You see the new car. You want the new car. The salesperson gives you the old, “What’s it going to take to get you into this baby today?” A negotiation begins with many moving parts: price, trade-in, warranty, rebates, service and color-coordinated floor mats. Next thing you know, you’re sitting with the dealer’s finance person ready to sign anything to get the keys.
This is where consumer protection comes in. When sellers extend credit like a car loan, they must follow federal and state laws (for a quick sample click here) that encourage fair dealing and honest business practices. We have all seen headlines about rip-offs. The emphasis is usually that consumers need protection from their dishonest counterparty. However, consumer protection laws also protect the buyer from themselves.
First, it takes two parties to enter a credit agreement, and the law applies to both sellers and buyers. It is a two-way street. Consumer protection law actually strengthens an agreement. It ensures sellers offer things clearly and that buyers understand the offer. In other words, the car dealer is penalized for fraud, but the car buyer is also penalized for trying to weasel out of what they signed to avoid payment!
Second, consumer protection law slows down the buying process. We experience a strong mix of emotions in buying a car (fight or flight in negotiating, euphoria at closing the deal, threats to identity and self-image after being offered a mini-van, etc.). While products and sales play upon emotion, reading and signing the agreement is a rational process. The paperwork is by design an obstacle to completing the purchase. The bigger the purchase, the more paperwork.
Finally, human beings’ attention and memory are selective. We often see and recall what we want. We distinctly remember the cool rims but forget the 5 year loan at 20% interest. To overcome selective attention and memory, consumer protection specifically highlights loan costs and terms. So, for a credit card, terms are clearly outlined in a standard table. Home mortgages show the total amount paid back (including interest – it’s shocking) and may even have you initial each page of the payments schedule to make the obligation crystal clear. The process ensures that you understand the agreement and highlights things you might otherwise gloss over.
Buyers need to beware, not only because of crooks, but because of their own psychology. The worst financial damage is often self-inflicted. The combination of super-charged emotions and selective attention/memory can lead to poor decisions. Consumer protection laws slow down the process and highlight important terms and conditions. It is a buzz-kill to drag through the paperwork, but that’s the point!
Photo credit: rjs1322