Get Clark Smart

CHAPTER 1
Cars

The most difficult calls I take on my radio show involve cars. We call them “razor blade” calls, which means the situation is awfully bad. A typical call involves someone who’s recently purchased a used car, sometimes for several thousand dollars, only to find it is riddled with problems. They’re faced with impossible choices. The vehicle often can’t be repaired properly, and the dealer won’t take it back. That could mean scrapping it, absorbing an expensive loss, and trying again.

It’s even worse if the buyer is making car payments on a useless vehicle. These situations are very sad, because in many cases nothing can be done to help the caller. It’s simply too late.

What I hope to do is educate you so that you can avoid the most common mistakes, and at the same time buy a car more effectively, with less stress, and probably get a better deal than you ever have before.

I want to teach you the right way to buy a new car or a used car, finance that purchase, and get it fixed if something goes wrong.

*Buying a New Car*

There are a lot of tools available today to help you buy a car. Unfortunately, most people don’t take advantage of them, because they get caught up in the emotion of buying. If money matters to you, put that emotion aside and be smart about your car purchase.

The first thing to do is to prequalify for a car loan, so you’ll know how much car you can afford and what type of monthly payment you will have to budget. It also means your purchase won’t collapse because you can’t get financing. The best place to prequalify is at a credit union, because they’re cheaper—credit unions usually will offer car loans at 1.5 percentage points below what a bank will charge. If you’re not a credit union member, check www.cuna.org, to see if there’s a credit union you can join. Or try online lenders such as www.eloan.com, whose rates usually will be at least a full point below those of a traditional bank. But even if you prequalify at a bank, that’s better than just walking into a dealership and trying to get financing there.

Once your financing is set up, decide what kind of car you want. One of the best times to look at cars is when a dealership is closed, so there’s no salesperson there to pressure you. It may sound strange, but a shopping mall parking lot also is a good place to look at a lot of different vehicles. Just don’t act like you’re trying to steal someone’s car.

Everyone wants a car that will run dependably and stay out of the repair shop. The best way to improve your odds of getting a trouble-free car is to check out the repair records of the models you like. Consumer Reports magazine is the best place to find repair data on cars. Each year, the magazine’s April issue is devoted to car buying, and it contains detailed ratings and data on a variety of models for several model years. Consumers Union, which publishes Consumer Reports, also publishes a car-buying guide that is available year-round in bookstores. Consumer Reports is available online for a monthly fee at www.consumerreports.org.

Of course, no repair data is available on newly introduced models. I don’t recommend buying a new or radically redesigned model, because if you do, you are the guinea pig for any problems the vehicle might have. After a few model years, you have a better idea if a car is well-made and worth purchasing.

Once you’ve narrowed your search to a couple of different models, call your insurance agent to find out how much it would cost to insure those vehicles. There may be a significant difference between your choices, even between two versions of the same model. The size of the cars’ engines, for example, could be one reason for a cost difference.

Become familiar with the various versions of a car. The Honda Accord, for example, might come in DX, LX, EX, and SE versions. Each version comes with a different package of options and standard equipment. The most expensive version of the car will cost several thousand dollars more than the least expensive version. It’s to your advantage to buy the least expensive version of the model that meets your needs. That’s because, over time, the value of those two vehicles converges. An initial gap of $8,000 between the cheapest and most expensive versions might dwindle to $1,000 in the resale value of the two cars after a few years of ownership. If you buy the most expensive version, you pay a higher price both up front and at resale time.

I don’t recommend test-driving a car at a dealership. You’ll only have a short time to check out the car, and the salesperson will be right there. The best way to test-drive a car is to rent it for a day or two. Car rental companies make most of their money on business rentals, so they offer great specials on the weekends, when volume is light. I actually check out cars this way on business, since I travel so much. I’ve rented cars I thought I might want to buy and changed my mind after driving them for a few days. It’s the ultimate test drive and it’s not expensive. After all, considering that you might spend $25,000 to buy a car, spending $25 to $40 to rent it is rather inexpensive.

If you do a test drive at a dealership, a representative may ask for your driver’s license. If you turn it over, make the dealership give you a signed release saying they will not pull a credit report on you. Dealerships like to check your credit while you’re on a test drive, and if you visit several dealerships, the credit inquiries could damage your credit rating.

The Internet has put consumers completely in control of the car-buying process. To get the best deal, you have to have Internet access. If you’re not online, find a friend who is and enlist their help, or go to a local library. It’s that important. In fact, using the Internet will save you so much on your car purchase that, even if you don’t have a computer or an Internet-only appliance, spending a few hundred dollars to buy one would be a bargain.

First, go to www.edmunds.com and www. kbb.com (Kelly Blue Book) and look up the actual dealer cost on the base vehicle and options you’re interested in. Add the dealer cost for air conditioning, automatic transmission, whatever you want, and calculate the total dealer cost for the car. Go to both sites, because they may show slightly different figures. If they are different, use the average of the two. Any negotiating you do with the dealer should start from the dealer’s cost, not the manufacturer’s suggested retail price (the “sticker price”), which could be thousands of dollars more. The price you pay will depend upon the popularity of a particular model. For a car everyone seems to want, you might have to pay several thousand dollars more than the dealer cost. But for less popular or unpopular cars, you could buy the car for just a few hundred dollars above dealer cost, or even below dealer cost.

At one time, you could get an instant price quote at a number of Web sites for the model you wanted to buy, then buy the car with no negotiation. I had thought this was going to become the popular way to buy cars. But instead of more and more companies selling this way, the number has shrunk to just one, www.carsdirect.com. With this site, you enter the model, equipment, and interior and exterior color you want, and within fifteen seconds, they give you a guaranteed price quote. It’s amazing. If you wish, you can then go through that process, as I have, and buy a car online. I did this at the late www. carorder.com for my mom, and was able to buy her car at $6,000 less than she had been quoted from two dealers. Maybe selling a car for $6,000 less than anyone else wasn’t a good way to stay in business.

Although most of the independent shopping sites have folded, dealers have discovered that selling vehicles via the Internet can be good for them. The giant national chain AutoNation reported that it sells 10 percent of its vehicles through its Web site. Even if you don’t buy on the Web, you should telephone dealers to get their best price.

If you choose to buy a car the old-fashioned way, by walking into a dealership and talking with a salesperson, be prepared for a difficult process. Some dealers still use a variety of tactics to snare you. They know you’re excited about buying a new car and will use that to their advantage. One strategy they’ll employ is delay. Dealers know that the longer they can keep you at the dealership, the more likely you are to buy a car. So they’ll try to keep you there for several hours.

One common tactic to delay you is to make your car unavailable. When you show up at a dealership, they ask to have the used-car manager check out your current car, to evaluate its trade-in value. While you’re test-driving a new car, they send somebody to look over your car and make sure you don’t get it back too quickly.

In the movie National Lampoon’s Vacation, Chevy Chase’s character, Clark Griswold, goes to a car dealer to buy his family a new station wagon, only to receive a hideous green “truckster” car with stacked headlights. When he asks for his trade-in back, he sees that the dealer has crushed it into the size of a coffee can for the local scrap yard. So he’s forced to take the horrible new car home. I hate to see anyone get ripped off, especially a guy named Clark.

One of the most despicable practices in the industry is “roofing,” in which the used-car people literally throw the keys to your car onto the dealership roof, then report that they somehow can’t find the keys. The purpose is to get you to drive home in the new car while they look for the keys.

I recommend that you discuss any trade-in only after you’ve negotiated the purchase of the new car. I’ll talk more about why in the next section. But if you keep the transactions separate and stay close to your car, you won’t be kept in the dealership any longer than you want to be there. The best way to protect yourself in a dealership is to be willing to walk out.

• Tips on Buying a New Car •

Prequalify for a car loan (preferably at a credit union) or apply online. That tells you how much car you can afford and what type of monthly payment you will have to budget.

Look at cars when a dealership is closed, so there’s no salesperson to pressure you.

The best way to test-drive a car is to rent it for a day or two. It’s the ultimate test drive and it’s inexpensive.

Start your research with at least two different vehicles in mind. Then check out the price, the reliability, and the cost of insuring each of the cars you’re considering.

Use the Internet to find out the dealer cost of the vehicle and options you want. Begin negotiating from that cost.

When you’ve narrowed the search to one or two vehicles and have the actual dealer cost for each, shop online for an instant price quote.

If you prefer not to buy online, use online quotes as a guideline and call local dealers to see if they’ll match the best online price.

If you go into a dealership to sign the paperwork and pick up a car, make sure the purchase agreement shows what you’ve agreed to pay. If it’s not the same, walk out.

If you choose to negotiate in the traditional manner with a car dealer, be prepared for a difficult process.

• Reference •

Consumer Reports’ April Auto Issue or Car Buying Guide

• Internet •

www.autonation.com

www.bankrate.com

www.carsdirect.com

www.cuna.org

www.edmunds.com

www.eloan.com

www.kbb.com

www.lendingtree.com

*Trade-ins, Financing, and Extended Warranties*

If you have a trade-in, the time to discuss it with the dealer is after you’ve completed the purchase of the car. Do it as a completely separate transaction, because if you mix the trade-in with the purchase, you’ll never know whether a dealer is offering you a great price on the new car and making up for it by giving you a poor value for your trade-in.

Start by finding out what your trade-in is worth. There are several good Web sites to visit, including www.edmunds.com, www.kbb.com, and www.autotrader.com. Check out each to get a balanced idea of what your vehicle is worth (although the prices at www.autotrader.com are ultraretail prices that you’ll wish you could get). If you’re not Internet active, ask a friend to help. There also are car price books, available at most bookstores and libraries.

On all the sites but www.autotrader.com, there will be two prices listed: the trade-in price, which is what you can expect a dealer to pay you, and the retail or market price, which is the price a dealer may sell it to someone else for. If you sell the vehicle yourself, you’ll be able to charge a buyer about halfway between average trade-in and average retail. Once you’ve measured that gap, you can figure out whether it’s worth the bother of selling the car yourself.

Once you’ve shopped around and the dealers realize you’re a good shopper, their prices will be similar. You can help decide which dealer to buy from by seeing how much they’ll give you for the trade-in. Take the car to each dealer for a trade-in quote and use that as the decision-maker.

I always skip the trade-in process and sell my cars myself. A large number of people do sell privately, and they are able to get a better price. But most prefer to trade their car to the dealer because they don’t want to deal with the hassle of a private sale—classified ads, phone calls, and test drives.

If you do sell your car yourself, watch out for a costly scam. Because laser printers are so common, it’s become very easy for anybody to create a phony cashier’s check that looks authentic. There are criminals who will offer to buy your car, and stick you with a check that’s completely worthless. They may be friendly and well-dressed, and not push that hard a bargain with you. Once they leave with your car, you’ll never see or hear from them again. For some reason, it takes about six weeks for a phony cashier’s check to work its way through the banking system. So by the time you realize your car has been stolen, the trail is cold. The car could be in Central America, or cut up into parts at a “chop shop.”

I almost got caught by this one myself. We sold my wife, Lane’s, car a few years ago to a gentleman who bought it for his daughter to commute to school. He took delivery at night in a shopping center parking lot about twenty-five miles from my home. We picked that location because it was about halfway between his house and mine. He gave me a cashier’s check for $6,000 and drove the car home. I went to cash the check the next day, and it was no good. When I looked closely, I saw that the check was dated a couple of days after the date of the sale. And it was drawn on a bank in a different city from the one in which he lived. So there were a couple of red flags, and I figured I had ignored my own rules and been taken. As it turned out, he was such a good customer that the bank had fronted the check to him before his loan had gone through. That’s why the check showed as no good in the system, but it was good by the date on the check. I was lucky, but it taught me that I really need to listen to what I tell other people.

To protect yourself from this kind of scam, meet the buyer at his or her credit union or bank, and have an employee of the bank or credit union hand the money to you. It can be a bank check—because you’re in the bank, you know it’s a real one. Then you hand over the title, and you create two copies of the bill of sale. Each should have the vehicle identification number, mileage on the vehicle, buyer’s name and seller’s name, and date. Each copy should be signed by both the buyer and seller. The buyer gets one copy, the seller the other.

Another scam involves criminals who will come to test-drive your car. While they’re supposedly test-driving, they make a duplicate key to your car. Then they come back later, to your home or business, and use the key to drive your car away. As a precaution, do the test drive someplace other than your home or office, so they don’t know where to come back to steal the car.

Financing the Car

It’s critical to finance the purchase of a car in advance at a credit union, an online lender, or a bank—not at the dealership. By doing this, you’ll know the financing is set, and you can proceed to buy.

Some Web sites to consider for auto financing are www.eloan.com, www.lend ingtree.com, and www.bankrate.com. Bank rate.com is especially good, because you can search for a loan by city, and see rates from different lenders.

When you allow the dealer to arrange financing, all kinds of terrible things can happen. If you drive your new car home and give the dealer your trade-in, you’re in trouble if, as happens more and more, the financing later collapses.

Here’s what happens when the dealer calls you a few weeks later with the sad news that your loan didn’t go through. Because the loan and purchase are done separately, you may not be able to undo the sale. Even if you can, your old car may be long gone. So you either have to come up with a lot more money for a down payment, or pay an exorbitant rate of interest, so that a lender will accept the loan. You can try to get the dealer to undo the sale and give you the value of your used car in cash. But depending on the laws in each state, you may have to fight to reverse the deal.

I got an incredible call from a woman who financed with a dealer. She went to see a salesman she had bought a car from a few years earlier, this time to ask about buying an extended warranty (I’ll talk more about extended warranties later in this section). The salesman quickly convinced her to buy a new car, and roll the old loan into a new car loan. According to the salesman, she could turn the car in after three years if she didn’t want it any longer. The bad news was that, without realizing it, she had signed her name to a seven-year auto loan with a $6,000 balloon payment due at the end of the seven years. She wound up owing $10,000 more than the car was worth. When I get these calls, it’s like trying to fix a train wreck. The damage is already done.

You can also end up paying a higher interest rate on a dealer-arranged loan, because dealers will sell a loan to a customer at whatever rate they can get the customer to pay. A disgruntled finance manager told me the dealership may get the loan at 8 percent and mark it up to 14 percent or 18 percent if they can get the customer to pay that much. The spreads are scary. The finance manager gets the car buyer to pay a higher rate by pointing out blemishes on their credit report, scaring them into thinking they might not be approved. When they’re done psyching the customer out, the customer is ecstatic to get the loan at the high rate.

Some dealers actually have been sued for allegedly conspiring with manufacturers to overcharge buyers on loans. The dealer and manufacturer then split the proceeds. The lawsuits also involve charges of racial discrimination, with customers claiming dealers are charging black customers more for loans than they charge white customers.

Dealers want to do the financing, because that’s where most of the profit is in car sales today. If you take the extra effort to prequalify with your bank or credit union, you will steer clear of a lot of financial danger. If the dealer offers a better interest rate than your bank or credit union, it’s okay to go ahead and take the dealer loan, as long as you have a backup lender.

Car buyers care mostly about their monthly payment, and are more and more likely to opt for long loans. But you should finance a car for forty-eight months or less. The sixty-month loan is a poor financial choice because in that period, the value of the car declines much faster than the loan balance. So, for much of those five years, you’re “upside-down” in the loan—you owe more than the vehicle is worth.

Being “upside-down” can be a major problem. Let’s say you decide after a couple of years that you can’t stand your car. Selling it won’t generate nearly enough money to pay off the loan. Unless you can come up with several thousand dollars to pay off the balance of the loan, you’re stuck in the vehicle. If the vehicle is totaled in an accident, you could end up owing the lender thousands of dollars. You have to cover the gap between the amount the insurance company pays and what you owe.

The beauty of a shorter loan, particularly forty-two months or less, is that the loan tracks the value of the vehicle. For most people, forty-eight months is a good compromise. I know this sounds harsh, but if you go in for a car loan and the payments for a forty-eight-month loan are too high, you’re trying to buy too much car. Stretching it to sixty months is the wrong response.

Extended Warranties

I don’t like service contracts or extended warranties for computers or consumer electronics, but I’m neutral when it comes to cars. Automobiles cost so much money and many people feel better having one.

However, it’s more important to buy a car with a record of reliability than to worry about an extended warranty.

If you do buy, choose only the manufacturer’s extended warranty or one sold by your insurance company. Don’t buy any third-party warranty. Many third-party warranty companies go out of business before they ever pay a claim, and even if that doesn’t happen, the language in these contracts is so full of holes it will be virtually worthless.

I’ve had case after case of extended warranty companies selling cheap contracts to dealers and then going out of business without paying claims.

These rip-off companies sell service contracts to dealers for $90, and the dealers resell them to car buyers for $1,100. The pitch is that the dealer will make a fortune even if they sell the warranty for $600. After a few years, claims start coming in and there’s not enough money in the pool to pay the claims. The company collapses or vanishes, and the consumer ends up with a worthless service contract.

The price on extended warranties is highly negotiable. One of the manufacturer’s contracts that retails at $795 costs the dealer $180. The dealer may make little profit on the sale of a car, but on an extended warranty the markup may be from 400 to 1,000 percent, depending on the type of warranty.

The best way to negotiate is to call your auto insurance agent for a quote on an extended warranty. Then, compare the costs and coverages to those offered under the manufacturer’s contract.

It’s very important not to make a decision on an extended warranty from the dealer or anyone else until you’ve had time to think about it. This is not a decision that has to be made at the moment you’re buying your vehicle. In fact, that’s the worst time to decide because you’re not thinking clearly. You’re excited about buying a new car and you want to be done with the paperwork.