3 Common Car Dealer Tactics Hitting Consumers Hard

Nov. 16, 2011 -- A car often can be one of the biggest purchases a person will ever make, and consumer groups say buyers are easily taken advantage of by unscrupulous car dealers.

That's why they are pushing for more regulations, and the Federal Trade Commission is hosting an all-day meeting on the topic on Thursday.

A car dealer's tactics can start the moment a driver pulls up at the dealership, according to Ray Lopez, who was a car salesman for 35 years.

"It's all a matter of the psychological games that we play," he said.

1. Yo-Yo Financing

One of the biggest games is "yo-yo financing," which occurs when a dealer is so eager to close the sale that he sends a buyer home with the car before the financing is secured.

"The person's already been driving the car, has already fallen in love with the car," Lopez told ABC News. "But when the financing falls through, the dealer calls back with bad news: Pay more money or return the car."

Lakeeta Johnson, a single mom from St. Louis, said it happened to her. Three weeks after a dealer handed her the keys to a Jeep Liberty, he called and demanded it back.

The dealer kept the car Johnson traded in and her deposit.

"I walked through the door with $2,500 and a truck to trade-in," she said. "I ended up with nothing."

Johnson is now suing the dealership to get back her old truck and the $2,500 deposit.

Cases like Johnson's may not be uncommon. According to the Center for Responsible Lending, one in eight buyers making less than $40,000 a year has been a victim of yo-yo financing. For people making less than $25,000, it's one in four.

"It's outrageous and shouldn't be done," said Jack Fitzgerald, a long-time auto dealer. He told ABC News that buyers should never leave with a car unless the deal is final.

"Don't take delivery of a car if you don't have a signed contract," said Fitzgerald.

2. Interest Rate Markups

Another one of the car dealer tactics is what critics call a hidden markup. That's when a dealer jacks up the interest rate on a car loan, without telling the buyer they have raised the rate quoted by the lender.

It's perfectly legal, and dealers argue that's markup covers their costs related to security and servicing the loan.

But the Center for Responsible Lending says interest-rate markups cost consumers nearly 26 billion dollars a year in "unneeded, excessive charges."

Consumers are advised to shop around for a loan, they may be able to get a better deal from a bank or credit union.

3. Add-Ons

Another trick car salesman use is selling expensive add-ons such as line paint sealant or fabric protection.

"All new cars come from the factory with paint sealant and fabric protection," Lopez said. "So, if you hear that, walk away."

The bottom line is that consumers need to do their homework before they walk into a dealership. They also need to be prepared to walk out and never look back.

"The moment you turn around, ca-ching, they know they've got you now," Lopez said.

Tips from the National Automobile Dealers Association:

Top 4 things to do before going to the dealership:
      1. Based on your needs and budget, determine a realistic price range for the vehicle you are considering to buy.
      2. Know the difference between financing and leasing.
      3. Know your credit record.
      4. Compare annual percentage rates (APR) from other lending sources such as banks, finance companies and credit unions.

Top 4 things to do while visiting the dealership:
      1. Stay within the price range you can afford.
      2. Negotiate your finance arrangements and terms.
      3. Understand the value and cost of optional products such as extended service contracts, credit insurance or guaranteed auto protection. If you don't want these products, don't sign for them.
      4. Read the sales contract carefully before you sign it.