Think Twice About Pricing a Car Based on Credit Quality

January 2011, Auto Dealer Today - WebXclusive

by Thomas B. Hudson, Esq. - Also by this author


The news report was depressing: A bankrupt car dealer accused of pressuring bad-credit customers into paying inflated prices for shoddy vehicles agreed to a term in federal prison for lying to banks. The dealer pleaded guilty to a charge of conspiring to lie on financial reports submitted to the institutions that financed his operations. He’ll be sentenced in January.

The dealer, indicted by a grand jury on 28 counts of bank, wire and mail fraud, had been set to face trial next month. If convicted, he faced up to 30 years in prison and a $1-million fine. The dealer admitted that he and his partners manipulated reports to give banks false information about the dealership’s financial state, inducing more loans from a coalition of banks.

The banks’ estimated total losses were more than $21 million, but prosecutors acknowledged as part of the plea deal that the banks' conduct could have contributed to the defendants' behavior. The defense lawyer, referring to his clients’ conduct, said, "They weren't trying to steal anything. They were just trying to keep the business alive."

Yes, it's always depressing to read about a desperate dealer, facing hard times or possibly even the loss of his business, yielding to temptation and flimflamming his banks or finance companies. Maybe, somewhere, a dealer has gotten away with this last-ditch ploy, but it seems that nearly always the dealer does a crash-and-burn.

"OK," I said, "another dishonest dealer goes down in flames." No news there. But then I got to a paragraph near the end of the story which really caught my attention.

The paragraph described an earlier problem the dealer had with the state’s attorney general. It recounted that the dealer filed for bankruptcy in 2005 shortly after a complaint from the AG. According to the earlier complaint, the dealership had engaged in several practices that the AG disapproved of.

According to the AG, the dealer's employees systematically refused to tell customers the prices of cars until after the dealer's employees collected financial information. Customers were then told they were qualified to buy only specific vehicles, often at interest rates approaching 25 percent.

It wasn't clear whether the dealer seriously contested the AG's action, but investors who bought the buyers' contracts eventually agreed to modify them for roughly 250 customers and cut interest rates to 17.95 percent. It also wasn't clear whether the investors put up much of a fight, either.

But what's wrong, you ask, with not telling a customer a car’s price until you know how good or bad the customer's credit is? In fact, haven't you been to industry conferences where “expert” sales training folks have taught essentially these techniques? I know I have.

Here's the problem with this practice. If the dealer prices a car at $12,000 for a cash buyer and $13,000 for a credit buyer, or prices a car at $12,000 for a “good credit” buyer but at $14,000 for a “bad credit” buyer, the bump in price, in both instances, permits the AG to argue that the increased price is a proxy for finance charges, and the increase would need to be disclosed as a finance charge and included in the APR.

What's a dealer to do in order to avoid an up-close-and-personal meeting with his state's AG? We recommend that dealers prominently price all their cars (as some state laws require). The price is the price, no matter who is buying or how they are paying.

Dealers resist the advice, but it's the only way I can think of to position the dealer to defend allegations like these. If your sales practices resemble those described above, you might want to sit down with your friendly local lawyer, and make sure you lawyer is confident he or she can convince your state AG that your pricing practices are legal.

That is, unless you look really smashing in a day-glo prison jumpsuit.

Vol. 7, Issue 11


  1. 1. jb [ January 26, 2011 @ 12:13PM ]

    So you should price cars like that stupid CAC program has their dealers do.Here you go maa'm a 1999 chrysler van with 150k is only 12,995????

    No wonder all those dealers have closed up shop in my area

    Wonder how many special finance people could allow the salesperson to give out a cash discount price only to find out they need deep subprime help?? ok mr customer you need a 5k downpayment so we don't loose money financing your car?

    bhph cars are easy to price,subprime not quite so easily priced,I am interested to see what anyone else has to say

  2. 2. RG [ January 26, 2011 @ 12:37PM ]

    We have BHPH prices on all of our vehicles. We do no sub-prime. The managers are allowed to discount up to 10% off either a cash sale or a bhph sale. Needless to say we don't get many cash buyers, but I think that we are compliant. Are we?

  3. 3. Gene Daughtry [ January 26, 2011 @ 01:08PM ]

    RG you should be compliant. In BHPH I believe you have to decide what you are primarily, a BHPH dealer that might cash a car or indirect retail lot providing bank financing that does some BHPH, and then advertise into your primary business. We very rarely sell a car for cash for the simple fact that our prices are firm and a cash buyer isn't interested usually. We never advertise prices. I have been doing this since 1994 and it hasn't been an issue. When we have cut a price it was when we were negotiating with a cash customer.

  4. 4. Courious [ January 26, 2011 @ 03:26PM ]

    My question is what do you do when you have disclosed a price to a customer with a 1000 profit, then you get a call from a lender with a 3500 fee. Do you, A. tell the customer we have an approval but because the bank charged a fee we have to raise the price, or B. Not take the deal.

  5. 5. Arthur [ January 26, 2011 @ 08:07PM ]

    Courious, seems like both a & b may have the same result.

    Assuming the unit is still on the lot, you could interest the customer in an alternate vehicle that is really better suited for the customer, so you can build the fee into the deal.

  6. 6. Don Miller [ January 27, 2011 @ 05:31AM ]

    With Constellation’s BHPH Program, our client dealers use a DCF Window Sticker to provide upfront pricing to the customer’s including price and full disclosure of the finance terms. This helps to establish a positive, professional image and instant credibility with the customer and keeps the dealers out of trouble.

  7. 7. HR [ January 27, 2011 @ 07:32AM ]

    My sales people are information takers,thir job is to bring the customer in,get an app,paystubb and dl.We know within 3-5 minutes if we have a buyer or not.Why waste time walking the lot with someone who you know might not be able to buy a car and blurting out prices.Even with BHPH we still qualify the customer as we want to know he lives in our collection area and isn't in an active bk.Then we can decide which cars to show as we do bhph as well as bad credit lender financing.

    Why price cars?? unless you are selling to the cash customer who beats up on you way worse than most subprime customers who need the car.We tried a cash lot back in the 90s when we had 5 lots,it was the worst thing we ever did.

  8. 8. BD [ January 27, 2011 @ 07:39AM ]

    Do you, A. tell the customer we have an approval but because the bank charged a fee we have to raise the price, or B. Not take the deal.

    This is how you would get in trouble by raising the price,I would simply say

    That car will not work for _____ finance,we have to find the right vehicle that fits their criteria.

    I don't care what this article says,be very careful pricing cars upfront to subprime customers


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