Markets Wired

Two new staff reports from the Federal Trade Commission highlight some of the challenges and confusion consumers can face in buying and financing a car, particularly relating to charges for add-on items after the initial price negotiation that can lead to them paying more than expected.

The reports are based, in part, on a study of auto buyers conducted by the FTC that consisted of in-depth interviews with 38 consumers about the car buying and financing process.

A staff report from the FTC’s Bureau of Consumer Protection (BCP) notes a number of issues that arose in the study, from the advertising that draws consumers in through the entire car buying experience.

The BCP report notes that consumers were sometimes not aware of key terms of sales and financing contracts, and it points in particular to issues that potentially keep them from having an accurate picture of the amount they are paying. One issue noted was focusing on monthly payments rather than considering other important terms as well, like the total price of the vehicle and the amount and length of the financing.

The later stages of the buying and financing process, including the sale of “add-ons” like extended warranties, service plans, and GAP (guaranteed asset protection), and meeting with the dealer’s financing office for additional negotiations after seemingly negotiating a price with a salesperson, also present issues, according to the report.

When it comes to add-ons, the BCP report notes a number of issues that caused consumers significant confusion in the study, including limited or no discussion of charges for add-on products in the contracts, questions about whether the add-ons are a mandatory part of the purchase or financing, and unexpected limitations on add-on products such as extended warranties or service plans.  

The BCP report also cites issues after consumers negotiate a price with the dealership sales staff and are sent to meet with the “finance and insurance” office, pointing to multiple instances in the study where the previously negotiated price was changed during this process. The report notes that dealers should honor discounts and sales terms promised to consumers through the entire sales process, or not make them in the first place.

The report also states that consumers were at times not aware of the terms they had agreed to, with some only discovering key elements of their contracts while reviewing the documents as part of the FTC study. The report notes that the sheer length of the car sales process can overwhelm consumers and make it difficult for them to adequately review the paperwork presented to them.

A companion report about the study is issued jointly by BCP and the Commission’s Bureau of Economics (BE). The joint report provides a detailed description of the study’s methodology and analysis of the results of the in-depth consumer interviews, as well as a discussion of how the study fits within the existing framework of academic research into the car buying and financing processes. The report analyzes the responses collected in the study and how they compare to existing literature about how consumers move through the car-buying process.

The BCP-BE report also includes a number of overall lessons from the study regarding consumers’ approaches to the car purchasing and financing process and their understanding of many elements of the process. It notes a number of areas where consumers did not understand the process, including what terms were negotiable, the purchase process and terms and conditions of add-ons, and other important terms included in transaction paperwork.

The Commission vote to issue the reports was 4-0-1, with Commissioner Rebecca Kelly Slaughter recorded as not participating.