The “No payments for [blank] months!” sales gimmick doesn’t work in a consumer’s favor - at least when it comes to buying a car.

One example of a bad-for-consumers sales gimmick is the concept of “No Payments for [blank] Months!” The concept, borrowed from the furniture industry, seems solid enough. The dealership sells you a car and promises that you won’t have to make any payments for some period of time (let’s say 6 months).

Here’s how it works:

The dealership sells you the car for a price that includes 6 months worth of car payments. After the financing is approved, the dealership gives you a check for the amount of your first 6 payments. In effect, it’s no payments for 6 months.

Here’s why it’s bad:

1. You pay more interest, finance charges, and sales tax with this “deal” than you would if the dealership discounted the car for the same amount that they’re giving you to make your first 6 payments. Granted, you’d have to make the payments yourself, but you’d save money in the long run.

2. You can’t negotiate the price. Dealerships will be quick to tell you that you’re not going to get a discount if you decide to take them up on their ‘no payments for 6 months’ offer. While these deals sometimes work out to be very good, most of the time you end up paying more for the car than you otherwise would.

3. You need more time to get into an equity position. If you buy a car but don’t make payments for 6 months, you effectively create negative equity. After all, the car is depreciating as you use it, but you’re not paying anything to cover some of your depreciation. At some point when you do start paying, you’ll have already lost months of value before you ever make a payment.

Mitsubishi tried this promotion a few years ago, and all it got them was a large number of customers that would never buy a Mitsubishi again. The promotion was “no payments for 12 months,” and people clamored into dealerships to get a new Mitsubishi. However, after 12 months had gone by, these people had experienced a full year of depreciation without ever making a payment. As these people tried to trade-in their cars, they found out they were FAR behind in terms of reaching an equity position. In other words, they were stuck with the cars for a very long time.

Save the “no payments” deals for the furniture store (where they belong).

I guess I’ll never understand how the criminal mind works.

Still, the fact remains that identity thieves falsely purchase cars on a regular basis. While banks, dealerships, and credit bureaus develop processes to prevent this crime, one simple and relatively low-tech option has done wonders to deter identity thieves - requiring a thumbprint on the vehicle purchase contract.

Requiring a thumbprint to buy a car deters thieves, but it’s hardly necessary.

Collecting a thumbprint allows law enforcement to determine the ACTUAL identity of the person who signed the contract after the fact, all but guaranteeing an identity thief will be caught. While this program is currently voluntary in the city of Los Angeles, many car dealerships that have been victims of identity theft are excited to begin the program.

Unfortunately, many potential customers are also deterred by the thumbprint requirement. Some consumers regard a thumb print on a contract as an invasion of privacy. Others are concerned about their “biometric” identity information being stolen. Most consumers, however, find providing a thumbprint to buy a car excessive and perhaps a little insulting. After all, shouldn’t the current system stop theft in the first place?

The answer, refreshingly, is yes.

The vast majority of falsified vehicle purchases occur at dealerships with loose or non-existent identity checks. Conscientious dealerships will pause a transaction if there is any question about names, addresses, social security numbers, and/or dates of birth not “adding up.” Between the credit bureau, the driver’s license, the credit application, and the story from the identity thief, most of the time dealers have more than enough information to stop the false purchase from happening in the first place.

But sales people and sales managers often hide or ignore facts that don’t agree with the records, deciding that the conflicting information is “incorrect” in order to complete the sale. The truth is that most well-managed dealerships have no problems with identity theft because the stop the problem when it walks in the door.

If a dealership asks you for a thumbprint, there’s very little harm in providing it. Still, the fact remains that your personal information ought to be enough. Hopefully someone will put a stop to this practice and ask car dealers to pay a little more attention to the documents they already have.

1) When you buy a warranty from an auto manufacturer, you’re buying great customer service. When a covered part breaks on your car, the auto manufacturer’s extended warranty will usually pay for your repair without question. Auto manufacturers understand that failing to cover a repair might influence your next car purchase decision, so they take care of you to make sure you come back to them. After-market extended warranty companies, however, have no interest in maintaining a long-term relationship with you. Rather than cover repairs, after-market companies look for ways to deny coverage (even on ‘covered’ parts). Even worse, when an after-market warranty company does pay for a repair they often don’t pay the full amount. The repair shop must then either discount their work or attempt to collect the difference between their normal rate and the rate the warranty company pays from you. Bottom line - after-market warranty companies make money by denying your claims. Auto manufacturers make money by selling you more new cars. Don’t buy a vehicle extended warranty from an after-market company.

2) Manufacturer-backed warranties pay for better parts. Most of the time, a manufacturer-backed warranty will pay for OEM-quality parts. After-market companies, looking to save every dollar, rarely pay for OEM quality. Instead they’ll ask your repair shop to use after-market parts of lower quality, and in some cases they’ll only pay for used parts. Yikes.

3) Manufacturer-backed warranties will last. Here’s a scary story - a company called Automotive Professionals Inc. stopped honoring 250,000 service contracts when they filed bankruptcy in April 2007. The vast majority of those warranties are now completely worthless. The chances of this happening with a manufacturer-backed warranty are remote at best.

4) Manufacturer-backed warranties are easy to use. Finally, and perhaps most importantly, using a manufacturer’s extended warranty is easy. When you buy the warranty, most manufacturers enter it into their computer system. That way, when you go to any of their dealers, your warranty information is a few keystrokes away. Claims are just as easy too - most manufacturers have automated systems for processing extended warranty claims. Basically, all you need to do is show up. The manufacturer takes care of the rest.

Make sure to read our Extended Warranty Buyer’s Guide if you’re in the market for a new car, and remember to compare prices among different dealers before you buy a warranty.

1. Buy a new Toyota. Toyota Motor Credit is now one of the largest auto lenders in the US, and for good reason - they can borrow money from Wall Street at interest rates that other auto lenders can only dream about. That means they can offer loans at a better interest rate to consumers, even customers with bad credit. While Honda, BMW, and Mercedes also enjoy preferred lending from big banks, they don’t offer the sort of terms that Toyota provides for credit-challenged customers.

2. Buy a new truck or SUV. There has NEVER been a better time to buy a new truck or SUV. Huge discounts, generous cash incentives, and aggressive finance offers are available for anyone looking to buy a new truck or SUV. While it’s going to be more expensive to fill-up these vehicles, all the discounts and incentives mean a person with less-than-perfect credit can often get a loan offer. Just make sure to buy a smaller truck or SUV (say a Toyota Tacoma or Rav4) that you can afford to fill up.

3. Have you called your credit union? Credit unions often use generous lending guidelines that are favorable for most consumers - especially for anyone with a poor credit history. They also offer a personal touch and a loan approval process that many consumers find friendly and helpful. If you don’t currently belong to a credit union, check with your employer and/or H.R. department to find out what options are available to you.

4. Check out the certified used cars. GM, Ford, and Chrysler now offer aggressive certified used vehicle programs with great warranties and aggressive financing, just like Toyota and Honda have been doing for years. If you’re trying to buy an inexpensive vehicle with bad credit, a CPO car might be worth a look.

5. Stay away from “buy-here-pay-here” car lots. Because of the current credit climate, a buy-here-pay-here dealership may seem like a decent option. However, for most consumers, a buy-here-pay-here car loan is a bad idea. First, the payments are rarely reported to the credit bureaus, meaning that you’ll get little or no benefit from making all of your payments on time - your credit score will not improve. Second, many of the vehicles being offered at these dealerships aren’t worth half of what consumers are being asked to pay. Steer clear of this option if at all possible.

6. It’s all about cash. Now more than ever before, auto lenders are requiring substantial amounts of cash down. Historically, lenders have found that requiring a large cash down payment from a customer dramatically reduces the chances that they will default on their loan. So, if you’re trying to buy a car and your credit is poor, it’s time to buckle down and save. Put off any non-essential expenses, save as much cash as you can, and you’ll increase your chances of getting approved with every dollar you can put down. Figure 10-20% of the purchase price will be your required down payment.

7. Get your family involved. While we’ve never been an advocate of co-signed loans, if the situation is truly desperate a co-signer can often help a person with bad credit get a car loan. Spouses, parents, and siblings are the most helpful, and they usually have to reside in the same state. It’s also important to note that co-signers don’t help much with an approval if you’ve already had a car loan without a co-signer. This should be a last-resort option.

It’s important to remember that this credit crisis will likely be short-lived. Analysts estimate that the credit climate will normalize in the next 18 months. While it will never be like it once was (when nearly anyone could get a car loan regardless of credit history), people with bad credit should be able to get car loans again very soon. Make sure to apply for credit at a few different lenders too - that will help you figure out what your options are. We have a recommended list of auto lenders you can register with.

I am looking to buy a new car and am a little scared about financing. I was turned down by Bank of America because they don’t accept anyone for financing with less than three years of credit. I am 26, my credit score is 745, and I have 5 credit cards (all without balances). I want to get financing, but do not want to do any guess work. Can you tell me who might consider financing me for a car?

Answer:

I wouldn’t put too much stock in the opinion of any one bank. In my experience, there are really two kinds of lenders - banks that want to be in the business of auto loans and banks that don’t.

Most banks don’t want to be in the business of lending money on cars. It’s a difficult business for a bank to be in without a large dedicated auto lending staff. I’ve been amazed multiple times by the vast difference in lending between banks.

Take your situation. You have a 745 credit score, and assuming you’ve had the same job and residence for at least six months, you should have no trouble getting a loan — even being a first time buyer. In fact, you should even be able to get a decent interest rate. Yet Bank of America turns you down. ANY ONE of the captive auto lenders (GMAC, Ford Motor Credit, Toyota Motor Credit, etc.) would love to have your business. The same goes for the larger national auto lenders like Chase and Wells Fargo.

My advice would be to contact your local credit union. They will probably offer you the best finance terms of any lender. However, I would also suggest you keep an open mind towards dealer-provided financing. You definitely fall into the “A” credit category, and auto dealers (with their huge lending portfolios) can often beat the best deal you can find on the street. If you get pre-approved at a local credit union or two, you’ll have a good estimate of what you can expect in terms of interest rate.

My recommendation: You should apply to a local credit union and ignore the fact that Bank of America “doesn’t look at people with less than three years.” You have an excellent credit score, and assuming you’ve got good job and residence stability, you should have no trouble getting financing.

1) Don’t call it a warranty. While the common term is “extended warranty,” the correct term is actually “service contract.” What’s the difference? Warranties cover defects only, a service contract provides service to a specific set of parts regardless of why they failed (except for abuse and acts of God).

2) Only buy a service contract backed by an auto manufacturer. Simply stated, manufacturer-backed service contracts are the best. Buying a service contract from an after-market vendor can be a complete waste of money. After-market service contract companies often dispute claims, they’re difficult to work with, and they sometimes fail to pay all your repair costs. The auto manufacturer wants to sell you another car someday, so their service contracts are usually excellent in terms of coverage, ease of use, and customer service. Read more about why you should buy a manufacturer-backed warranty…

3) Buy the best coverage. Don’t bother with buying anything less than a comprehensive service contract. What you’re looking for is a service contract that covers everything on the car, excluding wear and tear items. Buying the best coverage makes sense - even a repair of a small trivial item, like a bad power lock switch, can cost hundreds of dollars. Why not cover every part? Besides, buying lesser degrees of coverage usually doesn’t save much money. In many cases, the cost difference is a few hundred dollars. Get the highest level of coverage and you’ll be glad later.

4) Buy the longest term you can (provided the mileage makes sense). When you buy, try and match your coverage years with the miles you’re going to drive. For example, if you drive 15k miles a year, a 6yr/100k mile service contract makes sense. If you drive 10k a year, a 7yr/75k mile service contract would be better. Whatever you do, get the most you can - service contracts are most valuable in the last year of their coverage. Having said that, don’t pay for a service contract that lasts less than a year. They’re rarely cost effective.

5) Compare prices. This is the most important part of buying a service contract - since you’re only going to buy a manufacturer-backed service contract, you need to compare prices at lots of dealerships. The standard practice at most new car dealerships is to sell service contracts for $800-$2000 over cost. That kind of profit margin can easily double your expense. So, when you’re offered a service contract, find out what the up-front cash price is. Next, write down that price and ask if that’s the “best price” they can give you. Finally, tell the finance person that you’ll think about it and get back to them soon. When you get home from the dealership, call around to other competing dealers and ask them for their best price. A few minutes worth of work can save you a few hundred dollars.

6) Read the service contract. The vast majority of dealer employees are honest, however, that doesn’t mean you should trust everyone you meet. When it’s time to pay for your service contract, make sure to read it carefully. Be sure you understand the level of coverage you’re buying, the number of years and miles that you can drive while covered, and your deductible. Also, make sure the contract is for a manufacturer-backed warranty. I’ve heard of a few dealership personnel selling someone a after-market service contract and telling them it was factory-backed.

7) Check out the manufacturer’s service contract online. Most manufacturers have great websites that explain their coverage - just remember that the price online isn’t necessarily the price you’ll pay. Ford, for instance, sells their service contracts to their dealers for much less than they’ll sell them direct to customers. Your local Ford dealer can often beat the price you find online by a few hundred dollars - the same goes for Toyota, GM, and a host of others. In fact, the price you find online should be the most you pay.

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Here are some links to manufacturer’s service contract websites with more information:

Chrysler Service Contracts - servicecontracts.daimlerchrysler.com - Dodge, Chrysler

Ford ESP - GenuineService.com - Ford, Lincoln, and Mercury

GM Protection Plan - GMProtectionPlan.com - Buick, Chevrolet, GMC, Pontiac

Honda Care - HondaFinancialServices.com - Honda, Acura

Hyundai - HyundaiUSA.com - Hyundai

Toyota Extra Care - ToyotaOwnersOnline.com - Toyota, Scion, and Lexus

I lease a 2006 Toyota Camry and recently the driver side window made a really loud noise when I rolled it down, and then I wasn’t able to roll it back up. I paid the dealership $150 for them to look at it and tell me that the whole window needed to be replaced. Apparently, the window clips broke and since the clips come from the manufacturer I would need the whole glass replaced. My warranty expired about 5,000 miles ago, but I consider myself a good customer. The dealership told me it would cost $400 (less the $150) to repair. They also offered me 20% discount. I feel that this repair should be taken care of by the dealer or Toyota – what should I do?

Answer:

First, what the dealer has told you is correct. It’s silly, but once the clips holding the glass to the mechanism break, it’s time to replace the whole apparatus.

Since the dealer isn’t willing to repair the window free of charge, you can try and find an independent repair shop to do the work for less. However, the 20% discount the dealership offered you likely makes them the cheapest place to go.

As far as getting your repair covered completely, there is something called “after warranty assistance.” It’s not really easy to get, but I would definitely try. Just keep in mind that since your warranty is completely past, you will likely have to pay something. The question is, how much? After warranty assistance will usually cover 50-80% of the cost, so that should be your goal.

Our Recommendation: Speaking with the GM is usually productive in this situation, but you want to give the service manager a chance to come through for you. We would suggest you call and ask the service manager for after warranty assistance before you call the general manager.

While these regulations are definitely needed, the fact is criminals will always find a way to bypass regulations. Rather than relying upon the government to protect your next auto investment, here’s what you can do to reduce the chances that you end up with a car with a “washed” title:

1. Don’t buy a car from a private individual if their name isn’t on the title of the car they are selling. When it’s time to sell a car with a washed title, a lot of con artists will say that they’re “selling this car for my friend or relative, that’s why my name isn’t on the title.” If this story is true, they should be able to supply their friend or relative when it’s time to complete the transaction (as recommended in our 7 tips for buying a car from a private party post). If not, you should be suspicious.

2. Inspect the car carefully. While most salvage and flood damage vehicles are easy to spot - you can use your nose to smell must and mold from flood damage, and you can look for signs of body repair to spot a major salvage repair - some salvaged vehicles are impossible to spot without a full mechanical inspection. This is just one more good reason to pay your local mechanic to inspect any used car you’re going to buy.

3. Get a vehicle history report. Carfax and Autocheck both offer vehicle history report services, and for a relatively small amount of money you can get a guarantee that the car you’re looking at doesn’t have a washed title.

4. Use your head - if it’s too good to be true, walk away. One of my biggest pet peeves is with consumers that don’t understand one simple fact: If it seems too good to be true, it IS too good to be true. If you find a used car selling for half as much as all the similar used cars you find, ask yourself “What’s wrong with this car?” Nine times out of ten the people who get taken advantage of didn’t bother to stop and consider why the car they bought was “such a good deal.”

If you follow these four tips your chances of buying a salvaged or flood-damaged car drop to about zero.

No? Neither would I, and neither would a lot of people, which is why Arizona dealer Rick Johnston (who runs Wildcat Mitsubishi in Tuscon and Ideal Automotive in Sierra Vista, Arizona) is in so much hot water right now.

For the time being Rick Johnston, along with his sons Beau and Heath, owns and operates two auto dealerships in Arizona. Yet in light of recent allegations directed at the Johnston family, it’s likely that the Johnston’s days or running car dealerships are running out. Just last month Fort Huachuca Army Base officially banned all of their military men and women from buying a car at either one of the Johnston’s dealerships. Army spokesperson Tanja Linton said, “We were concerned that our service members were being taken advantage of.”

Victims of illegal and/or aggressive dealership sales tactics are often reluctant to share their experiences, but U.S. Army soldier James Tuman has been speaking openly about his experiences.

Tuman had a motorcycle and SUV that he traded in for a used car from Johnston’s Ideal Automotive. After driving the car Tuman quickly learned it had several mechanical problems. When he tried to return the car, Ideal Automotive said that they would not accept his return or provide a refund. Instead, they offered to take back the car and sell him a different one. Tuman, unsatisfied, said he was going to make an official complaint instead. Ideal Automotive responded with threats, saying that they would declare the car “repossessed” if he didn’t fulfill his obligation. Since a repossession could affect Tuman’s security clearance (the military has rules forbidding soldiers with repossessions to hold high security clearance), Tuman was forced to accept the dealership’s mistreatment or jeopardize his career.

Tuman is not alone. Since 2005, the Arizona Business Bureau has reviewed 30 complaints against the parent company of these two dealerships, Johnston Shield, Inc.

The complaints against these dealerships range from refusing to return a deposit, selling trade-ins before deals were finalized, and incorrectly claiming that parts were covered under warranty. According to the Arizona Star there are also claims that the Johnstons sold damaged vehicles and even called the police on customers for what appear to be unfair reasons.

It’s not just the issues with the customers that have the Johnston’s under fire. In July the company filed bankruptcy stating the company owed more the $2.1 million to unsecured creditors including more than $1 million to the IRS and about $283,000 to the Arizona Department of Revenue for sales tax and payroll tax.

Other indiscretions include making finance deals without a license for two years. Although they now have a valid license, the dealership could face serious fines of up to $5,000 a day for each violation. The dealership is also getting heat from the Transportation Department for continuing to issue temporary license plates. There was an order in place to stop them from doing so because the dealer issued plates with the wrong VINs on five separate occasions. This violation will likely mean more fines.

With the mounting expenses, reduced customer base, and bad publicity, the future for Johnston Shields, Inc. is not so bright.

Just a quick search on the Web will turn up a variety of not so savory reviews. Including this one from MerchantCircle.com: “If I could give this business negative stars I would. This company (ran by ex-cons) have done numerous customers wrong and have violated a variety of laws in the process.”

To be fair there are positive reviews on other sites like Edumunds.com. I’m not about to say that everyone has had a bad experience at the Johnston’s dealerships, but from what I can tell most of those that are speaking up don’t have much nice to say.

The lesson? When car shopping, take the time to read online reviews of your local dealers. While every dealership is going to have negative reviews (it’s the nature of the business), watch out for dealerships with an inordinate amount of negative complaints.

1) Do you have the ability to pay for a big repair? The worst-case scenario with any vehicle is that a major part (like an engine or transmission) fails and you get stuck with a huge bill - $1,500+. The good news is that huge bills are pretty rare. If you feel confident in your ability to come up with that kind of money, than you may not need an extended warranty.

2) Are you buying a reliable vehicle? Before you buy a new or used car, you should spend some time figuring out how reliable it is. Do some reliability research on new cars, and check out our advice for figuring out if a used car is reliable. If you have any doubts about a particular car’s reliability, buying an extended warranty might be a good idea. Of course, if you have doubts, you should also consider buying a different car.

3) Is the car for someone else? Are you buying a car for someone else to use? If so, are you concerned that they might be taken advantage of? Extended warranties prevent your friend or relative from being talked into unnecessary repairs, especially if you’re not close by to help them out. [Far away college students and older relatives come to mind.]

4) Budgeting is easier than paying for repairs. Even if you can afford to pay for an emergency repair, there’s a budget advantage in buying an extended warranty - especially if you can finance the cost with your loan. Adding a comprehensive service contract to your car payment costs the same amount every month, ensuring that you know exactly how much you’re going to spend on repairs every month.

The main advantage in buying an extended warranty is that you don’t have to worry about repair costs. You pay up front knowing that whatever happens during the term of your service contract, you don’t have to worry about paying for repairs. We’ve seen warranties pay for new engines, transmissions, transfer cases, engine control modules, etc. They can definitely pay off. The main disadvantage in buying an extended warranty is that you may not get your money’s worth. If you pay $2,000 for a 6yr/100k mile comprehensive warranty, and your car never needs a repair, your $2,000 was wasted.

My official advice - if money’s tight, an extended warranty is a good bet. While you may not get every dollar you spend on an extended warranty back, there is a good chance you’ll need to fix something. Considering that a “cheap” repair is a few hundred dollars, buying an extended warranty - especially if it can be financed with your car - makes sense for a lot of people. On the other hand, if you’re well off enough to pay for repairs (even really expensive repairs), then an extended warranty is not for you.