To recap, we’ve been talking about my friend “Irene,” who bought a car she couldn’t afford, and then the dealer talked her into a second deal …. to pay even more money for a less valuable used car!<\/p>\n
When I looked at Irene’s paperwork for the second transaction, here is what I saw.\u00a0 This Retail Installment Sale Agreement contains key disclosures required by a law called the Truth in Lending Act, or TILA.<\/p>\n
Irene’s second contract<\/a><\/p>\n The first thing I noticed was the Total Sale Price, defined as “the total cost of your purchase on credit, including your down payment.”\u00a0 It was more than $3,000 higher than the figure on the first contract.\u00a0 That told me immediately that the dealer had taken advantage of Irene.\u00a0 She was trying to downshift, yet wound up in a more<\/em> expensive deal.<\/p>\n Then I looked at the Payment Schedule.\u00a0 Irene was looking to reduce her payment below $300.\u00a0 The monthly payment shown on this contract is $299.98.\u00a0 How did the dealer get the payment to be a hair under $300?\u00a0 By stretching out the time to 78 months — that’s six and a half years.\u00a0 Irene never noticed that her new contract was three months longer than the first one.\u00a0\u00a0 And the first one, at 75 months, was plenty long to begin with.<\/p>\n There’s no law regulating how long an installment sale can be for.\u00a0 Dealers know that customers often just look at the monthly payment and don’t consider the consequences of having a car not paid off for many years.\u00a0 Long contracts cost you money.<\/p>\n When it takes so long to pay down the debt, it means that you owe more than the car is worth for a long time.\u00a0 If during that time you get into a serious accident,\u00a0 such that your insurance company “totals” the car, you’ll still owe money to the finance company.\u00a0 That’s bad for you and maybe worse for the finance company.\u00a0 That’s why dealers urge you to buy gap insurance.<\/p>\n Though often written as “GAP,” like an acronym, “gap” is just a description of what is being insured:\u00a0 the “gap” between the car’s value at the time of an accident, which is the most that a collision policy will pay, and the remaining indebtedness that you owe on the car.\u00a0 Irene’s contract calls for her to pay $700, plus the cost of financing that $700 over 6-1\/2 years, for gap insurance.<\/p>\n Is gap a smart purchase?\u00a0 It’s hard to say.\u00a0 How long will the coverage last?\u00a0 Will you be insured for as long as there is a gap, or only for a couple of years?\u00a0 The dealer dictates the price for this product because it’s not really practical for a consumer to buy it from another source. Most such products involve a high markup by the dealer.<\/p>\n Another way to approach this question is:\u00a0 if gap insurance seems necessary, think about whether you can reduce or eliminate the gap to the point where you can self-insure against this risk.\u00a0 Maybe you’re buying too expensive a car.\u00a0 Maybe the interest rate is more than you need to pay.\u00a0 Maybe you should increase your down payment,\u00a0 or insist on a shorter period of payments even though that means a higher monthly payment.\u00a0 Maybe you have, or can start, a savings account, to pay off any gap in the unlikely event of having your car totaled in an accident.<\/p>\n Cars are expensive enough; what’s really awful is to have a deal padded with financing charges.\u00a0 Under TILA, certain kinds of insurance, including gap, are not counted as part of the Finance Charge if you are given the choice whether or not to buy them.\u00a0 But conceptually, gap insurance is part of the cost of credit.\u00a0 If you can buy a car without buying gap insurance, you will save money in the long run.<\/p>\n <\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" To recap, we’ve been talking about my friend “Irene,” who bought a car she couldn’t afford, and then the dealer talked her into a second deal …. to pay even more money for a less valuable used car! When I … Continue reading