New Cars - A Reality Check

In the years we've been in the automotive advice business we’ve received thousands of emails with questions about buying and leasing new cars.

Although each reader's situation is different, there seem to be general issues that show up over and over again that represent some common misunderstandings and misconceptions about new car buying and leasing. Let's address some of them now.

New cars are not financed by dealers
There is a common misconception that new-car dealers finance the cars they sell or lease. Not true. Dealers don't make loans or finance leases. A dealer may run a preliminary credit check on you prior to completing your paperwork, but this should not be interpreted as approval of your loan or lease application. He just wants to make sure he's not wasting his time on someone with serious credit problems.

A new-car purchase or lease deal is contingent on the dealer being able to find a finance company or bank who will agree to finance your deal, based on your credit history and debt load. The finance company pays the dealer for the car (which means the finance company owns the car), and arranges for the customer to pay them back the money for that car, plus interest. See Car Financing - How It Really Works for more details.

Dealers can ask you to return your new car
A dealer will allow you to drive away in his new car immediately after you've signed your loan or lease papers. This does not mean your credit has been approved or that your loan (or lease) has been accepted by a finance company. It means that the dealer is hoping that he can find a finance company that will accept you, and he's providing you the courtesy of driving his car in the meantime.

If your dealer can't find a finance company who will accept your loan or lease application, which can often take days or weeks, you may be asked to return your car to the dealer. Remember, the car still belongs to the dealer until he receives full payment from a finance company. If that payment doesn't come, he can and will ask for his car to be returned — usually to the great surprise of the customer.

There is no three-day grace period on new cars
One of the great misconceptions of all time is that there is a 72-hour or three-day grace period in which a car can be returned to the dealer after signing a purchase or lease contract. It's simply not true.

The misconception comes from Federal and state consumer laws that relate to door-to-door and health club contracts. Unless a dealer specifies, in writing, that he provides a return policy, there is no return policy.

Car dealers are not owned by car manufacturers
All car dealers are independent business owners, franchised by car manufacturers to sell particular brands of vehicles in particular areas. Dealers buy cars from manufacturers with borrowed money, on which they pay interest until the cars are sold. Dealers have normal business expenses such as rent, taxes, salaries, sales commissions, and insurance costs.

Consumers often believe they are dealing with the car manufacturer when they buy or lease a car, and have unrealistic expectations about price discounting. Manufacturers frequently help dealers by offering low interest rates, rebates, and other incentives from the manufacturing companies' financial divisions. However, dealers may also work with banks and credit unions to finance customer's loans or leases.

If you buy with a loan, you do not own your car
With a loan, the finance company or bank owns your car and (usually) holds the title. The only way you can own your car is to pay off the loan and receive a "clear" title. During the time you are paying off your loan, you may possibly own some value in the car, called equity, which is the difference between the car's current depreciated market value and the amount you still owe on your loan.

Often, this difference is negative, called negative equity, meaning you still owe more than the car is actually worth. In fact, you not only don't own anything, but you are in the hole to the finance company or bank — a troublesome situation if you want to sell or trade — a dangerous situation if your car is stolen or totaled in an accident — unless you have gap insurance, which is almost never provided with a car loan.

Given depreciation and finance chages, your car is never worth the same amount of money you've paid to own it.

If you lease, you do not own your car
With a lease, the finance company or bank owns your new car and always holds the title. The only way you can own your leased car is to buy out the lease and get title. During the time you are paying on your lease, you may possibly own some value in the car, called equity, which is the difference between the car's current depreciated market value and the amount you still owe on your lease.

Often, especially with a lease, this difference is negative, called negative equity, meaning you still owe more than the car is actually worth. In fact, you not only don't own anything, but you are in the hole to the finance company or bank — a troublesome situation if you want to sell or trade — a dangerous situation if your car is stolen or totaled in an accident — unless you have gap insurance, which is frequently provided automatically with a lease.

New car dealers are not looking out for your interest
It's a fact, car dealers run a highly competitive and profit-oriented business. Their business is to move cars, as many as possible, at the greatest possible profit. These motives often conflict with those of consumers, who are often dismayed to find out that a dealer has given them bad advice, played on their lack of knowledge, taken advantage of their trust, or even been dishonest with them.

Often, auto consumers spend too little time preparing for what is typically the second most expensive financial transaction of their lives (a home being first) and make serious mistakes during the process. Unfortunately, dealers are not there to protect you from your own mistakes. It is a customer's responsibility to watch out for themselves.

There are both good dealers and bad ones, but smart automotive consumers are wise to protect themselves in all cases.

All new cars are not the same
That all new cars are not the same may seem to be so obvious as to not need stating. However, many new-car buyers and leasers, particularly first-timers, tend to view cars as similar commodities that simply have different brand names — Kia is the same as a Honda is the same as a Pontiac and so on. As a result, they tend to make choices based only on price, features, style, and color.

In fact, cars have hundreds of characteristics that differentiate them one from another — characteristics that should be considered when making a buying decision. Examples of important characteristics that are frequently ignored or overlooked are: reliability, safety rating, safety equipment, mileage rating, insurance cost, performance, manufacturing quality, recall history, resale values, and warranties.

A new car dealer’s “best” deal is never his best deal
Regardless of what a dealer tells you, his best deal is never the best you can reasonably expect to get. In fact, other customers have very likely already gotten better deals because they were more knowledgeable or had better negotiating skills. Dealer's will always make you feel that any deal you get is an outstanding deal.

Consumers should always do price research before meeting with a dealer about a car. One of the best strategies is to get free price quotes from a number of online pricing services, such as Edmunds,  CarsDirect , Yahoo! Autos , and Automotive.com . By getting multiple price quotes, you can get a feel for the price you'll have to pay. Of course, you might be able to negotiate and get even better prices.

Rebates don’t come out of a dealer’s pockets
Rebates come from car manufacturers, not dealers. A common mistake made by consumers is they fail to negotiate further after receiving a rebate, thinking that the deal is as good as it can be.

With or without a rebate, dealers should be expected to make a contribution to your deal from their own pockets. In the business, this is called "dealer participation." This is an often overlooked opportunity to save money on car deals.

It is always advisable to check the Edmunds.com web site for manufacturer incentives – customer rebates and "marketing support" (factory to dealer rebates). Then look at the Edmunds' TMV (True Market Value) prices, which include rebates.

The dealer F&I manager is not your best friend
Regardless of the new-car deal you negotiate with your friendly car salesperson, you still have to visit with the F&I (Finance and Insurance) manager to sign papers and hand over money. Much of a dealer's profits are made right here in the F&I manager's office – after deals are agreed on. He may try to slip in a hidden fee or two, change an agreed-to figure, tell you that the salesman "made a mistake," sell you paint protectant and window etchings, bump your interest rate, or convince you that you need extended warranty protection and credit insurance. He might be a nice guy but watch to make sure his fingers never leave his hands. And - please - read your contract before you sign.

Buying a new car is a business deal, not an emotional encounter
When buying or leasing a car, leave your emotions at home. Car dealers are trained to spot customers who have already fallen in love with a car because they make easy marks. A customer who has already decided they have to have a particular car will accept almost any deal that is offered to them, no matter how bad the deal is. They can also be manipulated easily. Therefore, when buying or leasing a car, use your head, not your heart.

Upside down is not good - rollover loans are worse
When you owe more on your old car loan or lease than the car is worth, it is not a good time to trade for a new car, no matter what "deals" a dealer tells you he can make you. Reality is that the balance of your old loan or lease, minus any trade-in credit, will always be rolled over into your new loan or lease. This not only makes the new vehicle more expensive, but also very likely puts you right back into another "upside down" situation, except worse. Dealers prefer not to explain this to customers.

Leasing is a financing technique, not a scam
Leasing is a perfectly legitimate financing method that has been used for over a hundred years in many areas of business. It can be very beneficial to automotive consumers who quality. However, because car leasing is somewhat more complicated, many consumers don't understand it, and lease when they shouldn't, and then declare that leasing is a scam. The way to take advantage of leasing and avoid mistakes is to read the Lease Guide and become properly informed. Don't rely on dealer salespeople for leasing education and advice.

Repossession is a big problem any way you look at it
Some consumers who write to us seem to believe that new cars can simply be returned to the dealer if it is found that they no longer want the car, or if the car has had too many problems. To return a car in this way is called a voluntary repossession, which is actually no different than an involuntary repossession in which the car has to be picked up. In both cases, your credit rating takes a nose dive, you don't have a car to drive, and you still owe your loan or lease company for the car -- minus any money received after the vehicle has been sold at wholesale dealers' auction at rock bottom price.

Death and illness do not negate new car loans and leases
Another common misconception is that when someone passes away or becomes seriously ill or disabled, and the someone still owes money on a car loan or lease, the loan or lease is forgiven and wiped off the books. Not true. The estate of the deceased is responsible for all financial obligations left behind. This means car loans and leases must still be paid, or otherwise settled. Typically an administrator or estate lawyer handles these details.

For more, see LeaseGuide.com