economics of auto financing

I suppose my wife and I should consider ourselves fortunate that we can afford to buy a new car. And, because we have a high enough credit score, we are entitled to Honda’s 0.9% financing for 60 months and no down payment necessary. We waited until the end of June. Salesmen are more motivated to offer a good price at month's end because they are concerned about meeting monthly and quarterly goals. We knew the exact make and model car we wanted right down to the options and upgrades (none) and color (red). Our research showed us the best “out-the-door” price to request. (“Out-the-door” is car speak for a price that includes all the extras – optional equipment, fees, taxes, delivery charges, dealer prep, tags, registration, etc.)

We got an education this week. While we did get the car we wanted at a reasonable price and with the financing we wanted, it wasn’t easy. Car buyers need to know that negotiating with the salesman is only the beginning. If you are financing the car you have to negotiate with the finance department. After spending a couple of hours negotiating with the salesman, we agreed on the out-the-door price, or thought we did.

By the time we came out of a grueling one- or two-hour session with our finance manager, we were committed to $2651 worth of service contracts, which he kept insisting we were getting absolutely free. These “free” contracts added over $4000 to the price of our car over the 60 months. This man was a real shark.

It took my wife until the next morning to wake up to this rip-off and other “discrepancies”. Unfortunately, in Florida there is no “cooling off” period after signing for a new car. We were at a disadvantage when we went back to the finance guy. But, he did agree they had “neglected” to take off the $500 discount we were promised for financing through Honda. After reminding us he was under no obligation to do so, he rewrote the contract. But, he refused to yield on the “free” service contracts. Fortunately, we did have an advantage here. Service contracts can be cancelled within 60 days without penalty. It took a third day of negotiations, this time talking to the head of the finance department before, we finally got the contract the way it was supposed to be.

I agree that primary and secondary schools in this country should include a solid education in finance. But how do we protect ourselves against this kind of blatant lying? We consider ourselves pretty savvy and cynical, but even we were nearly flimflammed. I don’t see how even a good background in finance would help a lot of people. We were among the very small minority of car buyers who actually fight back. Government regulation has its limits. The more federal and state governments try to protect consumers, the more confusing the process gets. You should have seen the finance agreement – a very long sheet with numbers all over the place. And, we were pressured to sign it on the spot.

I think the dealer was willing to renegotiate our contract not once, but twice because most people don’t even know they were scammed in the first place. Or, if they suspect they were, they're either too embarrassed or beaten down to come back. Plus they may not even be able to articulate the problem. The dealerships count on that. They are not accustomed to dissatisfied customers coming back.

The working poor are an even sadder story. They try to buy the cheapest used car available just so they can hold onto a job and get back and forth to work. They are given subprime loans. Even those who might qualify for more favorable interest rates are steered to much costlier loans by these sharks. In Florida there is no interest rate cap on loans for used cars. Then, when the car breaks down or the owner can no longer keep up with the payments, the car is repossessed. And, it is invariably under water. This leads them to a lifetime of ever-mounting debt from which they can’t escape. Is it any wonder that there is over $1 trillion worth of auto loan debt out there? Can it be possible that this will be even bigger than the housing collapse?

One more thing - the reason car dealerships are able to get away with no cooling off periods and other outrageous practices is their prodigious political clout. There is hardly a community in this country that doesn’t have several car dealerships. Local television stations depend heavily on revenue from car commercials. Just count the number of car commercials during any weekday broadcast of the local evening news. The owners of these dealerships are pillars of their communities. They’re very active in all civic and fraternal organizations. Many may even hold political office. The Consumer Finance Protection Bureau is a noble idea, but it is no match for this juggernaut.

Showing 1 reaction

How would you tag this suggestion?
Please check your e-mail for a link to activate your account.
  • rich korn
    published this page in Ask Prof. Wolff 2017-07-01 00:31:29 -0400