When we evaluate a potential client’s contract documents, we always check to see whether the contract accurately shows the amount paid as a down payment. A few weeks ago, we discussed the problem of some car dealerships not crediting the full down payment to a vehicle purchase. . A very different problem – and one that we saw far more frequently – is when a contract shows a higher down payment than the amount that the consumer paid. For example, a consumer may give a dealership $1,000 down, but the contract may show that the consumer paid $3,000. Sometimes, the dealership is quite open about this. We have even seen dealerships advertise that they will give consumers more “credit” for the down payment than the amount that they actually pay. Other times, the consumer has no idea that the down payment was inflated.
Sometimes dealerships inflate down payments as a sales gimmick in an attempt to create the impression that the dealership is “giving” the consumer money to apply to the purchase. But, dealerships are not really giving the consumer anything. Suppose that the contract shows that the price of the car, with all fees and extras, is $12,000 in the example of the consumer whose contract falsely says that they paid $3,000 down. The consumer really paid just $1,000 down but is given “credit” for $3,000. So, the amount that is being financed is $9,000 ($12,000 minus $3,000). The cost to the consumer (before finance charges) is $10,000 ($1,000 down plus $$9,000 financed). So, what is really happening is the dealership inflated the price of the vehicle to $12,000, because an “honest” contract would show that the price of the car was only $10,000. So, the $2,000 that the extra that the dealership “gives” to the consumer is offset by the inflated portion of the purchase price.
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Frequently, car dealerships inflate the down payment in order to deceive the bank or finance company that is funding the purchase. Many lenders require that consumers pay a minimum down payment. If the consumer is unable or unwilling to pay the amount required, some car dealerships manipulate the contract numbers to make it look like a deal meets the lender’s requirements.
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Some dealerships argue that consumers are not harmed by this practice, because the dealership is just helping to get a deal approved. But, consumers are harmed in several ways. In Connecticut, a consumer is paying sales tax on the inflated purchase price. So, in the example above, the consumer is hit with an extra $127 in taxes.
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Another problem is that an inflated down payment is often a sign that a consumer has purchased a car that is not in good condition or that has a questionable history. Many banks and finance companies will not fund deals if the sales price is much more than the car is worth. Some dealerships get around this requirement by taking “problem” cars that would have a high book value if they were in good condition and pushing them on consumers who cannot pay a high down payment or who have credit problems. The lender, not knowing the vehicle’s condition or history, thinks that the car is worth more than its true value.
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Additionally, some consumers wind up with a car that they cannot afford. Sadly, not everyone has the skills to prepare a household budget. Many consumers believe that if a bank has looked at their finances and approved the deal, then that is evidence that they can afford the car. But, if that approval was obtained because the dealership lied about the terms of the deal, then the approval is not evidence of anything. When dealerships circumvent the lending requirements, the risk of default and repossession is much higher, and that harms the banks and finance companies. And, when consumers lose their cars to repossession, they cannot get to work or to class, and that drags down the entire economy. Everyone is harmed by this practice except the dealerships, who typically make most of their profit up front.
Consumers should look over their contracts carefully and refuse to sign any contract that shows a false down payment. If a consumer discovers that a dealership inflated their down payment after the fact, they should consult with a consumer attorney right away.