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Home > Financial Resource Center Home > Lease vs. Buy > Steering Clear of Laundered Lemons

While many connect the phrase "lemon" with shady used-car purchases from auto dealers, this particular investigation revolves around auto makers who buy back defective new cars only to resell them to dealers. The dealers subsequently sell them to buyers without disclosing the vehicle's past problems. Consumer advocates call the practice laundering, alleging that car sellers deceptively wash all stains of previous troubles from the car's paper trail.

State laws do exist which are designed to protect consumers from unknowingly buying defective vehicles. Each state does require that consumers receive refunds or replacements if problems with a new car cannot be fixed after a specified number of attempts over a given period. Thirty-six states also require dealers to reveal that a car is a lemon to buyers prior to the final purchase. In Michigan, for instance, the Consumer Protection Act safeguards consumers by requiring merchants—auto dealers included—to disclose to potential buyers any defects or problems with merchandise. However, there are no laws requiring manufactures to disclose such information to the dealership. Reliable dealers attempting to protect themselves and their customers, will, in most cases, request all such pertinent information about the vehicles they are purchasing.

While consumer advocates hope that the FTC will set national disclosure standards to protect buyers from laundered lemons, consumers need to be cautious when purchasing used and like-new used cars. Everybody's Money Magazine suggests that potential buyers:

  • Check the mileage. If it's low, question whether the owner ditched the car because of problems. Ask the seller to prove any claims that the car was returned for trivial reasons.
  • Check the label. If the car is advertised as an executive, brass hat, demo, program, or repossessed vehicle, confirm it. These aren't always problem cars, but you should insist that the seller support such claims in writing.
  • Check the warnings. Carefully read all disclosures on the car's window sticker, door frame, title, and contract. Look for any reference to defects such as factory or manufacturer buy backs, or warranty return.
  • Check the past. Request and review the car's service history and note any frequent problems or gaps in records. Study the title. Have the Vehicle Identification Number (VIN) analyzed. Experian Automotive Information Systems (a branch of the Experian credit bureau) maintains a database of more than 135 million VINs which can provide mileage reports at previous points of sale, safety recalls issued for the vehicle, and insurance claim information.
  • Check the car. Before you buy any used vehicle, have an independent mechanic assure you that it's sound. Ask the technician to check if all of that model's safety recall work has been done.

Protecting yourself from buying a lemon takes time and diligence, but in the long run you'll be financially and possibly physically better off. When the time does comes to make that new or used car purchase, contact your credit union for the best used car loan rates!