When A Car Lot Has Used Cars For Sale

This is what can happen when you see the sign; used cars for sale

A lady I spoke to at a seminar of mine told me she was concerned for her son. He went alone, to a used car lot and brought home a car. She was proud of him for taking the initiative to go alone, negotiate a car price and loan, and provide his transportation to and from work. He was told the length of his loan period, but it was not true. That time period has long past, and he still owed a lot of money on his car loan. She could not understand how this could happen. I told her to get the contract out, read the fine print, and get back to me. Before she contacted me, I told her what to look  for. The following items are what she looked  for, and sadly, many are what she found.

I informed her that she should talk to her son and tell him the importance of  “doing his homework” before he makes a major purchase of any type. The next time he sees; “used cars for sale” – he should immediately start his research.

The first thing to do is to call the local banks and credit unions to find out what the going APR and interest rates are. Currently (August 2014) used car loans are as low as 4.7%. If you go to a used car dealer and he offers you 20%, you are better off riding the bus. Alternatively, if he offers you a 7 year loan on an inexpensive used car, that is also a red flag — that something is wrong.

If you can qualify for a used car loan from a bank or your local credit union, these loans are far superior to the used car dealer loans. You can get qualified from your bank or credit union first, then take your “evidence of loan qualification” papers with you to the dealer.

The women I spoke to about her son’s used car loan informed me that her son’s contract stated he was paying 21% interest, he was told the interest rate was 9% by the dealer.

Used car dealers can charge something called a “dealer rate” over the “buy rate”. The dealer works with a lender who gives him the loan, and allows him to “mark-up” the interest rate as he wishes, this is the “dealer rate”. The dealer is not really concerned about the markup because he will get the difference between his rate and the lenders rate, or the lenders “buy rate”. He uses the excuse that his clients all have bad credit, and are high risk. That is not true, her son had good credit. His only problem was that he was a low-information buyer. The lenders “buy rate” is the lower rate the car buyer qualifies for — her son had a very low “buy rate”, but did not know it. Her son did not understand what the sign, “used cars for sale”, really meant, and neither did she.

Her son thought he had a good deal because his monthly payments were low enough for him to pay. The problem was, his payments extended over a period that made him pay three times what his car was worth.

The monthly payments are important, but not the main item you should focus on. The main items to focus on are 1. Interest Rates, and 2. APR (Annual Percentage Rate). Each of these items are determined by credit score and whether you are buying a new or used car.

You can decrease your interest rate and APR by putting down a larger down payment, if you don’t have a good credit history. But, make sure you get the lowest interest rate possible, check your contract. Before you go car shopping, ask around for a reputable dealer.

Since everything is negotiable, the first thing you need to do is to research the dealers you will visit. There information is all over the internet, both local and national websites have information on used car dealers. If you are interested in used cars, look up several makes and models with the year, and research the prices.

Before going to the car lot, you should know the current interest rates and APR on used cars. You should also know your credit report, and credit score. Ask the dealer to quote his interest rate and APR. Then ask him to show you a copy of his contract, tell him you have to take it home to read it. Of course, he will emphatically say, “no”, if he has given you a bad contract. At least, take out your magnifying glass and read it. If this angers him, that may be a sign for you to leave immediately.

Her son paid for several “add-ons” he was not aware of. The add-ons can include items that are already on the car or totally unnecessary, but with his purchase, were all “re-charged” to him. The items car dealers usually add on are 1. Service Contracts, 2. Rust Proofing, 3. Gap Insurance 4. Window Etching, 5. Credit Life Insurance, and anything else that is not necessary, but drives up the price of the car.

The only thing a used car buyer needs is car insurance, contact an insurance broker before you go car shopping, let him know you are buying a used car. He will work out coverage before you buy the car. Contact him from the lot to cover your car purchase. Refuse all of the add-ons; all of them will inflate the price of the car well past its value.

A really sad trick that some used car dealers’ play on low-information buyers is the conditional sell agreement. The buyer unknowingly signs a “conditional sell” agreement, after they have the car for awhile, the dealer calls and tells them to bring back the car. He then, informs the buyer that he/she must now sign a permanent sells agreement, but the interest rate has been increased.

To avoid a conditional sell agreement when you first purchase a used car, it is important to read the contract and its fine print before signing. But, the time you sign your first original contract, he has probably given you a lot of bad product if you have not been diligent. If he feels you may be a gullible, person by now, he  will close with a conditional sell agreement. Avoid a conditional sell agreement by questioning everything, and reading your sell agreement before you sign.

Many used car dealers sell the same car over and over. This is called churning. Because of the large “dealer rate” for loans, the add-on’s that over-price the car, and the hidden conditional contracts, many used car buyers end up getting their car repossessed. The car dealer knows this is a possibility, but actually creates the environment so they can “resale” a car over and over. The buyer goes into bankruptcy, because they have no options — in most cases. Many of these cars have major mechanical problems, so the dealer knows the car will either stop running soon, or the person will bring it back to the lot. In either of these cases he is able to resale the car. Make
sure you have a mechanical evaluation before you buy a used car, take a mechanic friend with you or pay a mechanic to evaluate it on the lot. There are mechanics who advertise, “used car lot – car evaluations”.

Because most contracts for used cars come with “arbitration clauses”, the buyer has no options for getting out of a bad contract, on a bad car. In some cases paying for Arbitration can be more than the car cost. Another big problem is that the arbitrator usually sides with the car dealer. The less expensive and least biased option, would be, Small Claims Court — but it is usually not in the contract, unless you demand it be put there.

Lois Center-Shabazz
author of, Live Rich Save Money! Budget Diary
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author of, Live Rich Save Money! 68 Powerful Ways to Save Money, Now and Forever
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