Fact: the inflation rate hit 9.1% in June 2022, the highest it’s been in over 40 years.
Meanwhile, new and used car prices have soared, but the traditional reasons for inflation may have little to do with it. The average new car sells for over $47,000, 13.5% more than it did a year ago, while used cars are being sold for over $28,000 on average, a whopping 40.5% more, far outpacing the rate of inflation and driving it further up.
American families have already been feeling the squeeze from higher consumer prices, and buying a car these days is only adding to the pressure. However, the dramatic increase in car prices has been a boon to dealerships, which are earning $6,200 of profit for each new car they sell while their overall profits are also reaching record levels. With the average monthly car payment reaching an untenable $700, something has to give eventually. If there’s any justice left in this world, it will mean dealers being slapped back down to reality.
Car prices have been steadily creeping upwards every year. Back in 2019, before the pandemic and the ensuing financial turmoil, advocates and journalists had warned consumers of the rise of the 84-month car loan which dealers were apparently using to drive up the average cost of cars sold. Longer terms meant lower monthly payments for consumers, but to dealers it really meant higher interest rates and higher total prices. Current prices though are a signal of straight-up price gouging.
Dealers have tried to explain away the unconscionable prices they’re now charging by pointing to supply chain issues and claiming that costs are going up on their end as well. But according to data compiled by the Bureau of Labor Statistics, manufacturers aren’t charging dealerships much more than they used to, so it’s not that dealers are passing on their own increased costs to consumers.
The vast majority of inflated car prices can be attributed to dealers taking advantage of the reduced supply to milk consumers for everything they can. As a result, we are now seeing absurd dealer mark-ups across the market. According to user-submitted data, the Ford F-150, the most popular car in America, is routinely being marked up by tens of thousands over MSRP. At some point, higher prices stop being the natural result of supply and demand, and start being predatory, and some dealers have seemingly passed that point long ago.
While the rampant bald-faced price-gouging is relatively new, some car dealers have long employed a variety of less than savory tactics to get consumers to pay more. Among those tactics are steering consumers into high-cost loans as mentioned above, as well as a practice known as yo-yo financing. In a yo-yo transaction, a dealer will allow a buyer to believe the sale is complete and take the car home, only to pull them back to the dealership, like a yo-yo, by claiming the financing fell through. At this point, the buyer is often pressured into accepting new, less favorable terms than what they thought they were getting.
It’s not just financing tricks, dishonest used car dealers have also concealed damage to cars, overcharged or deceived consumers into buying unnecessary add-on products like GAP insurance and paint protection that the buyer may not even know they’re agreeing to, tacked on hidden fees, and more. To make matters worse, most dealers also use a forced arbitration clause in their sales contracts that prevents harmed consumers from taking them to court.
Federal laws and regulations have been hard to come by against powerful car dealers. Following the 2007–2008 financial crisis, the industry famously and successfully lobbied to be exempted from the federal Consumer Financial Protection Bureau’s oversight. Enter the Federal Trade Commission (FTC), the federal agency with jurisdiction over car dealers. In late June, the FTC announced a new proposed regulation aimed at curbing systemic unfair and abusive practices in the auto market.
Among the rule’s provisions are measures intended to address charges for useless add-ons, ban deceptive advertising, curb yo-yo financing abuses, make pricing transparent, and more. Expectedly, dealers have already moved quickly to decry the FTC’s proposal.
The National Automobile Dealers Association issued a statement claiming the regulation is unwarranted and would make buying a car more difficult. But the opposite is true. Although FTC’s proposal could be improved to better protect consumers, this agency action promises to help them in several ways as they maneuver through the car buying process.
Meanwhile, car dealers certainly aren’t struggling to stay afloat. During the early days of the pandemic, car dealers collectively received over $12 billion in forgivable PPP loans. A rule to ensure car buyers are treated fairly is not going to hurt honest car dealers. There are plenty of honest dealerships that are already able to thrive without cheating their customers. Requiring all dealers to play fair is not an impediment to success, it’s a way to level the playing field for everyone.
Between car dealer profits and the safety of all American car buyers, no sane person would choose to jeopardize consumer safety in favor of boosting dealer profits. The FTC’s new rulemaking shouldn’t be controversial, and no honest dealer should have a problem with this effort to remove the worst deceptive tactics from car buying.
Now, as part of the rulemaking process, the FTC is taking feedback from the public about the new proposed regulation. Car dealers are making their voices heard. Car buyers should speak up as well. Tell your story here and help the FTC clean up the auto market.
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