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Monday, June 28, 2010

Your Auto Insurer and Gray Market Parts

I wrote an article recently for Hometown News and my blog entitled Your Car’s Collision Insurance; Do You Know Your Rights? The most important thing that you must remember if you ever incur body damage to your car (as most of us do at one time or another) is that Florida law gives you the right to have your car repaired by the body shop of your choice.

I have recently been made aware of yet another shady practice by insurance companies, including the two largest, All State and State Farm and that is the reason for this follow-up article to my original column.

You may not even know what a “gray market” auto part is. These are parts, both body and mechanical, that are manufactured outside of the United States and imported by a distributor not authorized by your car’s manufacturer. All auto manufacturers strongly discourage the use of these gray market parts by body shops and mechanical repair service departments. In fact, all manufacturers that I know of will not warranty the part if it is defective and fails.

The question you must be asking yourself is why would a body shop use a part that was not warrantable by the manufacturer and that the manufacturer recommended not be used in repairing your car? The answer is simply that your insurance company may insist that this much cheaper part be used to repair your car. In my previous article I mentioned several other ways that your insurance company may save themselves money at your expense like insisting on used parts or after-market (counterfeit) parts instead of new parts manufactured by your car’s manufacturer (OEM).

State Farm, All State, and most other insurance companies wrongly label the gray market parts on your insurance estimate as “used” parts. I’m not entirely sure about the reason for this deception but I have a good idea. If they listed the parts for what they really are, new parts not authorized or warranted by your car’s manufacturer, they would have to disclose this. If they mislabel them as used parts, they aren’t required to explain anything. Most people don’t read their estimates carefully anyway and are mainly concerned that their car is repaired ASAP before their rental reimbursement expires. They trust that their body shop and their insurance company are primarily committed to your car getting the safest and highest quality repair.

This is not always the case and the biggest reason for this is that you aren’t really looked upon as their “customer” by many body shops. Many body shops look upon the insurance company as their “real customers”. This is because 95%+ of their business is steered to them by insurance companies. The insurance company pays the body shop, not you. An insurance company won’t steer business to a body shop unless the body shop “plays ball”. This means backing up the insurance company with their insured when the insurance company insists on using cheap, unwarrantable parts or used parts to repair your car. If a body shop won’t “play ball” because they truly care about you having a safe, quality repair, the body shop will no longer steer their insured’s to that body shop. If 95%+ of a body shops work comes from insurance companies, this threat can be very convincing.

At the risk of repeating myself, this is why it’s very important that you exercise your right to have your car taken to a body shop that you know and trust. Beware the towing service that insists your car be towed to their storage yard or to another body shop than you desire. Towing companies want to keep your car in their storage yard as long as possible so they can collect a large storage bill. Some towing companies get cash kick-backs from body shops. Above all else, don’t allow your insurance company to tell you where to have your car repaired. They have a bag of tricks to frighten you such as “we won’t warranty the work if it’s not done by our “approved” body shop. The fact is that a good body shop will warranty your work for at least as long as the insurance company. Some insurance companies will go even further and tell you “off the record” why the body shop you prefer won’t do as good a job on your car. This is simply illegal as well as slanderous. If you ask them to put this in writing, they will decline.

Monday, June 21, 2010

Financial Reform and Car Dealers

As you know, there is a concerted effort in progress by the Obama administration and Congress to present a bill to our President to sign into law which would protect us from another collapse of our financial system. This bill is aimed mainly at banks, but also includes other companies that loan money or are involved in that process.

Many feel that car dealers should be included as part of the Financial Reform Bill. Currently the Senate bill includes car dealers but the House bill does not. There has been a monstrous effort on the part of car dealers and their lobbyists like NADA and the National Automobile Dealers Association to exempt car dealers from financial reform. Currently the House Ethics Committee is investigating eight House representatives who took large sums of money from car dealers just before they voted on the bill for financial reform. There is not a day that goes by that I don’t get an email or a fax from NADA or FADA (Florida Automobile Dealers Association) imploring me to give money to their political action committees or call my Senator to exempt car dealers from financial reform.

One might ask why a car dealer should be excluded. After all, a car is the second largest purchase that most of us make next to our homes and we almost always borrow money to finance this purchase. Car dealers argue that most of them don’t “really” loan money to customers who buy their cars because in most cases they sell the finance contract that the buyer signs to a bank or other lending institution. This is technically true, but is totally misleading and not at all a good reason to be excluded from the Financial Reform Bill.

Even though most car dealers don’t hold the loan for the cars they sell, they do everything else that a bank does in making a loan. The car dealer largely determines the credit worthiness of the borrower. He also largely determines the interest rate charged, the down payment, the length of the loan, and the collateral for the loan. The bank that the dealer sells the finance contract to certainly has a voice in all of this, but it relies largely on the dealer. The bank never sees or even speaks with their borrower. The car dealer interviews the customer for credit information, runs the credit bureau reports, and fills out the finance contract that the customer signs.

One of the biggest causes for the collapse of our financial system was from bad and fraudulent loans made in the housing market. Mortgage brokers, home buyers, and some banks knowingly falsified credit applications and made loans to people who obviously would not repair their loans. This same thing happened and is continuing to happen with car loans. The car dealer is often to blame when a credit application is falsified, a down payment is exaggerated, or the true value of the car is falsely enhanced.

Many car dealers make more money from financing the car then they do from the markup on the car. Dealer financing profits range between an average of $500 and $2,000 for every car sold. Financing a car also affords the car dealer the opportunity to include a large menu of “products” in the amount financed, which the dealer is immediately paid for. Some examples are GAP insurance, extended warranties, theft insurance, prepaid car maintenance, and road hazard insurance. They also receive a large kick-back from the bank they sell the finance contract to. The dealer “buys” a low interest rate from the bank, like 2.5% and marks it up to the customer to say 5.5%. There are limits on the amount of markup based on the customer’s credit worthiness, the banks rules, and state law. But a dealer can, within these limits, make many thousands of dollars in interest kick-back on a single transaction.

For those of you who are regular listeners to my radio show every Saturday morning, 9-10 on Seaview Radio 95.9 FM or 960 AM, you may have heard a recent caller named Norma. I’m trying to help her 79 year old brother, Herman, for whom Norma is the primary caretaker. Earlier this month, without Norma’ knowlege, Herman bought a 2008 used Kia SUV on credit from Delray Kia for a total sale price of $23,599.26. His monthly payments are for $312.11 for the next 66 months, 5 ½ years, and the interest rate is 14.99%. Herman’s only source of income is social security and he resorts to food stamps and “meals on wheels” to eat. Furthermore he is physically and mentally disabled with steel rods in both legs from a terrible auto accident. Herman does not have a copy of the credit application which he should have filled out and signed and has no recollection of receiving or signing one. Herman also had GAP insurance and Etch insurance “included” in his finance contract for a total of $898.

This sort of thing happens thousands of time every day and it may even be perfectly legal under today’s laws. What prompted having car dealers added to the Financial Reform legislation in the first place was a letter written to the chairman of the Senate Banking Committee, Chris Dodd, by the Secretary of the Army, John M. McHugh. He said that soldiers need to be protected from “unprincipled auto lending” so they can concentrate on their primary mission: “protecting our great nation”. Soldiers who are distracted by financial issues at home are not fully focused on fighting the enemy, thereby decreasing mission readiness”.

If we should protect our soldiers from “unprincipled auto lending” why not also protect our civilians, especially the elderly, poor, and disabled like Herman?

Saturday, June 19, 2010

Translating Misleading Car Ads

In previous posts I have recommended that you avoid reading most cars ads in the newspaper and in direct mail. Most TV and radio car ads are similarly misleading. My suggestion is that you carefully choose the precise year, make, and model you want with the precise accessories and get at least 3 legitimate bids from car dealers on the Internet or, next best, at the dealerships. However, if you do find yourself perusing the large number of car ads in the local paper, here are some translations of common misleading ads. I took these straight from a local paper.

20% to 40% OFF MSRP: Never buy a car based on how big a discount you are quoted. Always calculate the price you are willing to pay based on an accurate understanding of the cost of that vehicle. Different makes and models have different markups and factory incentives can cause the true markup to vary widely. What sounds like a big discount may also pay the dealer too big a profit.

LIQUIDATION SALE: Most of the time you pay just as much for a car during a “sale” as you do without a sale. The only exceptions are factory incentives which do have an expiration date. A “sale” is what advertisers refer to as a “call to action”. They are looking for something that will motivate you to come in today, rather than procrastinate. It doesn’t seem to matter if the motivation is untrue.

UP TO $15,000 OFF: Many dealers have an additional markup on top of the manufacturer’s suggested retail price, MSRP. They commonly label this a “Market Adjustment Addendum”. This can be thousands of dollars. Discounting a car thousands of dollars means nothing if the dealer just added a “Market Adjustment Addendum” for an amount equaling or exceeding the discount.

STK#62029A: When you see a number like this next to the price of a new car, it means that that is the only car you can buy for that price. The number is the stock number for that specific car which is supposed to tell you that this is the only car at this price. Many of these ad cars are of undesirable colors and accessories. They are advertised below cost and the loss is charged to advertising if they have to sell one. You chances of buying one of these are slim and none.

CREDIT PROLEMS ARE NO PROBLEM: This type of ad is particularly insensitive and distasteful. It is meant to attract people who have such bad credit that they think they cannot obtain financing. Unfortunately, there are people whose credit is so bad that no lender will offer them financing. These people are disappointed and embarrassed when they learn the truth that “credit problems can be, in fact, big problems”.

MINIMUM $10,000 TRADE-IN ALLOWANCE: This is just like the huge discounts. A trade in allowance means nothing if the car has been marked up high enough to offset the extra trade-in allowance.

WITH APPROVED CREDIT: This allows dealers to add a fine print disqualifier which is an extremely high Beacon score that disqualifies 99% of the car buying population. It is used in conjunction with very low lease payments or purchase payments. It is a “bait and switch” which affords the dealer the opportunity to raise your payments (and his profits) because your credit is “not acceptable”…to him.

PRICE GOOD ON DATE OF PUBLICATION ONLY: You will find this only in the fine print at the bottom of the page. This is added protection to the dealer, in addition to the stock # mentioned above, that he won’t have to sell you the car at the advertised price.

AS LOW AS or FROM: You will see this in smaller print next to a very big price and a big, pretty picture of the car. This is a further “C.Y.A.” for the dealer so that he doesn’t have to sell that car at that price.

WE’LL BEAT ANY OTHER DEALER’S PRICE OR THE CAR IS FREE: Some claims are so outlandish that I hesitate to bother warning you about them. Applying the old saying “if it sounds too good to be true, it probably isn’t” should protect most people from this kind of ad.

I could go on and on, but I hope I have already made my point. Car dealers’ ads are the absolutely worst way to decide which car you should buy and what price you should pay. When you respond to most car dealers’ ads, they are in control. You must take control and let the dealer respond to your carefully thought out and researched choice of year, make, model, accessories, and what price you offer to pay him.

Monday, June 07, 2010

The Dealer Fee… "Just Following Orders"

For the benefit of new readers, the “dealer fee” is the dirty little secret of most Florida car dealers. It’s an extra charge ranging from about $400 to over $1,500 and averaging about $800 that the dealers surprise you with after you’ve been quoted a lower price. If you want to learn more about this rip off to the car-buyer, just Google “dealer fee” and “Earl Stewart”.

Battling the dealer fee for years, I’ve often wondered why so many car dealers, sales managers, and sales people could go along with this unfair and deceptive sales practice. I truly believe that most people (including lawyers, politicians, and car dealers) are inherently good, honest people. I have to ask myself why would an honest person quote a price that he knows is a lot lower than the real one to a customer.

Last week I was watching CNBC and there was a discussion about the “Milgram Experiment”. This psychological experiment was conducted at Yale University by Professor Stanley Milgram. What motivated him to perform the experiment was to discover why millions of good Germans followed the orders of evil Nazi’s like Adolph Eichman while conducting the Holocaust during WWII.

The experiment involved volunteers called “teachers” who questioned other people called “learners”. The teacher asked the learner to correctly match certain pairs of words. The teacher and learner could not see each other, separated by a partition. The experimenter instructed the teacher to push a button sending an electrical shock through the leaner for each incorrect answer. The initial voltage was very low and not enough to cause any discomfort. However, the experimenter told the teacher to increase the voltage with each successive wrong answer. The learner and the experimenter were in on the ruse, which was that no electricity was actually flowing. The machine was connected to an audio device which emitted recorded shouts of pain when the fake voltage reached higher levels…all the way to 450 volts.

The amazing results were that 65% of the “teachers” went all the way to 450 volts, hearing screams of pain. They did this even though they believed their actions were causing intense pain and may also cause permanent bodily damage.

Psychologists ascertained that there were two reasons for this. The first is called “the Agentic State Theory”. This is the “I was just following orders” reason as repeated often in the Nuremburg Trials. The essence of obedience consists in the fact that a person comes to view himself as the instrument for carrying out another person’s wishes, and he therefore no longer sees himself as responsible for his actions.

The second reason psychologists believe accounted for this behavior is the “Theory of Conformism”. A person who has neither ability nor expertise to make decisions, especially in a crisis, will leave decision making to the group and its hierarchy.

So there you have it. Car sales people follow the orders of their sales managers, who follow the orders of their general manager who follows the orders of the owner of the dealership. But why do the owners, the dealers, trick customers with the dealer fee? They aren’t following anybody’s orders. The car dealers fall under the “Theory of Conformism”. They feel that as long as everybody else is doing it, it must be OK for me to follow suit.

A great local example of this started last year when Ft. Pierce Nissan began charging a $799 dealer fee plus a $750 freight fee, totaling $1,549. Napleton Nissan in Riviera Beach picked up on this and matched Ft. Pierce by adding $750 freight to their current $795 dealer fee. Next, Royal Palm Nissan in Wellington followed suit. Now most Nissan dealers from Ft. Pierce to Riviera Beach add over $1,500 to the price you are quoted on a Nissan.

Now you can understand why that smiling salesman can so guiltlessly throw the lever causing 450 volts of electricity to course through your body which is about the way most car buyers feel when they realized that they’ve been deceived. The salesman was “just following orders”.