To recap from last week: first Irene got into a car deal that was too expensive. When she went back to the dealership and asked them to help her get out of it, she wound up agreeing to pay three thousand dollars more for a smaller, more heavily used car than the first one!
What might Irene have done to avoid getting into this mess? With the benefit of hindsight, Irene made several common mistakes in buying her car.
First, she didn’t know the value of the cars she agreed to buy. Maybe there was a price written on the windshield, maybe not. But Irene hadn’t done any comparison shopping or research to know whether those stated prices were a good value. In fact, the supposed cash price for the first car Irene agreed to buy, as stated on her Motor Vehicle Purchase Contract, was inflated by the $2,500 the dealer “gave” her as a trade-in on her old car. Irene should have known her old gasping clunker wasn’t worth anywhere near $2,500. But she didn’t make the connection between the trade-in allowance the dealer graciously offered and the price she was agreeing to pay for the new car. Dealers don’t “give” you anything! What appears to be given with one hand is always taken away with the other! Similarly, when the dealer agreed to take car #1 as a trade-in for car #2, Irene didn’t know or didn’t notice that the new contract called for her to pay more than $16,000 for a car that, according to Kelley Blue Book, she should have been able to buy from a dealer for $13,000.
Second, Irene gave up her bargaining power at the beginning by signing over her trade-in, putting down a large cash down payment, and driving away in car #1 before she had been presented with a contract for the financing (called a Retail Installment Sales Agreement, or RISA). That is to say, she took possession of the car before knowing how she was expected to pay for it.
Dealers love to do this to customers — treating the financing as if it were some kind of minor detail. This has both a psychological and a practical dimension. Psychologically, you become invested in owning the car and not inclined to give a critical reading to the RISA when it’s put in front of you a few days later. Practically, even if you read the RISA and find that the interest rate is much higher than promised, or that the dealer made your monthly payments low by dragging out the contract to 4, or 5, or 6-1/2 years, even though you have a perfect legal right to opt out of the deal, the dealer will make it very difficult to do. He’ll tell you there’s some reason he can’t return your trade, or he won’t refund your down payment. He has already run a credit check and knows that you don’t have the option of going elsewhere without the down payment. He has you in a vise.
Third, and related, Irene didn’t insist on taking the RISA home to review at her leisure before signing it. Once you sign the financing contract, you are stuck with it. Dealers play on the idea many people have, deep in their mind, that you have three days to cancel a deal if you decide it was a bad idea. Unfortunately, this “cooling-off period” applies only to a very small set of contracts: basically, refinancing home mortgages and door-to-door sales. Irene’s RISA said, correctly, that NO COOLING-OFF PERIOD applied to her contract.
Of course, dealers don’t want you to read the contract, much less shop it around to compare against other sellers, and have a well-developed set of techniques to prevent you from exercising your rights as a buyer. The chief method, as mentioned above, is to present the contract after you already feel committed to buying the car and have no alternative financing lined up. Another favored method is to have a stack of papers, most of which are unimportant, and run you through signing them all without reading them.
The RISA is the most important document you sign when you have a dealer arrange financing for the car. It includes all the key terms you need to know whether you can afford the deal, whether it’s a good deal, and what will happen if the deal breaks down. Part of the RISA is a set of uniform disclosures required by the Truth in Lending Act: the Amount Financed, Finance Charge, Annual Percentage Rate, Total of Payments, and the payment schedule. In columns to come I will talk about the importance of each of these elements.