I hate it when a client comes in with a problem I can’t solve.
Just the other day I met a women I’ll call Irene, who was desperate for me to find a way to relieve her from an agreement to buy a car. Irene’s not an impetuous kid. She is retired from a professional career, living on a fixed income. Here is her story.
Irene’s old car was dying. She went to the showroom of a large franchise dealer in new and used cars, explaining that she desperately needed to replace her old clunker so she could get a part-time job. The salesman asked if she could afford $65 a week, showed her a midsize sedan that was almost new, and said he’d give her $2500 for her trade-in. That sounded good to Irene. She drove the new sedan home that same day. Two days later she went back to sign the paperwork. As promised, there was a $2500 credit for her trade, the interest rate was a reasonable 5% from a credit union, and the monthly payment was not too much over $300.
But it didn’t take long for Irene to realize she really couldn’t afford the payment. That was when she read over the installment sales agreement and saw that she was committed to 75 payments (6 years + 3 months); also, the dealer had tacked some extras onto the car’s price, including an extended service contract for $1700 and “gap” insurance for $700. (Later, Irene tried, but couldn’t explain to me what gap insurance was.)
She went back to the dealership and asked if they could modify the contract or substitute something cheaper. The dealer obligingly produced an entry-level compact with 40,000 miles on it and offered to let her defer the first payment for a few months so she could find a job in the meantime. Within an hour or two Irene had signed a new Retail Installment Sales Agreement. She was trading in the newer, larger car for a credit of about two thousand dollars. The interest rate was now a few points higher. The first monthly payment was deferred by a few months, but then it would be just a few dollars cheaper… and the term of the agreement was up to 78 months. And the price of the extended service contract, curiously, had increased by almost a thousand dollars.
I studied the two contracts. You know, I said, the total amount you will be paying, over the next 6-1/2 years, is three thousand dollars more than under the previous contract — for a much less valuable car. I pointed to the part of the contract that said, in rather large type: “No Cooling Off Period.” Unless the dealer agreed to rescind this contract, which was unlikely, Irene was stuck with it.
What could she have done to prevent herself from getting into this trap?
In future posts I’ll talk about how to read sales contracts, especially installments sales contracts for cars, and about other tricks and traps in dealer-arranged car financing.
But here’s a sneak preview: It’s a jungle out there. There are almost no limits on what a car dealer can charge for a car, for add-ons, or for the cost of credit. There are laws to protect you… but mostly by requiring that key terms of a deal be disclosed in a way you can understand before you sign your name to a contract. The key law is called the Truth in Lending Act, and it only helps if you use it.