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Article:
Car Buying Tips II
Jacksonville Attorney - Lawyer,
providing experienced Consumer Protection, Family Law, Estate Law,
Employment Law, Business Law, and Bankruptcy Law legal
representation in Jacksonville, Hilliard, Duval County,
Nassau County and the surrounding Northeast Florida areas.
This is part two of my column on car buying tips. I am
assuming that you have found a good car for a good
price, had it checked out with a mechanic, asked the
dealer about the prior use, condition and history of the
car, particularly if it is a used car, and that you are
ready to talk about financing.
Most people finance the purchase of cars but a lot of
people do not know how financing really works. In the
1970s, dealers began to have a separate department for
finance and insurance. In the industry, this department
is referred to as the F&I department. Banks and finance
companies agree to pay dealers commissions for
processing contracts and percentages of interest rate
markups. In addition, dealers earn additional profit by
selling extras such as credit life, GAP insurance,
window-etch security, warranties or other products. As
the profit margins on new cars shrunk with more
competition and more sophisticated consumers, dealers
have been forced to focus more on F&I to make a profit.
Many dealers now make more money in their finance and
insurance department than the front end profit, i.e.,
the difference between what they buy and sell cars. For
many dealers, they are no longer in the car selling
business as much as they are in the contract and extras
selling business. The better your contract looks to a
lender, the more the lender will pay for it. If you pay
a higher interest rate than is warranted for your credit
history, then the lender expects to receive more profit
from its risk and will pay more for this contract. Let
me give you an example. If the consumer would qualify
for a “buy rate” of 7%, but the finance manager can
write the loan for 8%, the bank will pay the dealer a
“reserve fee”, which is a percentage of the amount
financed. Reserve fees can range from one-half a percent
to six percent of the amount financed. The higher the
interest rate, the bigger the kickback. The practice of
charging a yield spread premium is subject to criticism
for many reasons. Indeed, many finance companies have
settled class action lawsuits alleging that they
benefitted from a practice of charging much higher yield
spread premiums to minorities than other consumers.
With some of this information in mind, you know you have
incentive to minimize the amount of finance charges or
interest you pay in any transaction because you will
rarely, if ever, be given the “best rate available.”
Before going to the dealer, it would be good to check
with your bank or credit union to find out what terms
would be offered if you were to finance a car.
Oftentimes, the bank or credit union will have different
rates depending on the year of the car. If you can get
this information ahead of time, you should be able to
compare what the bank or credit union offered to what
the dealer is offering and choose the option that best
suits you whether that is a lower interest rate or a
lower payment.
Most consumers do not realize it but they have the
option to actually compare a retail installment sale
contract from one dealer to a retail installment sale
contract from another dealer. In order to do this,
however, it is important that you do not sign a
“purchase contract,” “buyer’s order” or something that
says you are buying the car and will work out financing
options later. If you are financing the car, these
documents should not be required but I know of no dealer
which does not ask the customer to execute these as part
of the transaction even when a consumer is financing. If
you sign a buyer’s order, you are essentially telling
the dealer that the car is being purchased but that you
will try to work out the financing with the dealer or
someone else. If you insist that you do not want to sign
one but you want a retail installment sale contract so
that you can compare what the dealer is offering to that
of other dealers, you may get a run around that “we
don’t do that” or something to that effect. If the
dealer wants your business, they can do that. Indeed,
the Truth in Lending Act says that a financing
transaction is not completed until the consumer signs
the retail installment sale contract and the law
requires the dealer to provide you with a copy of that
contract before you sign it even if you give it
back to the dealer. Ideally, you could fax other dealers
a copy of your unsigned retail installment sale contract
and ask other dealers if they could meet or beat what
was offered.
A few words about extras. I am not going to declare that
none of the extras are worth purchasing. It depends on
your circumstances but you should know that the dealers
make a lot of profit from these extras. Some general
words of advice are to consider a manufacturer’s
extended warranty and an extended warranty from a third
party carefully. Sometimes there is a reason why there
is such a big discount in price. Also, look at the
language of the extended warranty for exclusions. Did
you know that if you do not keep receipts for all your
oil changes done in accordance with the warranty or
owner’s manual, some warranty companies may suggest the
warranty is invalid. I have seen it happen with sludge
claims.
Did you know that some Gap Insurance (insurance to cover
the difference between what the car is worth and what
you owe on it) only insures 125% of the fair market
value even if you purchased the car for more. For
example, sometimes a purchaser finances much more if
there is negative equity in a trade-in car meaning that
the trade-in was worth less than was owed on it.
Oftentimes you can get a lot more life insurance bang
for the buck paying for it separately or increasing your
policy rather than buying life insurance solely to cover
the amount owed under your financing contract if you
should die. Window-etch has proven to be very profitable
to dealers.
The bottom line is you should avoid paying for extras
unless you truly want them. Sometimes a dealer will
quote a monthly payment and ask if that is doable rather
than working with the price of the car backwards to
figure out a monthly payment. Some finance and insurance
managers are taught to load up on the extras and explain
to consumers that the reasonable monthly payment
includes these extras at no additional charge when, in
fact, the monthly payment would be a lot less if the
monthly payment was calculated without all the extras.
This practice is known as payment packing and has been
declared illegal by some attorney generals.
Finally, you should avoid paying a closing and
administrative fee unless that was agreed to up front.
If it is something that is only added in the finance
department and not disclosed in the advertisement or in
negotiations, this is a form of bait & switch and you
should not pay it. There is nothing wrong with making a
profit but I believe it is immoral to change the terms
of the agreement after someone has invested considerable
time and a deal has been reached. When I have challenged
this practice personally, dealers often agree to back
out the amount of the fee from the purchase price if
they can add it back as a fee. I consented because the
net purchase price remained the same. I suspect they
want to retain the ability to say that everyone who does
business with the dealer is charged this fee. I hope you
get some bang for your buck!
Disclaimer: The above Article
is intended to give you, the consumer, insight into various legal topics. This
information is not intended as legal advice, but rather helpful topical
information.
 If
you require professional legal services regarding
Consumer Protection, Family Law, Estate Law,
Employment Law, Business Law, and Bankruptcy Law issues, be proactive in
protecting your legal
rights by seeking the legal advice of
an experienced
Jacksonville criminal defense attorney
& lawyer. Contact
The Law Offices of
Steven M. Fahlgren, P.A.,
by calling
904.845.2255.
Jacksonville Attorney - Lawyer,
providing experienced Consumer Protection, Family Law, Estate Law,
Employment Law, Business Law, and Bankruptcy Law legal
representation in Jacksonville, Hilliard, Duval County,
Nassau County and the surrounding Northeast Florida areas.
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