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Monday, May 30, 2011

Should I Buy An Extended Warranty?

“Should I buy an extended warranty?” on my new or used car is one of the most common questions I get asked. Extended warranties are also referred to as extended service contracts. This article is how I answer this frequent question.

An extended warranty is simply a warranty that kicks in after the manufacturer’s warranty expires. But, extended warranties are never as comprehensive as the manufacturers’. A manufacturer’s warranty on a new car is about as close to a “bumper to bumper” warranty as you can get. However, even a l manufacturer’s warranty is not truly bumper to bumper because the tires are never included. The tire warranty is offered by the tire manufacturer A extended warranty is far from a complete bumper to bumper warranty but many car salesmen and finance managers will say their extended warranty is bumper to bumper…this is not true.

When the dealer (or anyone else) tries to sell you an extended warranty they will focus on all of the things that the warranty covers, but typically avoid telling you those items the warranty doesn’t cover. My first piece of advice is to determine exactly what is not covered by this warranty. Today’s automobile contains more computer hardware and software than it took to put a man on the moon. Computer modules are very expensive to replace and are usually not covered by extended warranties. Navigation systems are very expensive and usually not covered. Sometimes some or all of the air-conditioning system is not covered and this is another very expensive item to repair and replace. The more expensive a part of your car is to fix or replace, the less likely it is to be covered by the extended warranty.

All extended warranties cover the power train which consists of the engine lower block, drive shaft, and rear axle. It essentially covers the parts lubricated by your engine oil. These components rarely ever fail and, if they do, it’s caused by lack of maintenance or abuse, in which case the warranty won’t cover the repairs anyway. You’ll see a lot of dealers advertising a“free lifetime warranty” with every car they sell. These are power train warranties and they are free because they are virtually worthless.

If you decide to buy an extended warranty, be sure you know the company that stands behind the warranty. Check out the company’s financial stability. It’s not uncommon for warranty companies to go broke and you’re stuck with a worthless warranty. Many manufacturers offer extended warranties and these are generally safer bets than independent companies. If the dealer is selling his own warranty, be sure that he is financially strong and that you don’t have to bring your car back to the dealer anytime you have a repair covered by the warranty. You should have the right to have your car repaired by any service department in North America.

If you ever receive a solicitation to buy an extended warranty in the mail, by email, or by telephone ignore it. Ninety-nine percent of these are scams. The warranties are overpriced and cover virtually nothing that might need repairs, usually just a power train warranty. The companies offering them are likely to be gone when you try to make a claim. These companies (many seem to be based in Las Vegas) buy mailing and email lists from the various states’ departments of motor vehicles. They know your name, address, when you bought your car and the make and model from this data. They know when your car will be out of the manufacturer’s warranty by how long you’ve owned it. A lot of these solicitations appear to be coming from the manufacturer, but manufacturers never solicit their owners for extended warranties. The envelope and letters are made to look very official and threatening giving you only a few days to act before it’s too late.

I still haven’t answered your question about whether or not you should buy an extended warranty. You know to be very careful about which warranty and who you buy it from. I look at an extended warranty just like I look at an insurance policy. In fact, we’re lucky in Florida because automotive extended warranties are regulated by the state insurance commission. The rates are approved and registered with the state. In most states, the dealer can charge anything he can get for an extended warranty. In Florida you can also cancel an extended warranty you haven’t used anytime in the first 60 days. My philosophy is to buy insurance on something that I either couldn’t afford to fix or replace or if it would put a financial hardship on me if I did. I carry fire and flood insurance on my home based of this philosophy. I don’t buy an extended warranty on my iPhone because I can afford to buy another one of mine broke. I also recommend you consider buying an extended warranty if it will bring you “piece of mind”. This varies based on the personality of each individual. Whatever you decide, just remember that most insurance companies make lots of money. This is because they always take in a lot more money in premiums than they pay out in claims. When you buy an insurance policy, you’re betting against the house and in the long run you will always lose. But if you got peace of mind because you protected yourself against a loss that would have severely tapped your financial recourses, it’s worth it.

Monday, May 23, 2011

Don’t be “Spotted", "Puppy-Dogged", or "Yo-Yo'ed"

One of the most common unethical (and some say illegal) sales practices of car dealers is the infamous “spot delivery”. If you’ve bought a car in Florida (and most states), you probably have been spotted, puppy dogged, and yo yo’ed. Upwards of 60% of all car sales in Florida are spotted.

A “spot” is short for “spot delivery” which is literally translated into delivering your new or used car purchase immediately, “on the spot”. The spot occurs as soon as you’ve picked out your car and signed all of the papers. The car dealer has a lot of reasons to do this. The biggest reason is that so you can’t change your mind about buying that car. Legally, a contract is more binding when the seller and buyer have exchanged “consideration”. Your consideration to the dealer was paying him for the car which includes down payments, a trade-in, and a contract promising to make monthly payments. The dealer’s consideration to you is the car which becomes consummated when you drive it home.

Another part of why you won’t change your mind is that you will take the car home, park it in your drive way, and tell your neighbors, friends, and relatives that you just bought a new car. You’ll probably also brag about the fact that you have good credit, got a great price, a low interest rate, and a low down payment. Everybody will envy you because you can afford that new car, were so smart to negotiate such a good price, and had such good credit that you got the lowest interest rate and down payment. When you fall into this trap, you’ve just been “puppy dogged”. Have you ever bought a puppy for your kids and brought it home from the pet store? Your kids play with the new puppy and take it over to their friends’ houses to brag and tell them what great parents they have. What are the odds that you’re going to snatch that puppy out of your child’s arms and take it back to the pet store…even if it poops on your carpet?

As if all that isn’t enough, the dealer has another reason to spot deliver your car. If you traded in your old car, you can’t compare the price you paid for your new car because you no longer have your trade-in. Dealers have a vernacular for this too. It’s called “de-horsing”. In fact, a dealer will often de-horse a prospect before she picks out a new car and/or signs the papers. He will give her a demo to drive home just so that he can keep her from comparing the trade-in allowance on her old car.

In fact, the delivery consideration and the puppy dog are such strong tools to keep you from bringing the car back, the dealer needs an “ace in the hole” just in case he wants you to bring the car back. This could be because he wants or needs you to pay more for the car, pay a higher interest rate or down payment, or have a cosigner on the installment sales contract. The dealer’s ace in the hole is another contract known as the “yo yo” or rescission agreement. This piece of paper which you might not even remember signing says that you have to bring your new car back if the dealer cannot find a lender who will approve your credit, down payment, interest rate, and/or amount financed. A yo yo goes out and back and of course rescission means the contract is canceled. The yo yo agreement says that if you refuse to bring the car back, the dealer can repossess the car and charge you a high fee for its usage until you do bring it back, like 50 cents a mile and $50 a day plus his costs of recovery. If the dealer did not have this agreement signed, you could keep the car and make your monthly payments to the dealer at terms and conditions you originally signed. Dealers won’t do this because they don’t get all of their money up front as they do when they sell the finance contract to the bank. They also don’t like it because they assume the credit risk if the buyer defaults.

An interesting question to ponder is whether the dealer knew in advance that he could not find a lender who would finance your car with such a low down payment, such a low interest rate, for that little number of months. Why would he do such a terrible thing? Well he may think that you will fall in love with that car so deeply that you will agree to pay him more profit in terms of higher interest and down payment. He might know that you won’t want to suffer the embarrassment of telling your family, friends, and neighbors that your credit isn’t as good as you told them it was and you really aren’t so smart that you negotiated such a low price and down payment.

There’s even a good argument to be made for the fact that the spot delivery is illegal and perhaps even criminal because it’s a violation of the Federal Truth in Lending Act (TILA). Without getting too technical, the signing of the yo-yo agreement violates TILA because it means that the dealer is not the actual creditor. The finance contract you and he signed is almost meaningless and used only to take you out of the market. The only meaning is that you may have the option of signing a new contract but this one might be for more money down, a higher interest rate and/or longer terms. If you’re interested in the legal specifics of why the spot delivery and yo yo agreement are illegal and possibly criminal, click on Link to Ingalsbe Memo. This legal memo was written by an attorney, Raymond Ingalsbe, who is an expert on car dealers’ illegal practices. He has practiced law in Palm Beach County for over 40 years and sues only car dealers. He even helps train other lawyers how to sue car dealers. In fact, he sued me several time before I cleaned up may act and entered my phase as a “recovering car dealer”.

The bottom line is that you should not allow yourself to be spot delivered. Whether it’s illegal or not, it’s certainly not a smart move for the buyer. You wouldn’t move into a new home before the bank approved your mortgage would you? When you drive that new or used car home, be sure that your credit has been approved by the lender for all terms and conditions such as interest rate, number of months, down payment, and who signed the contract (is a consigner required). If that means waiting a few days, that’s good too because it allows you time to think over a very important decision. Buying a new car is the second largest purchase most people make in their lives and should never be rushed.

Monday, May 16, 2011

Ten Tips on Buying the Right Used Car

I sell new and used cars, but if I was not a car dealer and I needed to buy a car, I would buy a used one instead of a new. This is because a used car is a better value. You get more for your money due to avoiding the initial rapid depreciation of a new car. I use the term “used car” in this article because I despise mumbo jumbo euphemisms like “pre-owned”. A used car is a used car is a used car.

(1) Never buy a used car without a CarFax report. The dealer should provide you with one at no charge because any dealer worth his salt runs a CarFax report on every used car he trades in or buys to protect him. Simply don’t buy a used car from anybody that does not give you this report. CarFax reports now have, not only the information about collision damage, floods damage, previous odometer reading, and title issues, (all obtained from insurance records) but also the mechanical repair history (obtained from dealer records).

(2) Have your car inspected by an independent mechanic. Insist on having the used car you are thinking about buying inspected by your mechanic, not affiliated with the dealer. This should cost you no more than $150 and will be money well spent. The mechanic should look, not only for mechanical issues, but body and flood damage. If the mechanic finds some minor things that need fixing, insist that the dealer take care of these and include it in the price he already quoted you. If the dealer won’t allow this, don’t buy from him.

(3) Consult Consumer Reports, www.KBB.com, and www.Edmunds.com. These sources have complete information on the safety, reliability, maintenance cost, and even what a fair price is to pay for any used car. Consumer Reports lists the “Best and Worst Used Cars”. This is great guide and don’t ever buy a used car that’s on the “worst list”.

(4) A Certified Used Car is only as good as the dealer who sold it to you. All manufacturers sponsor “certified” used cars of their make. The main reason for this is that they like to sell the dealer warranties that the dealer then marks up and sells to you. A secondary reason the manufacturers do this is to enhance the resale value of their make car. This helps them sell more new cars because of the higher trade in value and the higher residual values on cars they lease enhance their profits. You can buy a warranty for used car even if it’s not certified, but in a certified used car it’s usually included in the price (which makes the price higher). One good thing about manufacturers’ certified programs is that sometimes the manufacturer will offer you lower financing rates. Certified used cars require that the dealer inspect all critical parts of the car and fill out a checklist that is anywhere from 75 to 150 items. That’s all well and good but how carefully is this inspection being done and by whom? You should ask to see a copy of the check list and ask about the qualification of the mechanic who performed and signed the inspection. All too often, the dealer assigns the lowest priced mechanic he has to perform these checks. It’s questionable whether he even performs all of them. A red flag is if you notice a straight line drawn through all of the check boxes instead of them being checked off individually.

(5) Money Back Guarantee. A lot of dealers advertise that if you change your mind about the car you bought you can bring it back and exchange it for another. This is a worthless guarantee. You can be sure that they will pick the car and the price of the car they will exchange it for and will end up making an additional profit. CarMax has a reasonable guarantee which refunds all of your money within five days with restriction that the car is returned in the same condition that it was sold. CarMax is a good place to buy a used car.

(6) Contact the previous owner of the car. The previous owner of the used car should be happy to talk to you. Insist that the seller provide you with his telephone number. If the dealer sold the car to that owner as a new or used car and serviced it, ask if you can see the service file.

(7) Test drive the car just as you will be driving it later. Simply taking the car for a spin around the block with the salesman is not enough. I recommend that you drive the car in the manner and places that you will be driving it when you own it. Take it out on the expressway if you do a lot of higher speed driving. You should drive the car for at least a few hours at all the same speeds, conditions, and on the same roads that you normally experience. Park the car, back it up, and take a friend for ride to get their opinion. You don’t want to have any surprises when you bring it home for keeps.

(8) The Internet is the best place to shop for your used car. Most dealers today display all of their used car inventory right on their website along with the prices. These prices are pretty close to the real price you will pay. The dealer knows that he won’t get many responses if he overprices his used cars. Shopping on the Internet give you ample opportunity to compare the same or similar used cars with lots of different dealers. As always, call the dealer before you come in to confirm the Internet price is an out-the-door price without a dealer fee, doc fee, dealer prep, etc.

(9) Commit all of the dealer’s promises to writing. Take notes of everything the salesman and sales manager promises you such as “we’ll fix that CD player if you’ll bring your car in next week” or “if you ever have a problem with the car we’ll give you a free loaner when you come in for service”. Make those notes part of the buyer’s order and be sure that a manager signs it. It’s also a good idea to always shop with a friend. In a “He said she said” situation, two people trump one.

(10) Get at least three bids on financing. Know what your lowest interest rate is for the year, make, and model car you’re buying. Get quotes from your bank or credit union and at least one other bank in addition to the rate your dealer offers you. If you do use your dealer’s financing, be sure you know and understand everything that’s included in your finance contract. You will be offered products like warranties, GAP insurance, maintenance, road hazard insurance, etc. It’s illegal for a dealer to tie your acceptance for financing or interest rate to your buying a warranty or any other product.

Monday, May 09, 2011

A Topsy Turvy Car Market

Every now and then something comes along and disrupts the normal ebb and flow of the markets. It happened back in 2008 to the world financial markets. This was brought on by a lot of manmade factors like unrestricted extensions of credit and lack of enforcement of regulations on Wall Street and Banks. In the last quarter of 2009, the famous “Cash for Clunkers” program disrupted car markets, new and used, and this was also manmade program by our government. It artificially stimulated new car sales for a short period and also had the effect of raising the prices of used cars.

Now we have both manmade and God made events disrupting the car markets. Political unrest in the Middle East has driven up the price of oil along with increased consumer demand as we emerge from the recession. But we also have an “act of God” event which was the catastrophic earthquake-tsunami that devastated Japan last month. Not only has production of cars built in Japan been disrupted, but the lack of parts manufactured in Japan has interfered with the production of cars all over the world, including the USA. We can expect a severe shortage of economy cars until the end of this year.

This couldn’t have happened at a worse time for the American car buyer because she was just getting back on her feet after three years of the greatest recession since the Great Depression. There is large pent up demand from consumers who have delayed buying that new or used car in 2008, 2009, and 2010. When car buyers delayed their purchases, there were fewer used cars traded in. You put high demand together with a low supply and every economist will tell you that spells soaring prices.

The good news is that prices are soaring only on fuel efficient cars, not gas guzzling trucks, vans, and SUV’s. In fact, prices on those are actually declining. Some more good news is that used car values have never been higher. If you’re driving a fuel efficient car now, it has actually appreciated in value since the beginning of this year. For example a 2008 Ford Fusion, rose $1,800 to $11,375 between January and May. Incredibly, the average value of a hybrid car such as a four-door Toyota Prius jumped $3,775 to $17,040 in those four months.

What does all of this mean to you? First, it means that if you’re thinking of trading in an economy car, you have something that the car dealer wants very much to add to his used car inventory. He will allow you a lot more money for it today then he would a few months ago. But don’t just settle for one dealer’s opinion on the price of your trade. Get at least three bids. Pit one used car manager against the other. If you’re driving a Honda Civic, visit at least two other Honda dealers (A Honda dealer will pay more for a used Honda than another brand) besides the one from whom you’ve decided to buy your new Honda. If there’s a CarMax used car outlet in your area, get a bid on your used Honda Civic from them too. When you’re getting these competitive bids, tell the used car managers that you are not buying a new or used car, but just want to sell your old one. Do not rely on the “book value” of your used car. When the market moves this fast on used cars, the books are way behind the market.

If you’re not in the market for a car but you own an economy car that you can get by without, you should consider selling it now at the peak of the used car market. The largest wholesale seller of used cars in the world, the Manheim Auto auction has an index (like a stock index) and it’s at an all time high since they began the index in 1995. Selling your used car now would be like selling your stock on October 9, 2007 when the Dow was at 14,164. I can’t promise you that used car prices won’t go higher for a few more weeks, but I can promise you that they won’t go much higher and that they will come down significantly from here. You can’t time the exact high or low of any market. There’s a saying on Wall Street…”Pigs get fat but hogs get slaughtered”.

We’ve talked about buying and selling used cars, but what about buying a new one? I’ve always preached that you should be careful in buying a new vehicle and it’s even more important now than ever before. You are in the driver’s seat in selling or trading your used car, but the dealer is in the driver’s seat in selling you the new one. If you don’t have to buy a new car in the next few months, don’t. New car prices will be coming down toward the end of end of this year. Manufacturers are reducing and removing incentives on new cars now but the y will be back. Dealers are holding out for more profit now on economy cars, but they won’t be later this year.

If you have to buy a new car, get at least three competitive bids on the new car as well as your trade-in and financing. Watch out for “addendum stickers”. Dealers are marking up the MSRP of new cars by thousands of dollars. Be sure that the discount you’re offered is off the MSRP and not off the “dealer list” which is MSRP plus another profit markup and over priced dealer installed accessories.

Your best price on new or used car is the Internet price. You can get this price and shop as many dealers as you want without ever having to leave your home or office. Consumer Reports, USAA, AAA, Capital One OverStock.com, Bank of America, and American Express have car buying services operated by company named Zag. They pit dealers against one another for competitive bids and give you access to the lowest price on a specific car in your market.

Monday, May 02, 2011

Dealer or Independent: Who Should Service My Car?

Should I, or must I, take my car back to the dealer for service? I can answer the 2nd half of that question easily. No, you do not have to take your car to the dealership’s service department for maintenance or repairs unless the repairs are covered under your car’s warranty. Be advised that the manufacturer has the right to take into consideration how well you maintained your car in accordance with his recommendations spelled out in your owner’s manual when approving warranty repairs. If you do choose an independent service facility, be sure that they perform the maintenance as recommended in your owner’s manual. Also, be sure that you keep a record of that maintenance.

Whether you should is more complicated. The fact that most new car buyers (about 75%) don’t bring their cars back to the dealer for service is a huge problem for all manufacturers and car dealers. It’s a problem for manufacturers because they can lose the parts sales which include oil filters and oil. The profit margin on auto parts is much higher than on the car itself. If you added up the price of all the parts in your car (twenty to thirty thousand), the total would be many times the price you paid for your car. It’s also a problem for dealers. The retail markup on an auto part is at least 40% and your car’s markup is less than half of that. The average dealer makes more money selling parts than he does cars and he also makes more money selling the labor to service and repair cars than he does selling cars. In most dealerships, the new car department loses money or makes relatively little. The parts and service departments are the real money makers. Finally, a customer who does bring his back to the dealer for service is twice as likely to buy his next car from that dealer.

The reasons that car buyers don’t usually bring their cars back to the dealer for service is very simply price and convenience. Independent service facilities and fast-lube shops are more plentiful than dealers and there’s usually one closer. Why drive 20 miles to your dealer for an oil change when there’s a Jiffy Lube around the corner. Prices are usually less at independent service facilities. Independents have lower overheads and usually don’t use factory parts. Non factory parts, often manufactured overseas are usually less expensive than original factory parts. Independents also don’t have to pay their technicians as much as dealers do.
To combat this problem, many manufacturers are offering free maintenance on new cars for two years and even longer. The idea is to get the new car buyer into the habit of coming back to the dealer. The dealer also has the opportunity to sell the free service customer some services that aren’t included in the free maintenance package. Dealers are also offering such things as free oil changes and a very few even offer free tires and batteries as long as the customer has all of her factory recommended service done by him.

I know I still haven’t answered the question of whether you should bring your car back to the dealer. The answer is that it depends on the dealer’s service department. Most car dealers have better trained technicians and more and better diagnostic equipment than the average independent. Furthermore the dealer’s technicians are specialists in his brand of car. A Ford dealer’s technician knows more about Fords than a Chevrolet dealer’s technician and more than the average independent technician. For this reason I usually recommend that you bring your car to a dealer of that brand for more expensive, difficult repairs. A good independent technician can change the oil and rotate and balance the tires on any car. But he can’t always diagnose a transmission problem and, if he could, might not have the specialized tools needed to fix it.

If the dealer of your brand is not price competitive, by all means check out the independent service companies. But, be sure that their technician, sometimes the owner is the technician, has the proper training. He should have certifications in the National Institute for Automotive Service Excellence, ASE. There are ASE certifications for all components of the car, including air-conditioning, engine, and transmission. Ask to see his certification and be sure that it’s up to date. Check the company out with the BBB, the County Office of Consumer Affairs, and the Attorney General’s office. Ask for the names of references from existing customers. Be sure that he is bonded so that in the event you have a claim against him, he has to pay. Find out how long he has been in business.

Two thing to be on the guard against (for both dealers and independents) is the “up-sell” and hidden charges. When you see an ad for a $16.95 oil change, you can be assured that you won’t leave that service department paying only $16.95. The oil change includes a “free inspection” which means the commissioned technician and service advisor will look for anything else that may need maintenance or fixing on your car. Just be sure what they recommend is really needed and the safest way is to take it somewhere else for a second opinion. Also, watch out for that hidden, extra charge at the bottom of your service invoice. It goes by many different names. Some of the most common are Sundry Supplies, Environmental Impact Fee, Hazardous Waste Disposal Fee, and Supplies and Small Tools. This is nothing more than profit to the dealer and is calculated by adding a percent of the total invoice usually five or ten percent. Almost all dealers and Independents add this charge that should be made illegal. My advice is to refuse to pay it and in most cases they will agree to remove it from your bill.