8 Ways Used Car Dealers Can Swindle You
Cars are more reliable than ever before, so buying a used car makes a lot of sense. Cars up to five or six years of age are often the best values. Not only are their prices far less than a comparable new car (values depreciate the quickest in the first four years), ownership expenses such as taxes and insurance are often much lower. Many used cars will also remain dependable for many years to come, making them a shrewd financial decision.
If you are thinking about buying a used car, we recommend referring to J.D. Power & Associates' list of vehicles rated highly for dependability. You should also refer to Edmunds.com’s Consumer Ratings and Reviews to read about other owners' personal experiences with their vehicles.
Even with all this good news, there are still many perils when buying a used car, and if you don’t know how to spot them, you can end up paying thousands of dollars more than you should or even losing the car. Here are eight tricks used-car dealers use to rip you off.
1. Heavy pressure. Salespeople's favorite customers are those who seem to be in a big hurry, since they tend to be the ones who do not inspect the car thoroughly or don't negotiate the price. Never go to a dealership acting rushed, even if you need a car immediately, as they'll surely take advantage of it. In fact, while they always say they don’t want to pressure or rush you, used car salespeople typically do because it works to their advantage.
Rushing the customer often allows them to control the conversation, sometimes changing the direction to matters other than car buying. Salespeople rush the sale to gloss over or skip important questions you may have about the car, its price, or the buying process. If you start to find you’re confused, frustrated with the sales process, or think the sale is moving along faster than you want, tell the dealer you want to go home and think it over. A typical response from salespeople is that others are interested in the same car. Don’t believe them; used car sales might be brisk, but not that brisk. Besides, if the car you're interested in is gone, there are plenty of other cars out there.
2. Pushing certified pre-owned cars. Used-car dealers say certified pre-owned cars are the next best thing to buying new and they’ve been very popular with budget-conscious drivers who want new-car dependability without paying the new-car price.
A certified pre-owned car typically costs $2,000 to $2,500 more than an identical non-certified car, but the extra price you pay is often more than what you would likely spend on repairs during the car’s warranty period. So, these cars are really nothing more than used cars with an expensive extended warranty tacked onto the price.
One sales pitch dealers use to sell certified pre-owned cars is that they’ve passed a rigorous inspection, often citing many inspected items (100 or 150 are often used, perhaps because they have three digits). And while many of these inspection points may involve the frame, engine and other major components, quite a few of the items on the checklists are redundant, and some, like the windshield-washer fluid level, are actually absurd.
But some certified pre-owned cars aren’t looked over closely at all. One certified pre-owned car — as was famously covered by many news outlets back in 2007 — was not one car, but two. The front half of a 2004 Chevrolet Monte Carlo and the back end of another Monte Carlo had been welded together. And it appeared that both halves of the FrankenCarlo had been involved in serious crashes.
Consumers should keep in mind that there is no industry standard to define what “certified” actually means. Any used-car lot can claim a car is certified. It’s a system that depends solely on the honesty of the seller.
Used-car retailers say they’ll fix problems they find before they sell a certified used car, but I’ve witnessed used cars arrive on a car carrier only to be immediately rolled out on the lot and tagged as “inspected and certified.” Once when I called the management of the lot on this, they said they had every intention to inspect the vehicle before it was sold. Other used-car dealers I spoke to told us they will sell any car as certified or not certified, depending on what the customer is willing to spend.
The only guarantee with a certified used car is that the dealership will make more money. With relatively newer used cars in particular, certification doesn’t make much sense as most cars are relatively trouble-free in their first three to six years. Your best bet when buying a used car is to take it to an independent mechanic for an inspection and skip the in-house certification and expensive warranty and put that money into a rainy-day fund for the car if something goes wrong.
3. Mixing negotiations. Most used car shoppers are fixated on the amount they can afford each month in car payments, and salespeople know this. It’s their hope that you will tip your hand what you think an affordable monthly payment will be. Oftentimes, they’ll even ask you what that figure is. Don’t fall into that trap, as a slick salesperson will use that number to pad in as much profit as he can for himself.
Used car salespeople like to start with the monthly payment because it allows them to combine the trade-in value of your old vehicle (should you have one), the price of the car you’re purchasing, and financing terms to fit that figure. In other words, they’ll get you to that monthly payment, but they’ll do whatever they can to hide how they got you there. Mixing these negotiations allows them to show the buyer one favorable figure, like the purchase price, while obscuring a less favorable figure, like the trade-in price or financing terms. You will typically end up getting to your monthly payment when the dealership plays with the term of the loan. So if they give you a bad deal on your trade-in, they’ll just extend the loan term by a year, and like magic, you’re at your target payment.
You can avoid this by negotiating every aspect of the sale separately. Start by knowing the trade-in value of your car, should you have one. Take into account the car’s condition, mileage, age, equipment levels, which all affect its value. Check with sites such as Yahoo Autos and AutoTrader.com to find out what similar cars in your area are selling for. Your trade-in price shouldn’t be much below the price than similar cars fetched in private sales.
Dealerships sometimes have two used-car pricing guides or “books” to determine the value of cars, and the prices in those guides can vary widely. Sometimes the dealer will use one guide to determine the value of the car they’re selling you and another to determine the value of the trade-in. Avoid the high-ball/low-ball game by asking the dealer to use just one guide and look over it with you.
Negotiate the price of a car that you want to purchase without revealing what you want in a trade-in. Some automotive buying experts even recommend you not show up in the car you intend to trade in.
Only after you’ve negotiated this price should you discuss your trade-in. If the dealership won’t come close to matching the price you can get in a private sale or from another used-car dealer, take the trade-in off the table and sell your old car elsewhere. But if you’ve agreed with the dealership on a trade-in price for your old car with the intention of applying it to your down payment, only then should you discuss financing.
Now knowing the amount you need to finance for the car you intend to purchase, have your loan pre-approved by a banking institution, instead of the dealership. Only if the dealership comes back with financing terms that beat those of your bank — which often happens in the 11th hour — should you go with their loan.
4. Obscuring a car’s history. While many new car dealerships that sell used cars offer services such as CarFax or Experian upfront, some independent used car lots are hoping you won’t ask for a vehicle-history report. Often, they’ll try to assure you they know plenty about the history and tell you not to worry. If they continue to try to stall or change the subject, this should send up a red flag, as they may be hiding something such as odometer fraud; flood, fire or accident damage; or evidence the car was once a salvage vehicle. While a clean car-history report doesn’t guarantee that the car you’re interested in won’t have any of these problems, it does a good job of sniffing them out.
5. Balking at an independent evaluation. After you make an offer on a used car, but before you sign anything, you should take the vehicle to a qualified mechanic who routinely does automotive diagnostic work. Many dealers will balk at this, saying they won’t let an outside party mess with the car. They’ll also tell you they've already inspected the car for you. However, nothing beats the certainty of an inspection by a third party. Many times, they’ll find issues with the car that will need attention soon, like costly suspension, brakes, exhaust, and engine problems. If an independent mechanic finds any problems with the car, deduct the cost of any needed repairs from the price or ask that the dealer have the problems fixed before you purchase the car.
6. Finance markup. Even major lenders like banks and credit unions typically charge more for a used-car loan than for a new-car loan; however, some dealerships that sell used cars have taken it to extremes. While the margin they make on used cars is often the biggest profit center for dealerships that also sell new cars, in-house financing is another cash cow. What typically happens when you apply for financing through a dealership is that they take your loan application to several lenders to see what interest rates you qualify for. So, if the best interest rate they can find for you is 7%, they’ll come back to you with a rate that’s between 2-4 points higher, skimming that extra interest right off the top and sometimes splitting it with the finance company.
The sad part is you might not even see much of a difference in your monthly payment, but the money adds up. Let’s say you were to finance $15,000 for a car and you qualified for 7% interest on a 48-month loan. If you were to get that rate, your payments would be $359.19 a month. But if the dealership comes back with their pre-packaged loan and the rate they’ll give you is 9.5%, you will be paying $376.85 a month. While $17.86 a month might not seem a lot more, you will be paying $847.68 over the life of the loan.
7. The spot delivery scam. Don’t ever take a car home unless all the financing has been completed. Some unscrupulous used-car lots use a “spot delivery scam,” where they allow potential buyers to leave with the car they’ve chosen before financing has been completed, only to call them up several days later to tell them the loan has fallen through. Then they ask for the car to be returned, sometimes threatening repossession.
When the car buyer returns to the dealership with the car, the finance officer is typically waiting with an alternative loan at a higher interest rate or a larger down payment, sometimes both. And when the price is marked up, a dealership can make thousands of dollars in unearned fraudulent gain.
This scam is most commonly used against buyers with bad credit scores, since dealerships perceive such people as vulnerable and easier to take advantage of. The best way to prevent a spot delivery scam is not to take delivery of a vehicle until you have been fully approved for a loan by the dealer or a separate financial institution. Again, it might be to your advantage to come to the dealership with your financing already arranged.
8. Remotely disabling the car you’ve purchased. Car dealers and other automotive lenders are targeting those with poor credit by installing GPS-based kill switches, or starter-interrupt devices, on the cars that they sell. The New York Times recently reported that about 2 million cars are now outfitted with such kill switches in the U.S., which is about one-quarter of subprime car loans. The remote disabling of cars can also hasten the eventual repossession and resale of the car. Used-car dealers and other smarmy creditors are not shy when it comes to remotely disabling cars whose owners are behind on their payments, but some consumers have reported that their cars were shut down even when they were current on payments.
Most of these devices are installed at the point of sale by “Buy Here, Pay Here” dealers that make direct car loans to customers. Not only does this give the dealer the capability to disable the vehicle, it allows the dealer to track the movements of customers, which is a major concern for privacy advocates.
Used-car dealers are quick to justify the starter-interrupt systems, saying that without them, hundreds of thousands of automotive loans would not be possible and they allow many more people the freedom of car ownership than would otherwise be possible. The National Alliance Survey says starter-interrupt systems disable 14% of cars immediately when the payment day is missed, while 30% of consumers are provided with a short grace period. About 54% of lenders use discretion with the systems, while another 1% report only using them as a threat.
But borrowers tell a different story. Many have told various media outlets that their cars have been shut off without warning, leaving them in a lurch or in danger. The St. Louis Post-Dispatch reports that cars have been disabled even when owners are current with payments.
Many lenders, such as credit unions and some regional and national banks, do not require starter-interrupt systems to get a loan. Always check to see if you can secure financing through one of those institutions before you allow one of these kill switches to be put on a car you purchase.