Is Your Car Dealer Ripping You Off?

Feb 1, 2022

We've all been there. You find yourself at the desk of a salesman at a car dealership. You've been at the dealership so long now the sun is starting to go down. The temperature in the office seems to have dropped 15 degrees in the last half hour. You're hungry and exhausted, but you are so close to having the keys to that new car you've been wanting. You can practically feel your hands on the steering wheel. If you can make it through this ordeal just a little longer, that car is yours. But that salesman has been gone for almost an hour now. Did he take a lunch break? Did he forget about you? The sad truth is, there's a good chance the once-friendly salesman is now putting you through "the grind."

Before we dive too deep into this, let me start by saying that not all car dealerships and salespeople participate in the underhanded and manipulative tactics I am about to outline, but many do. Not all, but many. Yes, many reputable dealerships work honestly and diligently to find you the best pricing and financing for your new vehicle. But we are not here to talk about the "white hats." We are here to talk about the scenario above where many have found themselves. Where the car dealer is milking as much time out of you, trying to make you as uncomfortable and desperate as possible, so you'll sign whatever pieces of paper put in front of you during closing. That's our task today.

For many people, the car buying process starts by researching what kind of vehicle they want. A new pickup truck, an SUV to ferry the kids around town, or maybe a Tesla to take some of the stress out of your daily commute. But the one thing people often neglect is researching their financing options. Many financial institutions are more than happy to negotiate loan options with you, from credit unions to online banks, even if you haven't picked out a vehicle yet. Doing this could help you avoid making last-minute decisions that could be lethal to your wallet.

Many car dealers make their money not on the sale of the car itself but in "F&I" or finance and interest. This is where extended warranties are packaged and where in-house loan options are built. And it's likely where our salesman from earlier is while you wait in his now freezing cold office.

The salesman will first have the F&I department figure out your loan. The dealership F&I department will now reach out to financial institutions on your behalf to arrange financing for your vehicle purchase. Depending on your credit, a bank will call the dealership back and say something like, "This is a good candidate for financing. We will approve the purchase of the $20,000 car with a 2.5% interest rate on that loan." Great! But by the time the salesman makes it back to you in his office, he puts a piece of paper in front of you that shows the bank has approved you for a $20,000 car loan at 7% interest! Wait-what? Who's pocketing that extra 4.5%? You guessed it; the dealership.

This is called a "wholesale loan." It happens to almost every person who buys a car at a dealership without pre-arranging financing. The best way to protect yourself from this is by working with your credit union or bank before you set foot on the car lot. Most applications are easy to fill out, and you could have your results minutes after applying.

Next up, your car salesman and his F&I friend are going to work up an extended warranty for you. They also call them "service plans" because extended warranties have gained a bad reputation (for a good reason). This will be presented to you at the closing table as a nice colorful packet of papers. The packet pages will feature pictures of smiling service technicians and lots of charts with big numbers reflecting the costs of engine rebuilds, transmission replacements, and worse! The salesman will talk about how much money you would be out of pocket if your car (which he promised you two hours ago was dependable) would suddenly break down. He may even tell you that he purchased one of these extended warranties for himself. Even better, he tells you that they can fold the cost of that extended warranty into your loan.

But if we dig just a little deeper and do our research, we'll find that many of these extended warranties are not only poison for your wallet but about as useful as an inflatable dartboard. First, extended warranties sold at the closing table can cost as much as $4,000-$5,000! And since the dealer was gracious enough to throw that into your already interest-inflated loan, that means you are not only paying interest for your car, but now you are paying interest on the extended warranty! As I said earlier, this is how dealerships make their money.

The other danger of these extended warranties or service plans is when it comes time to use them for a vehicle repair, the third-party warranty company wants nothing to do with you. The contracts that come with these are often riddled with loopholes and gotchas. The BBB website is littered with reports from consumers who felt swindled when it came time to use one of these service plans.

You can use a great trick when presented with one of these extended warranties at the closing table. When the dealer hands you the packet, ask if you can take it home, research the warranty company, and consider your options. Chances are, the dealer will say, "No." If that's not a red flag, I don't know what is. You should not feel forced into having to spend thousands of extra dollars (plus interest) on something with a moment's notice and not given the proper amount of time to do research.

The last time I purchased a car and had an extended warranty offered to me, I refused to buy it. The salesman got so mad at me, he threatened not to sell me the car. I called his bluff, stood up, walked out, and made it halfway across the sales floor before he came running after me and shoved a piece of paper in front of me stating that I refused to buy the service plan and "assumed all liability after 'x' miles, blah, blah, blah."

The better solution is to refuse the warranty plan and make sure that you keep enough money in your rainy day or car repair fund that you could stomach the price of a repair bill. If you don't end up needing to pay for a hefty repair, then all that money stayed in your pocket and wasn't handed over to the dealer at the closing table.

Purchasing a car shouldn't be stressful, but unfortunately, it often is. But you can take back control of the car buying experience by taking the time to research your financing options and being smart about extended warranties/service plans. Always keep your wits about you when at the closing table, and don't forget that there are now reputable online vendors who will sell you a car without putting you through "the grind." With car prices at record highs, it is more important than ever to protect your wallet from underhanded tactics used by many (but not all) car salesmen.

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