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Our Daughter's First Car Scam Experience

Even a famous car mechanic’s daughter is not immune to used car scams. Here’s how a daughter’s first car she bought on her own almost became a legally binding scam experience―from someone other than the dealership.
It's Not Just Car Dealership Scam You Need to Worry About

If you are like most parents, there is the bittersweet experience of cutting that last apron string or virtual umbilical cord when your child (now an adult chronologically) is left on their own to manage their finances and all that comes with it.

One good example when parents no longer hover over their child with helicopter parenting is when it comes to the first car your son or daughter buys on their own.

Related article: Mechanic Talks Candidly About the Best Used Car You Should Not Buy

Mechanic Explains How This Scam Almost Cost His Daughter $7,000

In a recent Car Wizard YouTube channel episode, the host and his wife discuss how their daughter almost got taken during a used car purchase. However, it was not the dealership doing the actual dirty deed directly but the financing department from their daughter’s loan lender that was caught engaging in “Backside Financing”.

What is Backside Financing?

Basically, Backside Financing, also known as "dealer reserve" is a practice in car sales where the dealership arranges the car loan for the buyer through a third-party lender, such as a bank or credit union.

The deal works like this or something similar to it:

  • The lender offers a wholesale interest rate to the dealership, which is lower than the interest rate the dealership offers to the buyer.
  • The dealership then adds a markup to the wholesale rate before presenting the loan to the buyer.

In other words, if the lender offers a wholesale interest rate of 4% to the dealership, the dealership can then add their own 2% markup to this rate and present the car buyer with a higher loan rate than they might have gotten elsewhere cheaper with a lender not affiliated with the dealership. This markup is additional profit for the dealership on top of the sale of the vehicle. Which is legal; But not in the best interests of the car shopper.

Back to The Actual Scam

While we are not provided with any of the details of just what kind of arrangement there may or may not have been between the dealership and the lender as the host was hesitant to name names to avoid a lawsuit, what made this lender loan deal a scam was the accusation that the loan was padded with unnecessary charges to inflate their daughter’s monthly payments―by $100 per month which over the load period translates to a final car cost of $28,000 for a just under $17,000 used car.

Follow along with the host as he and his wife review their daughter’s $16,900 2019 Ford Fusion Hybrid purchase during the first ten minutes of the video. However, if you want to skip the review and get to the meat of the scam, start the viewing at timepoint 10:10 of the video.

Just in case you want the facts without watching the video, a summary is provided below the video.

Our Daughter's First Car: She Almost Got Scammed $7K!

 

Video Scam Summary

The scam consisted of three unnecessary add-ons the loan department tacked onto the loan agreement but did not discuss with their daughter:

  1. Gap Insurance Coverage: According to the Bankrate dot com website, “Gap coverage covers the difference between what you owe on your auto loan and the payout you receive from your insurer if your vehicle is stolen or rendered a total loss. While it does fill in a financial gap, that is not where this coverage gets its name — it actually stands for “guaranteed asset protection.” According to the Car Wizard this is unnecessary as your car insurance likely already provides this protection. Why pay more for extra insurance you already have?!
  2. Life/Disability Coverage: The name of this coverage is self-explanatory and one we are all familiar with when buying a home or car. Again, your auto insurance very likely already has this protection in place.
  3. Extended Warranty: Extended warranties are one of the most ubiquitous add-on charges whether you are buying a cheap tool from Harbor Freight or an expensive new car. Extended warranties are questionable at best and according to the host of the video, useless much of the time since many garages will not recognize extended warranties on used cars brought in.

The message from the host is that the unnecessary add-ons added another $100 per month to their daughter’s loan payment which would have come to an extra $7,000 she did not need to really pay over the loan period. The lesson he wants everyone to know is that you have to read all of the print in your car loan paperwork just like you have to read the paperwork in your car deal at the dealership.

For additional used car scam-related articles, here are three useful ones for your consideration:

Timothy Boyer is an automotive reporter based in Cincinnati. Experienced with early car restorations, he regularly restores older vehicles with engine modifications for improved performance. Follow Tim on Twitter at @TimBoyerWrites  and Facebook for daily news and topics related to new and used cars and trucks.

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Image source: Deposit Photos

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