5 Ways Car Dealerships Are Ripping You Off (And What You Can Do About It)

Purchasing a car is a big investment, so it can be tough to find the right deal. And like I said in my article on mechanics, I’m not here to tell you that your dealership is ripping you off; most dealerships do what they can to sell their cars at fair prices.

At the same time, though, car dealerships are businesses, and, like other businesses, they have the goal of making as much money as possible. This makes it extremely important to be prepared when you go into a dealership to avoid paying more than you need to or buying a car that doesn’t meet your needs. Today, therefore, I’m going to list the most common ways a car dealership may try to rip you off- and how to avoid them.

Note that while there are certainly many reasons to buy used cars rather than new cars, the old car vs. new car debate is a separate topic beyond the scope of this discussion.

1. Charging Too Much

Dealerships often charge you more for a car than you would pay at another dealership near the same location. This may sound obvious, but many people don’t think to check multiple dealerships when they’re searching for a new car. Even if a dealership’s price is at or below Blue Book value for a specific car, you may miss out on a lower price if you don’t take time to look at other dealerships.

Some people avoid missing out on lower prices by using sites like cars.com that check multiple dealerships. To get the best deal, though, I recommend that you go to a dealership, test drive the car you’re interested in, determine the exact model and options you want, and then reach out to several dealerships once you’re prepared for the negotiation.

By doing this, you let dealerships know that you’re serious about a car and willing to shop for a lower price, which puts you in the driver’s seat and makes them meet you at a price that’s better for you. Indeed, I have found that it’s almost always better to separate browsing and test driving from actual negotiation; doing so allows you to negotiate with multiple dealerships at once and prevents a one-on-one discussion with a professional negotiator.

Check out my Youtube video to know:

2. Providing Unfavorable Financing

In some cases, you may be able to pay for your new car in cash, which can be great. If you can get a low interest rate, though, there’s an argument to be made for financing and then investing the money that you would have paid for the car. There’s also an argument that you should forget about new cars altogether, but, for the purposes of this discussion, let’s assume your heart is set on buying a new car and you’re talking to the dealership about financing.

Often, people aren’t prepared to consider the details of a financing arrangement, which makes it easy for the dealership to advertise a deceptively low sticker price or monthly payment. When you’re in this stage of purchasing a car, therefore, you should be on the alert for salespeople who know which numbers to emphasize and which to downplay.

Interest

Interest is a key yet sometimes overlooked factor that can make a big difference in the price of a car. For example, one dealership might have a car listed at $10,000 and 3% interest, while another dealership might have the same car for $9,500 and 6% interest. If you focus solely on the price, you would probably choose the second option, but that option could end up being much more costly than the first depending on the length of the loan.

If you put $2,000 down on each and then finance the rest over 60 months, for example, you would spend a total of $10,625 on the first car and $10,700 on the second car. This example shows how easy it is for dealerships to make it seem like you’re getting a good deal, even when that isn’t the case.

Loan Term

The interest rate clearly has a big impact on overall price, but so does the length of the loan. For example, imagine two different dealerships have the same car for $10,000 at 6% interest, but one has a term of 60 months, while the other has a term of 120 months. Focusing only on the principal and the interest, it looks like both dealerships are offering the same loan, but in reality, the first car would only cost $11,280, while the second car would cost $12,658 (assuming a 20% down payment).

In this case, even though the cars have the same price and same interest rate, the term of the loan causes a difference of almost $1,500. Knowing that people frequently focus solely on the principal and interest, dealerships frequently make a significant profit by raising the term length. In some cases, you might need a longer term to make monthly payments, but it’s important to remember that each additional month on a loan will come with an additional amount of interest.

How to Avoid Financing Issues

If you’re worried about negotiating the financing on your new car, I recommend that you don’t go into that negotiation blind. Frequently, people see a good sticker price and sign off on whatever financing option the dealership gives them, thinking they’re getting a good deal no matter what. But in the same way that you want to separate a test drive from price negotiations, you also want to separate price negotiations from financing discussions, since dealerships are going to make an effort to get you on their financing plan.

You can improve your leverage for these financing negotiations by shopping around upfront or getting pre-approved for an auto loan before going to the dealership. If you have approval from one or more lenders, you can push dealerships to give you better terms than they otherwise would. In fact, it can be even better to go through an outside lender than a dealership because doing so allows skip the process of negotiating over financing.

3. Lowballing on the Trade-In

If this is your first car or you’re planning to keep your old car, this point doesn’t necessarily apply, but if you’re planning to trade your car in at the dealership, then you need to be prepared to negotiate that as well as the sale price and financing. The same principle applies here: if you only focus on the sales price or financing, you might lose some value on your trade-in.

Like with sales price and financing, it’s important that you always do your homework before going to the dealership so that you’re prepared and can get a better deal. The easiest way to prepare in terms of trade-in is by starting with a site like Kelley Blue Book, which gives you an estimated trade-in value range based on details about your car. This gives you an idea of which offers dealerships make are fair- and which are rip-offs.

While trading your old car in at the dealership is convenient, you may be able to get more value by selling your car directly to a buyer. If you can find someone who offers you a good amount in cash on a site like Autotrader or Craigslist, you can go into negotiation without having to worry about the trade-in value. On the other hand, if you go into negotiation having to consider trade-in value in addition to everything else, it can be much more difficult to get a deal on your terms.

4. Upselling an Expensive Extended Warranty

As I mentioned earlier, buying a car is a big investment, a fact dealerships are all too eager to exploit by trying to convince you that you need an extended warranty. They upsell all the bad things that could happen, emphasizing how much repairs could cost in a worst-case scenario to make the warranty sound like a no-brainer.

And while you might end up saving money through an extended warranty, the dealership wouldn’t try to sell it to you if they thought they would lose money. On top of that, many extended warranties only cover certain types of damage. In my opinion, then, paying a dealership for an extended warranty is similar to betting against the house- you might win, but overall, the dealership wins more often than they lose.

There’s some value in the peace of mind that comes from a warranty, so paying extra to extend it isn’t necessarily a bad investment, but it’s important to compare your options instead of accepting your first offer. You may also want to consider a third-party extended warranty, which can be an affordable alternative- though you should carefully vet it to make sure it’s reputable and will cover your needs.

Whether or not you want an extended warranty is up to you, but bear in mind that an extended warranty is not a necessity. It may save you some money on repairs at some point, but if you spend a few hundred dollars per year on your warranty premium, you might actually realize a net loss.

Instead of spending your money on a warranty premium, you could put it directly into a savings account. For example, if your new car comes with a three-year warranty and you put $50 a month into a savings account, you’ll have $1,800 saved up by the time the warranty expires, even discounting any interest.

Doing this ensures that you have money ready to cover repairs, without losing it in years where you don’t need any work done. You won’t be fully covered if something goes badly wrong, but that’s part of the inherent risk of the decision.

If you’re not sure you could handle the cost of repairs in a worst-case scenario, then, you might want to avoid that possibility, even if it means potentially losing money on warranty payments. However, bear in mind that warranty providers win that bet more often than they lose, so in the end, you’re paying for the peace of mind of knowing that you’re covered.

Overall, then, there’s no one right choice concerning extended warranties; you should consider both sides and make an informed decision for yourself.

5. Charging Additional Fees

I’ve listed four of the most common tactics I’ve seen at dealerships, but ultimately, there’s no limit to the tricks dealerships have up their sleeves. Instead of trying to list all of them, then, I’m going to discuss how you can prepare to spot the barrage of additional fees and charges that may come your way.

Even though some fees are avoidable or negotiable, you won’t be able to avoid every charge. Often, though, dealerships list a large number of fees at the same time, making it difficult to tell which are set and which are negotiable. Most people consider these fees to be minor compared to the whole car; after all, a $100 fee is only 1% of the value of a $10,000 car. At the same time, though, $100 is always $100, even if it appears next to a much higher price.

Again, each dealership has unique fees, so it’s hard to say exactly what you could be charged, but there are some common fees you should be aware of.

Advertising Fees

Many dealerships charge an advertising fee, meant to offset the price the dealership paid to market the car. Generally, manufacturers price vehicles based on their costs, leaving dealerships to handle marketing and customer acquisition fees, which dealerships then try to pass on to customers through an additional fee. This fee, which can reach several hundred dollars, is difficult to spot, since it’s not always listed as an advertising fee.

It’s hard to say whether your dealership will be willing to negotiate this fee; they need to recoup their advertising expenses in some way, but they also need to make sales. If you’re willing to push back a little, you may be able to get a discount. However, you should always ask about the advertising fee early on in the process so that you aren’t surprised if one shows up.

Documentation Fees

Dealerships also commonly charge a documentation fee for things like your title, registration, and license plate. These might sound like afterthoughts, but they take time and money on the part of the dealership, so there’s a good chance that you’ll be charged either a flat rate or a percentage of the sale price.

Documentation fees have gained notoriety for being unfair and arbitrary, which has caused a number of states to regulate documentation fees at dealerships. In California, for example, dealerships can only charge up to $65, unless they participate in the state’s Business Automation Partner program, in which case they can charge up to $80. There’s no official site to check the rules for each state, but I recommend researching the regulations in your area so you can tell if the dealership tries to overcharge you.

Market Adjustment Fees

Many dealerships also charge a market adjustment fee based on market factors. For example, if a new car releases at $30,000 but has a demand much higher than the supply, dealerships often raise the price by charging an additional fee, the market adjustment fee.

Ultimately, the market adjustment fee is the dealer’s bet that they’ll be able to find a buyer; if you want a popular car and aren’t willing to pay the extra price, they’ll wait for someone who is. In some cases, you may be able to negotiate this fee, but depending on market conditions, the dealership might not have any motivation to work with you.

Destination Fees

Finally, some dealerships charge a “delivery”, “preparation”, or “destination” fee, which is similar to paying for shipping on an online order. This fee is difficult to negotiate, since dealers need the money to pay for cars’ transportation to the dealership. Usually, the only way to deal with this fee is to check it beforehand and then factor it in when comparing costs.

As I mentioned before, there isn’t a limit to dealer fees, but if you know these and follow the principles I’ve set out in this video, you’ll be more prepared than most. Unfortunately, the potential for getting ripped off doesn’t end after you buy a car; as I discussed in my article on mechanics, you’ll probably have to deal with similar tactics when you need repairs, so be on your guard at all times.