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Sunday, November 23, 2014

Gap insurance and vehicle warranty scam

I don't usually finance cars, so I haven't really seen one of these "finance" sales guys in action, until recently, when I decided to finance a car for my daughter.  I think I've been offered extended warranties in the past, but I always decline.  It always seems smarter to self-insure on the small stuff.  And of course, I'd never encountered "gap insurance" before.  Gap insurance is just insurance that you buy in case you total your own car, and the insurance company will only pay the "value" of the car, as opposed to the remaining loan amount.  That presumably has some value at the outset of a car loan, since (as they will tell you), the car loses considerable value the minute you drive it off the lot.  But if you're making payments of (e.g.) $300 or more towards the principal, the amount of the loan should be less than the value of the car by the end of the first year or so.  So by then, you're losing money, since you paid a few hundred dollars for the gap insurance.  And remember, your recovery is just going to be the difference between the loan amount and the value of the car; i.e. at most, if you're lucky enough to total the car within the first year, you'll get two or three thousand dollars back on your investment.  If your investment in gap insurance is $700, you're basically betting that there's a better than 1 in 5 chance that you're going to total your own car in the first year, and that your insurance will only pay something less than the loan amount.  I think most of us can beat those odds.

In other words, gap insurance -- at least actuarily speaking -- is a complete ripoff even if you don't put any money down.  It's an even bigger ripoff if you put money down.  The only time it might make sense is if you are literally planning to total your new car.  Still, I don't advise you to do that just because you got suckered into buying gap insurance.  Certainly, if you were to total your car by driving it through the showroom window of the dealership that sold you the gap insurance, there would be some poetic justice.  But I don't recommend doing that, and it's quite possible that exclusions would apply.

The guy I had didn't tell me what the gap insurance cost.  Instead, he first showed me what my monthly payment would be without any extras.  Or at least that's I thought he was showing me.  It was about $330 for an $18,000 loan.  Without doing any calculations, that sounded ok.  In fact, I had told my daughter the number would be a bit over $300 for a 5-year 1.9% loan; since $300 over 60 months would take care of the $18,000 principal.  The guy agreed it would be a bit more than $300, and that's when he came up with the $330.  I didn't really have any basis for questioning that; I didn't have a calculator.  He said that for only $30 more a month, I could have both an extended warranty and gap insurance.  But that was math I could do -- $30 a month over 60 months is $1800, which is more than I wanted to pay.

In the end, I seemed to have "bargained" him down to a deal where it would only be $15 a month more than the original $330, with an even better warranty, and the gap insurance.  I confirmed with him that this meant I was paying $900 for both of them, and that actually sounded ok to me. The gap probably wasn't worth much of anything, but maybe an extended warranty would be a good idea.  The guy said that he was losing money off of the deal, but he had to make his quota.

As I looked at the documents (I had to sign about a million of them), I noticed that the gap insurance was marked at $700, and the warranty was at $1198, which seemed disturbingly high.  I asked about it, but he pulled out his calculator again and somehow managed to convince me that I was only paying $900 for it.  In the course of this, the guy told me he had reduced my rate from 1.99 to 1.90, and that this is what had made the apparent difference.  It didn't look or sound quite right -- after all, the papers said $1198 plus $700, but I'd been in the dealership for about 5 hours. I'm sorry, I was beaten down, and totally off my guard.  Of course, I had trouble accepting the obvious because that would mean that this guy -- who had become a good friend of mine during this process -- was lying to me.  The shop had already closed by now and I just signed the documents, assuming I had a right of rescission.

I finally got out of there, and of course, this issue kept me awake much of the night.  In the morning, I figured out what had happened.  The payments at 1.9% over 60 months should have been $314, not $330 (you can check this on any car dealer website's rate calculator).  I have no idea where the initial $330 came from, but that was clearly the "anchor," and it allowed me to apply my math skills to decide that I was getting a pretty good deal.  After that, I never really looked back, even with the cold, hard numbers staring me in the face.

Really sad that someone as suspicious as me, and as sensitive to being ripped off as I am -- and (can I say it?) as educated, smart, and mathematically-inclined as me -- can still get taken in this way.  But car salespeople -- and loan salespeople -- are professionals.  They do this stuff for a living, day in and day out.  

Notice that even though I was smart enough to realize right off the bat that gap insurance was almost totally worthless, he STILL managed to sell me $700 worth of gap insurance by appearing to roll it in with a good deal on a warranty.  I know many of you are thinking I must be some kind of idiot, but I'm telling you, if it could happen to me, it could probably happen to you.  There's a lot of psychology involved -- not to mention trickery and obfuscation -- and in the end, I think it could happen to almost anybody, unless of course you've gone into the negotiation having read something like this.

The other lesson is to always ask if there is a rebate or other dealer incentive on the car.  I usually do, but I forgot this time.  I felt like I got a pretty good deal, but it was only in the financing process that I realized that part of what I thought I had "bargained" so hard for was a rebate.  Of course, the salesman said he was losing money too.  Sad how all my good (if somewhat new) friends are lying to me nowadays . . . .

I went in the next day and undid the loan deal.  I was afraid they would try not to let me (as far as I can tell, there is no 3-day right of rescission in Virginia for this kind of thing, although the contract itself said I could cancel it for a $50 fee), but I think they need to be careful about how they deal with seemingly irate customers.  They got me back to the finance room, and the guy redid the paperwork without any complaint.  Of course I was nice about it, although I had a nasty letter in reserve that I would have pulled out if I had gotten any trouble out of him.

I doubt they would have let me give the car back, but they didn't want that scene playing out in their showroom either.

I sort of feel like I should report the whole thing, maybe to the Consumer Financial Protection Bureau, the Better Business Bureau, or the FTC.  But I gave back the evidence that I had (i.e. the contract he had drawn up).  In any event, they'd defend by saying the price was on the document, and they are selling a product for that price, and that many consumers think it is worth it.

Anyway, I figured if I write it up here, maybe it will help someone else out one day.  I seriously doubt that there's anything specially dishonest about the particular guy or dealership I dealt with; I wouldn't be surprised if they are all like that, and all use similar tricks.  That's how the successful ones make their money, after all.

And here's the scene from Fargo that I always think of when I visit a car dealer.  I.e. it's what they are doing when they say they are going off to talk to their "manager" of "boss" to approve some deal or other.  In this case, Jerry Lundegaard wears down and screws over a vigilant customer who specifically said he didn't want the ripoff undercoating:

Customer: We sat right here in this room
and went over this.
Jerry: Yah, but that TruCoat...
Customer:  I said I didn't want any TruCoat.
Jerry: Yah, but I'm saying, that TruCoat, you
don't get it, you get oxidation problems...
Customer:  You're sitting there talking in circles
like we didn't go over this already.
Jerry: Yeah, but this TruCoat...
Customer: We had a deal for $______.
Darned if you didn't tell me you'd get me
this car without the sealant for $______.
Jerry: All right, I'm not saying I didn't.
Customer: You called me and said you had it.
"Ready to make delivery" you says.
And here you are and you're
wasting my time and my wife's time.
And I'm paying $______ for this vehicle here.
Jerry: All right.
I'll talk to my boss.
See, they install that TruCoat
at the factory. There's nothing we can do.
But I'll talk to my boss.
Customer: These guys here. These guys.
Customer: It's always the same. It's always more.
Jerry: [pretending to talk to his "boss"] You goin' to the Gophers on Sunday?
Salesman: Oh you betchya.
Jerry: You wouldn't happen to have an extra ticket?
Salesman: You kidin'!?
[Jerry returns to the customer]
Jerry: Well, he never done this before. But seeing as it's special circumstances and all, he says I can knock a hundred dollars off that Trucoat.
Irate customer: One hundred... You lied to me, Mr Lundegaard. You're a bald-faced liar. A... fucking liar!
Customer's wife: Bucky, please.
Irate customer: Where's my goddamn check book? Lets get this over with.

* * * *

I guess everybody knows that car salespeople -- and the dealerships that profit from their work -- are little better than crooks and liars.  Still, I hope this post helps at least one person from falling into the "gap" insurance trap. Whether you want an extended warranty or not is up to you, 


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