A Cautionary Tale

The car dealer does not always have your best interest at heart.

by Bill Steinberg

fter dropping out of grad school, I moved to Los Angeles, in hopes of pursuing a career as a screenwriter. The city ate me alive, and ate up my savings even faster. So one summer day in 1982, I walked into a Buick dealership on La Brea Avenue and talked my way into a sales position. For the next five years I worked at a handful of dealerships, including a BMW agency in Canoga Park.

I witnessed every mistake a buyer could make while shopping for a car. I also learned the lingo of the car business, which would make it quite easy in future years to negotiate car deals.

In 1988, after migrating to Memphis, I began a career in finance. But I still occasionally help friends and clients buy or lease new cars. When I found out that our daughter’s baby-sitter – let’s call her Kelsey – was shopping for an inexpensive new car, I referred her to the general manager at one of the larger dealers in Memphis. I hoped to help her negotiate a price that represented “the low end of the spectrum of acceptable gross profits” for the dealer, while sparing her the potential pitfalls of retail car shopping.

Poor Kelsey had the car dealership experience from hell. She never met the manager and she was “slammed” into a used car with a long-term finance contract at an interest rate that many would consider usurious. How did this happen?

When Kelsey first visited the dealership and presented my business card, she was told that the general manager was unavailable. She was assured, however, that all her needs would be met. While I was not there to witness all that transpired, I have pieced together the following scenario.

Following my advice, Kelsey focused on leasing an inexpensive car with a payment that fit her budget. Because she didn’t fully understand the leasing concept, she was easy prey to be switched to a used-car deal. She was apparently told that her credit history was not good enough to qualify for a new car. She had too much pride to solicit a co-signer.

No one explained the liability of buying a car whose warranty would end before the finance contract. No one urged her to give me a call to review the deal. Finally, no one told Kelsey that her finance contract was not officially approved, and that she might have to return the car if the lender did not approve the credit application.

The dealer made a significantly higher gross profit on the sale of the used car and also picked up additional profit by marking up the finance rate that they would charge Kelsey above the rate charged by the lending institution.

Amazingly, even though her monthly payment was more than 40 dollars beyond her budget, Kelsey was thoroughly happy with the deal. But after hearing the magnitude of my concerns, she asked me to go to bat for her.

My initial call to the dealership located the sales manager who had “desked” the deal. He eventually agreed that the current factory-sponsored lease deal, with a monthly payment more than 40 dollars less and a contract term 24 months shorter, might represent a better value for Kelsey. He agreed to void the used-car deal, but only if she would first sign a lease contract. He was obviously afraid that Kelsey might take her business elsewhere, after being treated so shabbily. He also confirmed that it was standard procedure to deliver the car, or “roll a unit” before a finance contract was officially approved. He seemed to have little or no empathy for the embarrassment a customer could experience by having to return a car after showing it off to family, friends, and colleagues.

Kelsey returned the used car and signed a new lease contract. However, at my insistence, she did not take delivery of her shiny new vehicle until the financing was approved. Unbelievably, when I checked the numbers on her paperwork, they didn’t add up.

On the next business day the general manager declined to take my call. Having reached my frustration limit, I drove to the dealership early the next day, determined to get satisfaction.

At the dealership, I made eye contact with the general manager at a distance, before asking a receptionist to let him know that I needed to speak with him. When he learned the nature of my visit, he apparently chose to evade me. I had to deal with a number of his delegates before they realized that I would not be put off.

Finally, the culprit I sought, one of his managers that I had dealt with over the phone, invited me to his cubicle. He was extremely defensive and belligerent. When it was all over, with lunchtime approaching, the figures on the lease were recalculated in Kelsey’s favor.

With my mission accomplished, I left the dealership with an empty feeling in the pit of my stomach. It takes a lot for me to lose my appetite. n

(William I. Steinberg, CFP is director of financial planning at the Memphis investment advisory firm of Kelman-Lazarov, Inc. E-mail questions or comments to bill@kelman-lazarov.com.)