If you’ve shopped licensed dealers in California for a new or used car since July 1, 2006, you were protected by something called the “Car Buyer’s Bill of Rights.” This relatively new law was passed to protect buyers from long-held practices that had previously worked against them.
This law addresses two major areas of your vehicle purchase. The first relates to financing: requiring credit score disclosure and capping dealer markup on your interest rate. The second major area allows the customer to return a used vehicle (at a cost).
To fully appreciate this law, let’s compare it to the dealer practices it strives to stop.
Dealers must provide an itemized price list for items such as warranties, insurance, etc., if the items are being financed.
Imagine buying a car before this law was passed. In the end, of course, you agree to a payment. But before 2006, this payment could’ve been laced with additional items not previously disclosed during the negotiation or paperwork process – items you may not have agreed to, if the dealer had asked. You walk into finance and magically you seem to be given tons of freebies:
“Sign here, please, for your 7-year extended warranty, and for your paint and fabric protection.”
“Is it extra?” you’d ask.
“No, Dear Customer, it’s all included.”
This dealer skill was formulated and refined after many years. Dealers even have a term for it –“holding.” Back in the day, a skilled finance manager was one who knew how to “hold.” But with this law, a contract must clearly list the price of every additional item. Knowing this, isn’t it easy to see why the sales contract is often the last form you sign?
You may have also noticed that since 2006, dealers put a great deal more effort into selling you additional items before the finance process. Salesmen often slip back and forth between the desk and negotiating table with 4-squares – including the price plus extended alarm, LoJack, gap insurance, paint and fabric protection, and maintenance plans – all written boldly in marker. You may refuse these items, but the finance manager will surely try for a better offer once you step into his realm.
Dealer compensation from an institution financing the purchase of a vehicle is limited to no more than 2 percent for a loan term over 60 months and 2.5 percent for a loan term of 60 months or less.
Before this law, dealers had no official cap on their rate markup. Lenders were often left to determine their own guidelines. Imagine yourself a desk manager with a litany of available lending options. One lender (offering an average loan rate) may allow a higher markup than the others. The customer in this situation would not only get a mediocre loan rate, they’d get the loan favoring the dealer with the highest allowed markup.
If you were a desk manager, your priority would be to generate profit for the dealer. With this lender in mind, you’d pencil a deal with the maximum rate markup and see if they bite. If you could make 7 points on a $25,000 loan, you could generate $1,750 of back-end profit. Let’s say the customer asked for another $500 off so their deal matches a competitor’s price. No problem. You could make your customer extremely happy and pocket an extra $1,250 at the same time. I often wonder if customers, remembering the old days, still think dealers can discount cars far below cost. Back in the day, doing so was actually a reality – as long as they could pull significant profit from other sources.
A cap of 2% for 60 months or more or 2.5% for less than 60 months still may not seem fair for the limited amount of work to process a car loan. But, at least shoppers are protected from excessive loans and now receive more favorable “buy rates.” In addition, since the markups are all the same, shoppers can rest easy knowing the lender winning the deal will probably have the lowest available APR.
With the availability of so many rates online, the next portion of the law helps protect you from markups.
Dealers must provide buyers with their credit score and an explanation of how it is used
In the previous section, you may have thought, “I’d never agree to an insanely high interest rate. I know my credit’s good.” Well, if you didn’t know your credit (and how many people really did back in the 90s?), dealers didn’t need to provide you with your credit score or an explanation of how it’s used. Simply put, if you didn’t know your score was good, they could get away with not telling you.
Now that your score must be disclosed, you may more easily see whether the lending rate the dealer provides seems fair. Keep in mind, dealers don’t provide your credit report. They only tell you the reporting agency used, its phone number, the range of scores from that particular agency, and most importantly, your score.
Even though the above portions of the Car Buyer’s Bill of Rights cover new and used car financing, one section concerns only used cars.
Used car buyers may purchase a two-day sales contract cancellation option.
California law doesn’t include a “cooling off” period, but with the Car Buyer’s Bill of Rights, you may purchase a Contract Cancellation Option Agreement if the used car is priced below $40,000. This allows the customer to return the car within two days. Here’s how it works:
$75 for a vehicle at $5,000 or less (restocking fee of $175)
$150 for a vehicle between $5,000 and $10,000 (restocking fee of $350)
$250 for a vehicle between $10,000 and $30,000 (restocking fee of $250)
One percent of the purchase price for a vehicle between $30,000 and $39,999.99 (restocking fee of $500)
Personally, I don’t see many advantages to this law. Since the Contract Cancellation Option Agreement was introduced, I’ve only seen one person get one (which they never used).
For customers who aren’t sure about a used car, my advice is to put off the purchase until you are sure. Perhaps speak to the dealer about having your own mechanic review the vehicle or provide you with a Borrowed Car Agreement that lets you drive the car for a day or so. Keep in mind that many dealers prefer not to BCA a used car because it takes the car off the market.
Prohibited, “Certified” used vehicles
This portion of the Car Buyer’s Bill of Rights prohibits dealers from advertising a vehicle as “certified” unless the dealer performed a complete inspection of the vehicle and provides the shopper with a copy of the inspection report.
A few other important items prohibit dealers from advertising a vehicle as “certified.” If it was damaged by accident, fire, or flood (unless repaired to safe operation condition prior to sale), branded as a Lemon Law Buyback, has frame damage, or was sold “as is,” it cannot be called “certified.”
Before this law was enacted, imagine being lured in with some advertisement of a “certified” used car. You drive down to the dealership, astounded at the great deal, hoping it’s still there, only to arrive and find out it’s being sold “as is.” If you bought the car, you’d have no legal recourse or the backing of a certified warranty to fix anything that should arise down the road.
One key benefit of this section is better transparency. If a car has a decent mileage and year but isn’t certified, there’s probably a very important reason under the surface that you should be concerned about.
I didn’t cover every detail of the Car Buyer’s Bill of Rights, but the DMV does a good job of outlining it. To read it in its entirety, visit http://dmv.ca.gov/pubs/brochures/fast_facts/ffvr35.htm.