A Vox reader writes: “Why are car dealers so shady? How do consumers avoid them? Is it frustrating for everyone?”
Americans have long hated the car-buying experience. It’s not uncommon to spend hours (or even the whole day) at a dealership, finally reaching a deal and still walking away feeling vaguely hoodwinked.
“It’s a process that generally stinks, and it’s designed that way,” says Tom McParland, founder of Automatch Consulting, a service that helps car buyers find the best price on the vehicle they want.
A lot of the distaste comes down to the uncertainty of what you’ll end up paying. In an age when you can buy almost anything online without interacting with another human being, where you can easily shop around for the best deal, cars remain one of the few purchases where your personal negotiation skills — as well as, sometimes, your race, gender, and income — can determine the price.
The newsletter is part of Vox’s Explain It to Me. Each week, we tackle a question from our audience and deliver a digestible explainer from one of our journalists. Have a question you want us to answer? Ask us here.
Sometimes, the tactics car salespeople use go beyond just the hard sell to the downright deceptive. One common trap is bait and switch prices, where a car is initially advertised as one price (usually achieved by piling on discounts that you may not qualify for). When you run to the dealership to snag the deal, you’re told the vehicle has already been sold but there’s a similar one that’s more expensive. Or take yo-yo sales, in which you drive your new car home only to be told a few days later that the financing fell through so you’ll have to accept a higher interest rate or make a bigger down payment. A dealer might also try to sneak unneeded add-ons — like extended warranties or protective coatings — onto the total price of the car.
Last year, the Federal Trade Commission received more than 184,000 auto-related consumer complaints, making it the third most common category after complaints about credit bureaus, as well as banks and lenders.
While there are some fair dealers, the car marketplace has “a lot of sharp and unethical business practices, and consumers are hurt by it,” says Chuck Bell, programs director of advocacy at Consumer Reports. “By the time that the consumer gets out the door, they feel like they’ve been doing battle.”
Why is shopping for cars done this way?
The first hint that you’re on unequal footing with a car salesperson comes when they’re cagey about giving a price quote even over the phone, let alone in writing. McParland says that the dealers he calls around to for clients often tell him that he has to come to the dealership for a price. “They’re basically just telling us to go pound sand,” he says.
Dealers want you to come in because it’s much easier to upsell you that way. You’ve invested some effort into the process, and the salesperson can get a better read on how impatient you are to buy a car, how inexperienced you are with car shopping, and plenty of other factors to wield to their advantage. On the other hand, if they offer you an out-the-door price — which includes all extras and fees — before you ever meet in person, you could easily take the price to a competing dealer and ask if they can do better. While online used car dealers like CarMax and Carvana did make “no haggle” car prices more popular, they often come at a premium, according to McParland. Some traditional car dealers now offer fixed prices too, but it’s probably to your benefit to try to negotiate down.
How did the system get to be like this?
The general practice of negotiating car prices instead of paying a fixed price may actually stem from horse trading, in which sellers and buyers also haggled and buyers would even trade in their old horse to offset the price of the new one, much as we do with cars today.
The model has endured for so long, though, in part thanks to state franchise laws that ensure these middlemen car dealerships can’t be easily cut out. Most states ban carmakers from selling directly to consumers. Tesla is the rare exception of a car company that sells directly, and it has battled with car dealers for the right to do so. Car dealer trade groups have considerable political power, and they’re organized enough and deep-pocketed enough to lobby against reforms that would threaten the status quo, such as changing franchise laws that give them exclusive rights to sell a certain car brand in a particular territory. The National Automobile Dealers Association (NADA), for its part, argues that franchise laws in fact increase competitiveness and benefit the consumer, all the while creating local jobs.
“They’re an enormously powerful lobby,” says Bell.
Just look at how the industry pushed back against enforcement curtailing auto lending discrimination. Car dealers often arrange financing for customers, but they add a mark-up to the interest rate offered by banks because they can pocket that extra money for themselves. How much of a mark-up is applied is at the dealer’s discretion, and unlike mortgage lenders, they’re not required to collect data on the race of their customers, making it much harder to see if they’re complying with fair lending laws. Research shows that car dealers often charge higher interest rates to people of color. When the Consumer Finance Protection Bureau started cracking down on this practice in 2013, the industry fought back and won.
Is there any hope for making the car-buying process better?
Still, there’s reason to be optimistic about the future of shopping for cars. Late last year, the FTC announced new regulation that takes aim at the most rampant deceptive practices used by car dealers. It would, for one, require dealers to disclose the full, out-the-door price of a car, including all add-ons, before a customer visits the dealership. The price and other terms related to purchase of the car also have to be expressed in simple language. Dealers also wouldn’t be allowed to charge customers for useless add-ons. The FTC estimates the rule will save customers $3.4 billion and cut down the time spent shopping for cars by 72 million hours.
The rule was supposed to go into effect this summer but was delayed after two car dealer trade groups, including NADA, filed a challenge. The association told Vox that the rule would make the car-buying experience worse. “Consumers will have to spend an additional 60-80 minutes at the dealership, complete up to five new, untested forms, and will lose at least $1.3 billion a year in time as a result of this rule,” a spokesperson wrote in an email.
But Bell is confident that the rule will ultimately go into effect, and if you’re looking for a car, you should behave as though these protections already apply. McParland advises asking dealers to provide, over email, an “itemized out-the-door price” on the vehicle you’re interested in. If they refuse, “that’s usually a red flag, so move on to somebody else,” he says.
This story was featured in the Explain It to Me newsletter. Sign up here. For more from Explain It to Me, check out the podcast. New episodes drop every Wednesday.