Beware Of The Puppy Dog

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Most of us as kids have brought home a puppy at one point in time and begged “Can I keep it? Please?!”

Car dealers are hoping you’ll do the same thing. They know cars, like puppies, are  easy to fall in love with, hard to resist, and even harder to relinquish.

How it works

Buyer meets car and falls in love. Everything is there: options, color, make and model. Everything except for the financing, which is “conditional” or “contingent” on loan closing. The dealer assures you they can lock in that sweet rate you both discussed. No problem, they say.

You’re free to take the car home while the dealer hammers out the financing details. Kids chase you down the street. Neighbors swoon. Co-workers beg for rides during lunch hour. You are hooked. You love the car. It’s everything you ever wanted on four wheels. What’s not to love?

See where this is going?

The dealer then calls or emails you with the bad news: that hot interest rate or loan term either doesn’t apply to your particular make or model, or there was another issue that prevented you from qualifying for the initial financing terms.

Chances are, the dealer knew this already. Dealers eager to move inventory will let you “puppy dog” the car: take it home for a few days, show it off to your friends, and fall in love with it.

The dealer hopes you either won’t notice the higher rate or won’t mind because there is no way in hell you’re returning the car. You’re smitten.

No matter how besotted you are with your shiny new-to-you toy, be firm.

What you can do

California drivers are in luck, as there are  buyer protections in place to soften the blow of attempted puppy-dogging involving used cars priced at $40,000 or less:

  • The dealer must offer you a two-day contract cancellation agreement. You’ll be charged a nominal fee based on the price of the vehicle.
  • While the dealer will charge you a re-stocking fee if you return the car, it must be offset against the contract cancellation agreement fee.
  • If the dealer already sold or transferred the title to  your trade-in vehicle, they must pay you the greater of either the Fair Market Value of your trade-in or the value stated in your contract with the dealer.
  • New cars are exempt from these rules, however.

Puppy-dogging prevention

Assuming you haven’t yet set foot in a dealership, there are options to help you avoid the puppy-dogging trap:

  • Get pre-approved for financing through your bank or credit union. You’ll know exactly which rate, term and loan amount you’ll be getting.
  • Utilize the car-buying service through Triple A, your credit union or CostCo. They do the legwork and haggling for you.

Very few of us can resist a sweet new or new-to-us car that is just begging to come home with us. Before you ask, “Can I keep it..please?!” know your rights as a car buyer in your state and understand your financing options before you head out to a dealership.

Learning to spot the puppy-dogging game ahead of time will give you the power to issue a swift “No!” and to walk away. Rolled-up newspaper is optional.

 

 

 

 

Should You Take Out That Huge Car Loan?

 

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One of my friends recently bought a brand-new Hyundai Sonata. I’m a sucker for a shiny toy as much as the next person, but I blanched when she told me how she got the car in the first place.

She took out a six-year loan.

She’s on a budget like everyone else and commutes about 70 or so miles round-trip each day for work. She needed something more substantial that would get her through those commutes comfortably and trouble-free. Her old car was a money pit and cost her a couple of workdays this year already.

Car loans these days stretch out to 6-8 years. They were unheard of until about 10 years ago. Now they’re the norm and the notion scares the hell out of me. Here’s why:

  • Higher interest rates: the long-term car loans typically carry a higher interest rate. Very few people qualify for the Tier 1 0 percent financing that car dealers love to advertise,  so be prepared to pay a higher interest rate.
  • Negative equity:  A new car depreciates about 22 percent during the first year. You’ll spend a good portion of that loan term “under water” or “upside down.”
  • You’ll need a HUGE down payment to offset the negative equity and to somehow get ahead. Most average people (that’s us) don’t have the means to come up with a substantial down payment.
  • Harder to recover from a total loss: whenever a car is totaled in an accident, the insurance payout is typically based on the car’s value at the time of the accident. The gap between the car’s value and the loan balance is the driver’s responsibility. It’s not pretty, even with a lower loan balance. A total loss can ruin you financially and leave you without a car if you don’t have the means to pay off the balance.
  • Low resale/trade-in: most dealers are willing to take a car five years old as a trade-in if it’s in  good shape. There’s still some equity in the car, but after years five and six, the value of the car drops considerably. Private party resale value will only be slightly better.
  • You’re stuck: if you end up hating the car three years in and want to replace it, the remaining loan balance will be attached to the loan balance on the replacement car. You’ll be shackled to a car payment for much longer.

Alternatives

There are two key alternatives to the long-loan trap.

  • Buy only what you can afford to pay off in five years tops. It may mean buying a smaller model or a lower trim line, but it beats being chained to car payments for six or more years.
  • Buy used: there are deals to be had on used cars. You’ll pay less, face less depreciation, and can buy more car for the buck. Do your research and you could end up with a good deal on a pampered lease return or CPO car.

I get it. Easier said than done when sitting in a dealership surrounded by so many sparkling new cars. Who can resist?  You can. Stand firm and don’t fall for the lower payment offered on a long-term loan. You’ll be able to afford not only a shiny toy, but also the accessories that will make that shiny toy uniquely yours.

Dirty Dealer Deed #2: Buy Here, Pay Here

Last week, I talked about yo-yo sales.

Yo-yo sales are bad enough, but Buy Here Pay Here (BHPH)  dealerships are the dirtiest dealer deed  of them all. They target vulnerable consumers (that’s you, o broke one) with predatory practices, their loan terms are not of this planet, and the cars they sell are pure crap (It’s my blog and I’ll opine if I want to).

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How it works: Unlike an established franchised dealer (Three Stooges Honda, for example) BHPH dealerships are completely independent. They’re typically located within low-income communities or in communities with a large immigrant population. Why? Because space rents are lower and the populace is easy pickins for a sleazy car dealer.

Their cars are stacked in front, complete with whirligigs, signs, and other gizmos intended to suck in, er, attract buyers.  If you’re broke and in need of a car, that buyer is you. You may have no credit, or poor credit, or are new on the job.

You might also be the first in your family to buy a car, and may not know how the process works.

Everything is done in-house, from your purchase to the loan servicing. Unlike traditional auto loans, where you make your payment to a third-party lender, you make your payments directly to the BHPH dealership. Here are some other key differences:

  • You’ll need to make weekly or bi-weekly payments, very often in cash.
  • Unlike a traditional dealership, where you have a selection of cars to suit your budget, BHPH dealerships offer a narrower range of cars to choose from.
  • Their stock typically consists of older, high-mileage vehicles that traditional dealers may have passed on at auction. One look at the Carfax report will tell you why.
  • Miss a payment with a traditional lender, and you’ll get dinged with some late fees plus some annoying phone calls. Your car will typically be repossessed after30-90 days of non-payment.
  • If you miss a payment with a BHPH dealership, you can expect to have your car repossessed the next day, and expect to pay several hundred dollars in late fees.
  • You can expect to pay a higher down payment.
  • Your interest rate will typically be in the double-digit range, essentially torpedoing your budget and your ability to repay the loan.

The Ripoff is strong with this one

BHPH dealers in California came under fire for such practices and for “churning” vehicles, e.g. rapidly selling a repossessed vehicle to a succession of buyers.  The Los Angeles Times outlined the saga of the “Golden Kia” in their story from July 2013.

BHPH vehicles are typically sold for much more than they’re worth, leaving you with making payments on a car that’s not even close to being worth what you are paying on it. In other words, you’re hosed. In more elegant terms, you’ll be underwater on your car loan.

Do you see where this is headed?

You will also have very little recourse if the BHPH dealership closes, as they are wont to do.  A high default and repo rate means little to no cash flow, which means very little opportunity to pay rent and other expenses.

These dealers are in the news, and with good reason. You need to be careful. Just because you’re broke and can’t qualify for that shiny  zero percent financing the big dealerships offer, doesn’t mean you have to put up with BHPH shenanigans.

Tomorrow: How to buy a car without going the BHPH route, and tips if BHPH is your only option.

“BHPH you’re my only hope!”

Sorry.  Couldn’t help it.

Until next time.

 

 

Dirty Dealer Deed #1: Yo-yo Sales

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Watch out for this dirty dealer deed 

Most dealers are on the up-and-up. They sense the stiff competition from online car buying services and have cleaned up their act for the most part. This post isn’t about the good guys, however.

Learn how to recognize a yo-yo sale, the go-to dirty trick for sleazy car dealers.

It finally happened. Your old car reached the point of no return. The cost of repairs exceeds your car’s value…by a few thousand dollars, no less. You’re tight on cash, but you also have a postcard from a local dealer running a “we can help anyone!” campaign.

You found a car that you love. It’s perfect. Not too expensive, but it’s not a beater, either. You sign on the dotted line and take the car home. The dealer assures you they will be able to find financing at the terms you negotiated with them. Cool. You hop in your new car and head home. Your #ICantBelieveItsMine selfie hits your social media feeds within seconds.

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