a kickback from the finance company in excess of
$1,000. 100% of that comes right out of your pocket.
Gee Thanks! I really appreciate you arranging that special financing deal for me
that padded my loan by an extra 3%!
Even worse, you charged me a $350 fee for putting the loan together.
And that, my friend, is “highway robbery.”
That’s why GM issued a dealer directive in February 2004 limiting their dealers
to stealing - oops, excuse me, that’s “charging” - a maximum of 3% of the sales
price when adding a little something extra to a customer’s finance charges.
Gee thanks GM! I really appreciate you looking out for the consumer like that.
It shows you really put your customers first!
Of course, most of the other manufacturers have no such limitations in place at
all, so chances are that those dealers are even worse.
Most people never suspect that their dealer took your purchase info and credit
score, obtained a 6.9% bank financing offer, bumped it up to a 9.9% installment
sales contract, and pocketed a huge 3% loan “sourcing fee” from the bank!
#4 - Fleece You with Fees ($1100 on an average car)
Fees have gotten way out of line. Dealers and manufacturers are in cahoots to
pass on most of their normal business operating expenses to you.
They include them as part of the either the sticker price or boldly list them as
line items in the sales contract documents.
The only legitimate fee is the destination charge. It does cost good bit of
money to deliver a car to various parts of the country. But it always costs less
than half of what they actually end up charging you as a “destination fee.”
So the destination fee is marked up by 100%. Well, guess what? Every other fee
is 100% bogus!
Car dealers have no business charging you these wild and crazy fees, but people
agree to pay them, so dealers keep layering them onto the bill of sale, even
though they are just normal business expenses of the dealership or items that
the manufacturer already paid for.
Outrageous examples include advertising fees, floor plan fees (dealer
financing), prep fees, document fees, administrative fees, license & tag fees,
mandatory port fees, unwanted sealant fee, ADM fee, etc.
Advertising costs have no business being added back as an advertising fee.
Refuse to pay any fee associated with advertising costs. These are usually
listed as some type of alphabet soup fee.
For example, check your Ford/Lincoln Mercury invoice for this line – FDAF/LMDA.
It means Ford Dealer Advertising Fund/Lincoln Mercury Dealer Advertising.
Just like advertising fees, floor plan fees don’t belong on your side of car
buying costs. In both cases, the manufacturer already subsidizes both of these
in separate payments to the dealer when the car is sold. So the dealer is
charging you these advertising and floor planning fees and collecting this
expense reimbursement from the factory!
Same thing with dealer prep fees. The manufacturer already pays the dealer to
remove the plastic from the seats, vacuum the floor mats, and wash the car. But
the dealer charges you for it again anyway.
Document fees and administrative fees are another rip-off. It doesn’t cost $350
to plug numbers into a computer and print out documents. Never agree to pay
these kinds of fees.
Title & tag fees - Dealers routinely markup the cost of getting the title and
tags – by 500%! Refuse to get ripped off like this. Tell them that you’ll do it
yourself.
Car dealers love to add in mysterious fees and tell you that they’re mandatory.
I’ve got news for you – they’re not. It’s just another excuse to pass on some of
their own internal costs to you. Don’t let them stick you with this nonsense.
One of the worst examples is the ADM or ADP fee. ADM stands for Additional
Dealer Markup. ADP stands for Additional Dealer Profit.
Gee Thanks! I want to pay you an extra fee that’s nothing but 100% pure profit.
How they get away with this thievery is beyond me.
See our Section on Don’t Get Fleeced by Fees for more details on how to deal
with this double-charge/triple-markup nonsense.
#5 - Charge Exorbitant Markups on Extras
Dealer profit margins on options and accessories are roughly 75% and sometimes
even higher. Always compare the price of the option from the dealer with buying
it from a more reputable source.
You’d never pay $600 for a CD changer in a store would you? If you would, I’ve
got a special deal for you on a bridge I own in in Brooklyn.
How about $200 for rustproofing that you can get anywhere for $49 or less? Or
$300 for fabric protection that’s really nothing but two spray can treatments of
ScotchGuard costing $15?
Pin striping for $199 when it only costs $30. $1300 for power seats that cost
$250. The list is endless.
I’ve seen an AM/FM/CD radio listed for $500. You can find better equipment for
less than half that price at any car audio dealer. Again, always compare the
option price to the “real world” price.
Another way you get robbed on option pricing is with extremely high pricing for
highly desirable standalone options.
But, try to buy just the single option you want and it’s even more expensive as
a solo option than as part of a package.
They inflate the list price on standalone options and then “discount” the option
bundle packages by 20-25%. That’s why the option bundles seem like such a good
deal in comparison.
Don’t succumb to this nonsense. Buy as many options away from the car dealer as
possible.
See the Section on Car Options to learn how to save money on every option you do
buy from the dealer and moneysaving links to the top aftermarket suppliers.
#6 - Force You to Buy Unnecessary Items
The car dealers scheme with the manufacturers to get you to buy things you don’t
even want by bundling them with the things you do want and need.
Take a close look at the contents of any “Appearance Package” or “Sport
Package.” This stuff has at least a 200-300% markup on it. The good items are
sandwiched between items that are marginal in standalone value, but seem like a
good deal because you’re saving 20-25% off the combined standalone prices.
However, it’s not a good deal if you end up paying for things you didn’t want in
the first place just to get a better “deal” on the one thing of value to you in
the package.
Always decide based on what you need, not on what the dealer wants to bundle
into your total price.
For example, many import cars are now coming with a rubberized protective
covering applied at the port of entry. Since every car has it, you can’t avoid
the treatment. However, you’d be foolish to agree that it’s worth the $300 the
dealer claims for it.
Bottom line: Every item is negotiable. And almost every forced item is bogus.
Don’t pay 300% markup on stuff you don’t need or want.
#7 - Confuse You on Terms & Paperwork
Ever wonder why a car dealer has a “Business Manager” AND a “Sales Manager” AND
a “Finance Manager”?
It’s simple really. These people are really just extra sales reps.
Their job involves getting you to agree to accept overpriced items and bogus
extra charges that the dealer wants to add to your car purchase paperwork.
Trying to get a straight explanation of what a particular charge really is can
be a challenge.
You have to play hardball with these folks because they know every trick in the
book. If you don’t agree with a line item charge, tell them to remove it or
you’ll leave right now.
Don’t ever agree to pay for anything you didn’t want, didn’t order, or don’t
understand what it’s for.
Don’t sign anything that you don’t agree with or don’t understand.
WARNING: When you sign a document, you are agreeing that you have read and
understand all the terms and conditions.
Don’t sign anything without reading it thoroughly. Read the Section on
Understanding Contracts & Paperwork for additional tips.
#8 - Jack Up the Price You Already Agreed On
One simple trick that’s often used on unsuspecting buyers is to make math errors
on the paperwork.
Why? Because almost no one ever checks the math on the dealers forms. It’s a
simple, but very effective trick.
Always bring a calculator and double check every figure.
Try not to laugh too hard when you catch them in the act and hear the excuse
that their computer has been acting up lately.
Never leave a blank spot or blank line on any financing form. Write the word
“blank” or draw an “X” through it and initial it right there.
Why?
Because dealers have been known to falsify paperwork AFTER you’ve already signed
it. They’ll add amounts in on those blank lines, correcting the totals, and
placing false initials next to the corrections.
You’ll be amazed at how many “mistakes” you’ll find on your purchase or loan
paperwork.
In a 2003 Florida investigation, 34% of all car loan paperwork from two major
dealerships of a national automotive chain contained fraudulent or misleading
information.
Either they’re not earning that $300 document fee very well or they’re
purposefully making mistakes.
You choose which fairy tale you want to believe:
1) That it costs $300 to do the paperwork
2) That those mistakes are innocent errors
3) That their computer is “acting up” again
When it comes to facts and figures, always double check everything!
#9 - Squeeze Extra Money from Bad Credit Buyers
Car dealers love people with bad credit. For them, a low credit score is like a
license to steal.
A common dealer scam involves telling you that your financing is contingent on
buying credit life or term life insurance to cover the loan. They’ll also inform
you that an extended warranty is required.
It’s nonsense of course, but many people believe these lies because they’re
hearing it from a “manager.”
Or, they’ll include a clause in the paperwork that says “financing is subject to
approval” and encourage you to drive the car home today.
A week or two later, you’ll get a call telling you that your loan fell through
and that you need to pay a higher interest rate to another lender.
And of course, they’ve already sold your trade-in so there’s no way you can back
out of the deal.
What really happened was the dealer found the highest possible interest rate for
your loan, put you in a position where you legally have to accept it (unless you
scramble and quickly secure your own financing), and suckered you into a bad
deal through the “financing is subject to approval” clause.
NEVER finance your loan through a car dealer! They are strictly a middleman and
an untrustworthy one at that.
And that goes double if you’ve got bad credit. Read the Section on Obtaining
Your Best Loan for more tips & techniques.
#10 - Push Unsuspecting Buyers Into Bad Leases
GM offers a program called SmartBuy that is really a lease.
Check out the description from GM:
“SmartBuy is a program that enables you to own your vehicle and lower your
monthly payments. The low payment is possible because each month you pay for the
portion of the vehicle you expect to use plus a finance charge.
At the end of your contract you have several options, including a final balloon
payment or the advantage of simply returning your vehicle and paying a $250
disposal fee.”
Talk about perfuming the pig! Just say it’s a lease.
Dealers have their own leasing programs that they push on people who are looking
to lower their payments. What the “buyers” find out later is that they owe huge
amounts of money because the residual value was inflated or the mileage limits
were extremely low.
Never lease a car unless you have a specific business reason to do so and can
write off the leasing cost as a business expense.
If you can’t write it off (legit example: traveling sales rep), then it makes
absolutely no sense for anyone who doesn’t own their own business to lease a
car. Period. Exclamation point.
There’s a reason leasing is referred to as “fleecing” in the industry!
See our Section on Finding Your Best Leasing Deal for specific details, leasing
calculators, leasing deal analysis software, and more.
#11 - Sell Overpriced Extended Warranties
Manufacturers and car dealers offer some really awful deals on extended
warranties.
Let’s take a look at what’s wrong with the manufacturer version:
- An OEM extended warranty often has large gaps where the powertrain is covered for seven years, but other items for only three years.
- In addition, they don’t cover normal “wear & tear” items. Effectively, they really only cover catastrophic failures.
- Plus, you have to prove that you performed all regularly scheduled maintenance at certified dealers. Guess what that means? You’re locked into using only their overpriced dealer network.
- Rental cars are not covered for any work performed under standard three year warranty coverage.
- The list of exceptions is quite lengthy, so always read the fine print.
Here’s what’s wrong with the aftermarket warranties that the car dealer is promoting:
- Generally, these are flimsy warranties with high deductibles, often per part and per occurrence.
- Many times they won’t cover overheating or any towing charges.
- You have to pay for the repair and wait for reimbursement. After submitting claims, be prepared for a rude awakening. Your $1300 extended warranty only covered half your total expenses.
Both of these types of warranties are vastly overpriced compared to third-party
coverage from
Warranty Direct and
1SourceAutoWarranty.
Here’s why theirs are better:
- Covers wear and tear, not just breakdown
- Price is at least 50% lower
- Covers towing and rental car costs in first three years
- $0 deductible available
- Warranty is transferable with car
- Can buy coverage long after car is purchased
- Repairs can be performed at any ASE certified shop
- Pays repair shop directly
Never buy an extended warranty from a car dealer. Read the Section on Extended
Warranty Coverage for more information.
#12 - Overcharge for Service
Car dealers love getting you for a customer.
Why?
So that they can overcharge you for service!
On typical repairs like brake jobs, tune-ups, and alignments, a car dealership
will charge 50% more than a national chain does for the same work.
How do they get away with the exorbitant pricing?
Easy. They’ve got a captive market.
Buyers return to the dealership where they bought their car because they think
they’ll be treated fairly and get better pricing than non-customers.
Wrong! Everyone is subject to their sky-high markups on parts and excessive
labor charges that they justify with “authorized dealer” and “certified
technician” labels.
Guess what? As far as extra quality, that stuff’s all horse hockey. Parts
quality is no better, turnaround time is awful, and where exactly is that
“loaner car” they promised?
Well, it’s actually a rental car. But that’s OK because it’s yet another profit
center for the dealership.
Bottom line: Be extremely careful of any and all dealings with any car dealer.
They’ve been honing their craft for over a hundred years now and they’ve gotten
extremely efficient at robbing you blind.
The worst part of it is that most people really believe they got a good deal on
their new car.
In reality, 90% of new car buyers get ripped off.
Congratulations to you because you’re now part of the lucky 10% that won’t get
fleeced.
Watch Out For Negotiating Scams
Car dealers employ a variety of negotiation tactics designed to weaken your
resolve, distract you, where you out, discourage you, encourage you, and in
general, vacuum your wallet.
They’ve been practicing and perfecting their techniques for decades. Face it -
you are never going to be their strategic or tactical equal in any normal
negotiation.
You need to watch out for:
1. Focusing the purchase discussion on monthly payments
2. Unapproved access to your credit report
3. Other sales people pretending to be “managers”
4. Various acting performances designed to fool you
5. Maneuvers that snag back your rebates.