The risk of losing your money when you buy a new car

Buying a car is an exciting experience for most people. They spend a lot of time and energy in researching options, visiting dealers and test-driving. By doing so you minimize the risk of buying a car which does not suit your needs. Therefore it is remarkable how little attention car buyers give to the risk of losing their money, when they buy a car.

In the Netherlands it is common practice with most dealerships that consumers pay a car upfront. Only large companies with excellent credit ratings or consumers that have a long trusted relationship with the (owner of the) dealership are permitted to buy a car and pay afterwards. The majority of buyers who do not use any credit facility at the dealer and pay for the car directly, are requested to pay upfront.

When you buy a car and the dealer hands it over to you, there is at least one other party involved. The process goes like this.

A consumer wires money into the account of the dealer. The next working day, and in some cases more days later, the consumer and the dealer have an appointment to hand over the car. Before the appointment the dealer checks if the money is in his bank account. When the buyer is at his desk he checks the details of the drivers license and logs in to the national registration of car licenses. He changes the name on the registration of the car from his own to the consumer’s name.  From that moment on the car is officially the property of the buyer.

But what if something happens to the dealership between the moment of transferring the payment into the bank account of the dealer and the appointment of the handover?  In 2009 the car conglomerate of Kroymans went bankrupt. The company consisted of more than hundred legal entities among which were dealerships of a.o. Opel, Ford, Kia, Alfa Romeo, Cadillac and Saab. Consumers had paid upfront for their new car but found a closed gate at the time of the appointment for the handover.

News site Z24 reports about Kia buyers who had to take their loss when their dealers went bankrupt

Recently the renowned Dutch automotive dealership of Hessing filed for bankruptcy. These are not the only cases. Every year dozens of independent dealerships go bankrupt. In 2011 171 automotive companies in the Netherlands went out of business.

In other industries this problem has been solved and the automotive industry could take a look at how that is done. The classic example is when you buy a house the payment is transferred into suspense account of a notary, who also handles the changing of the name of the owner in the national registry of home owners. More closely related to the car industry are kitchen retailers. This industry has created an image for itself of unreliability through the many bankruptcies in the past decade. Unfortunately for the owners of a kitchen showroom, consumers are also not always that reliable in paying afterwards. With a kitchen it is quite hard to repossess the products. And even if a retailer succeeds at that, it is virtually impossible to resell it, because it is tailor made to the dimensions of a house.

In this industry this problem is now solved by the people of FEET (First European E-money Trust). They have developed a simple but clever website and application which allows buyers to first pay the amount to a suspense account. The dealer can check online if the amount is granted to him and once he delivers the kitchen, car, or whatever goods, he can notify that and  immediately the amount is transferred from the suspense account into his own. This eliminates the risk of non-payment for the dealer and the risk of not receiving your goods for the consumer. FEET is backed up with an official banking license from the Dutch Central Bank, which makes it a trusted party in this process.

BOVAG, the Dutch automotive business association, would be a logical party to offer such payment security system. Other logical parties would be automotive transaction platforms, such as Autoscout24, eBay/Marktplaats or Autotrack.

That such a system could help consumers and dealers do transactions and reduce the risk involved, is not a question. The question is if the automotive industry waits with it until a bad reputation forces them to come up with it, similar to the kitchen retailers, or that they take action before and make consumers buy cars with confidence.

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