Vehicle Buyback Programs

A few years ago I paid some stupid tax.  Suffering from an incurable form of car fever, I went out and financed a late model, used Chevy Silverado pickup truck. It ranks right up there with the dumbest financial moves I’ve ever made.  I fell victim to the “I work hard, so I deserve it” line of thinking.  I do work hard, but I didn’t deserve it.  After eventually wising up I sold the truck, took a $1,000 hit between what I paid for it and what it sold for, and moved on.  Since then, I’ve received several letter from the dealership offering to “buy back” my truck.

The Vehicle Buyback Pitch

The letters all have the same tone–because of my superior finance history, and the wise choice I made when selecting a vehicle that has held its value over time, I can bring it back to the dealer where I purchased the vehicle and drive off the lot with a new truck, no down payment required.  Sounds like a pretty sweet deal, doesn’t it?

What they don’t tell you in the body of the letter, but reserve for the tiny print in the footer of the letter, is that you also drive away with a brand new, 60-month loan.  How nice.  Assuming I had kept that truck, I would nearly have it paid off by now, so why would I want to obligate myself to another five years of car payments?

What’s In It for the Dealer?

Dealers are trying all they can to move new car inventory.  With the economic downturn, few people can afford the exorbitant costs of a new car, and more and more consumers are looking for used models.  The vehicle buyback program is the auto industry’s attempt to replace their new car inventory with more popular used models.  But there is a catch.  The offer sounds sweet because no down payment is required.  You simply hand over the keys, they pay off any remaining balance on your old car, and you drive off in a new car with the same monthly payment thanks to a longer financing term.

The problem is that your current car is probably worth significantly more than the value they quote for offsetting your down payment for the new model.  In other words, if you owe $3000 on your current car, but it is worth $12,000 in a private sale, you have $9,000 worth of “equity” in your vehicle.  The dealer might require a $2,000 down payment for new cars, but offer to waive that for you in lieu of your trade-in, and pay off your remaining $3,000 loan.  To the naked eye it sounds like a great deal, but if you simply sold your existing car for $12,000, paid off the loan yourself with the proceeds, you’d have $9,000 to play with, not the $5,000 (loan payoff plus down payment waiver) they are offering.

Of course, the dealer’s hope is that you take them up on the offer because they can turn around and sell your used car for $12,000 (or more) and pocket the profit themselves.  Bottom line?  If you like your car, and it is a reliable form of transportation, don’t let some gimmicky sales letter talk you into “trading up.” That is just dealer-speak for going deeper into debt for a longer period of time.

Comments

  1. This is why I’m nervous about buying a car for the first time—these dudes at the dealerships have so many tricks up their sleeves its ridiculous. I’m thankful I’m at a job and city (Chicago baby) that doesn’t require a car, but after all the stuff I’ve read about dealerships, I’m frightened they’re going to get the best of me. I’m horrible at being a jerk even when I should be.

  2. This ranks up there with some of the more dubious examples of ripping the customer off from banks, credit card companies and suchlike.

    Isn’t it amazing how our ears are tuned to being ripped off by scams, pyramid schemes and all kinds of other things, yet we’re also ripped off by almost everyone else we deal with too.

    Ah well, at least some of us are getting more attuned to that too.

  3. If you think you can afford a car payment start making one to yourself, right now. Put that money aside and when you are ready to buy a car, buy whatever you can afford with what you have saved. Then keep making the same payment to yourself, you will have it for repairs and then eventually you can buy a nicer car, and so on until you have the car you want without interest.

    And even if you want a new car, buy a new car that is about a year old (dealers still have neww 2007 & 2008′s on the lot as the 2009′s are coming out, these are cheaper but great cars!!!) And pay the cash you have been saving.

    On a side note I have never paid more than $1,000 for a car, sometimes much less or gotten cars for free. They have all lasted me at least a year, some with no repairs other than basic maintance. In the past 12 years since I have had my license, I have spent about $6,000 on cars and repairs (not including maintance like oil changes.) This breaks down to about $500 a year, or what many people pay a month for a car. My cars may be older but most look pretty nice and run great.

    Thanks for your blog!!!

    (p.s. -my ex husband did buy a new car, huge mistake!!!)

  4. Nice article. I wonder if you might discuss the issues around selling a car you own outright to a used car dealer. I’m probably going to turn in my car and just learn to drive my husband’s stick shift so that we can eliminate one vehicle. I paid cash for a low mileage late model two years ago, only $6k. I haven’t put many miles on it, but I still doubt I’ll get much for it, however I sell it. I just wonder what the plusses and minuses of private sale vs. selling to a dealer might be.

  5. I have never bought into the “trade it in while it still has value”. If it still has value why on earth would I get rid of it!

  6. I received a couple of those letters recently. I have a car that is considered hot right now because of the high gas prices. When I bought it – it wasn’t the hot car a SUV was. The salesman kept trying to get me to test the SUV. Thankfully, I stood my ground and purchased the car I wanted then. And now I have no desire to buy another. Unfortunately, I still have the monthly payment that went with it but not for much longer.

  7. I bought a car earlier this year at a really good discount. Did all the negotiating online and paid invoice less than. I plan to drive it into the ground too. I’ve helped others save money by negotiating online as well.

    My girlfriend’s best friend fell for the used car/down payment scheme. Lost thousands in the deal AND overpaid on a $35k Acura. She’s paying to stupid tax now by getting a second job and trying to sell her car (has about $5k in equity in it). I feel for her.

    I always like to thank people like her and Frugal Dad for making the mistakes for me, because y’all have saved me thousands over the years.

  8. A thousand dollar hit isn’t too bad for a mistake like that. My friend is doing the same now; selling so they can pay off the loan, and they’ll still owe about a grand. But I’m proud of her for realizing that they’ll lose more if they keep making the payments. It’s tempting to keep paying for four more years, rather than paying the stupid tax and getting it over with. Some loans I’ve seen though, the interest is so high, the car price was far above its actual value that you’d be looking at multiple thousands in the gap.

    My new car payment is $100 a month, to my ING account named “car fund.” (I have many years left in my Toyota, and I’m not buying new.) We used to get buy back offers like that all the time, too. Every time I thought, are they crazy?

  9. @the weakonomist: Glad I could help….LOL! On a serious note, I actually enjoy telling about my screw-ups here because I hope it will keep people from repeating by mistakes. I certainly haven’t made all the right moves, but I can share quite a few wrong ones. The point is we learned from the experience, worked off our mistakes, and have moved forward, never to repeat them again.

  10. Dear Lord no! You actually READ the FINE PRINT FrugalDad??! Who in the world does that? I thought people are supposed to be SCAMMED by GREEDY corporations and the like as if they were unattended babies playing with scissors. This is why the fine print is there because LEGALLY the eeeevil corporations do have to tell you what they are actually offering you in the “deal”. They cannot hide it and lie. Too bad many people can’t take the minute or two to read it and make sure to blame the government for not informing us sooner and making sure we understand in simple kid terms. It didn’t take long for someone to chime in about those greedy scamming companies and I’m sure it won’t be the last. Strange how people seem to think any business that would like to make a profit is inherently bad, bad, evil, doubleplus ungood.

    @Writer’s Coin, the internet is a wonderful place and you can find all sorts of sites that have information on what to look for when talking with dealers and how they work their sales techniques. There was a great article by a journalist that actually got a job as a car salesman for about a month and he wrote all about how it works and what they know to do in certain situations.

    @Rebecca and others, did you folks make sure to thank all those “stupid”, “greedy” people (quoting from people here, as I don’t agree) who bought the cars new so that you are able to drive inexpensive used cars? Someone out there had to buy that car new and take the depreciation hit so that you could benefit. As blindly idealistic as people would like to be, in order to live frugally we depend on others who are either not frugal or so well off that they don’t have to be frugal. Just as doctors make a living from pain and suffering (which sounds unfortunate but is true), the frugal-minded people make bargains from those who have or want more.

  11. This is so true. The delaership that I worked for during the summer (as a college student)two years ago did this type of move all the time. I was so suprise on how many people who thought it was a good idea.

  12. The dealers (and banks for that matter) just hate to waste the time to ‘let you’ read the fine print. I just firmly told them that I was not signing anything until I had read all/everything/each page in the packet. They could wait it out and answer my questions, or I could walk out the door. They waited.
    That was 8 years ago, and 114,000 miles, and I don’t intend to ever buy a new car again, but as it was exactly what I wanted, and as the used cars of the same type were selling for less than $1000 less, I felt the new one, with the new car warranty was the better way to go, in this particular case.

  13. I’m working for a long time in auto industry and I know many tricks that dealers are using to get money out of your pocket. Don’t blame dealers and don’t get scared of them they just doing whatever they can to survive in these troubling times. I would make a couple of suggestions to “Writer’s Coin” – unfortunately buying a car it’s always about to lose a money, it’s depreciative asset and there is no way car will hold the value unless we are talking about collectible cars, which is not the case, I guess ?. Basically you have 2 scenarios if you have a cash at your hand and when you are not hence need a financing. So if you need a financing the most efficient way to buy is NOT LEASING! It actual car loan, after you paid off your car, drive it to the ground. That the scenario when you lose the least money. Let me know if you are interested in more details I can elaborate on my blog.

  14. Don’t you think, though, that most people regard car payments as akin to death & taxes: something you can’t avoid? How many folks do you know who are driving a paid-off car? The cost of even a late-model used car is so high most people have to finance it, and five years is a long time for a vehicle to survive on the roads.

    In that scenario — i.e., that folks think of a car payment as a nonoptional part of life — it makes perfect sense that consumers would fall for a “buy-back” offer.

    I was lucky enough, after I bought my first car on time, to have a second income stream that allowed me to pay off the principle in about 18 months. After that, I just kept on making the $300/month “car payment” to myself…actually, to a Vanguard short-term corporate bond fund, which makes 3% to 6% and even in bad times loses little or nothing. If you plan to drive a car for 10 years, even if it takes you five years to pay off the original loan, by the end of the car’s lifetime you have more than enough to buy a new vehicle in cash.

    But…umh…whether you’re making the payment to yourself or to a lender, you’re still making a car payment. Personally, I prefer myself, as creditors go, but the fact is you still have to find a way to get that payment out of your cash flow.

  15. Well, I must be one of “those” people, as my car is paid off and my truck I paid cash for. I did have payments of $312/mo stretched to 5.5 yrs – BUT I paid it off in under 2 yrs as I hate making payments. It’s 8 yrs old and has 114,000 miles on it and I plan for it to last to 200,000 at least, so it’ll be awhile :)

    And yes, I paid myself after it was paid off, and plan on paying cash if/when I buy another one – I hate car payments :(

    Another trick the dealers pull….Every time I took the car in for maintenance while still in warranty, they would give me a ‘loaner’…it was always a newer model and an upgrade from what I had… They were sure nice to drive and always the dealer would tell me how easy it was to get into the newer one :) The most blatant was on the major maintenance at 90,000 – when I had a loaner for two days… for my basic Forester, the loaner was a fully loaded sporty new Tribecka…wow! What fun to drive! And I have to admit it was tempting! But I managed to say NO! LOL!

Leave a Comment

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>