New car customers stuck with old loans when dealers don't pay off the trade-in
Many consumers who buy a new car still owe money on the car they're trading in. The situation is usually handled by the dealer agreeing to pay off the old loan, the cost of which might be folded into the new car price. No problem a year ago, but it's a bigger issue now. With 5,000 dealers closing their doors last year, some of those old loans aren't getting paid off. Consumers who bought new cars are finding out they're still on the hook for the old car loans, and in some cases, if another consumer has already bought the trade-in from the dealer, the bank will repossess it.Complaints about such practices are rising, but there isn't much a buyer can do: if the dealer has gone bankrupt, mere scraps are rewarded to most folks in the scrum of creditors. Most states have insurance bonds against these kinds of losses, but they might pay as little as $5,000, which is barely enough to cover one default.
Ohio, Virginia, and West Virginia have restitution funds. California -- exceptionally victimized by the practice because of the number of cars sold in the state -- is creating one that will be fed by a $1 fee on every car sold, but it isn't operational yet. In the meantime, used car buyers should ask to see the car's title to ensure it's clear. And for all buyers, in good times and especially in bad, caveat emptor.
[Source: MSNBC]
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Reader Comments (Page 1 of 2)
ack154 8:33AM (2/03/2009)
So the dealer rolls the price of the old loan into the price of the new car but doesn't actually pay off the old loan and then the old car gets repo'd from its new owner? Am I reading that right?
Wow. That's not shady at all....
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Andrew 8:36AM (2/03/2009)
What a mess. I'm sure this totally trashes the owner's credit who traded in the car in the first place. What's BS is that they can repo the car because the dealer has been paid on the already.
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Valentino Amoro 1:22PM (2/03/2009)
Totally agree w Rocketboy. Thats exactly the greed that got the US economy in this mess.
If you owe negative equity on a car there's no need to take on more loans than the new car is worth (terible as cars always depreciate) and get a new one.
People in most countries around the world would never do something like that. It sounds ridiculous.
It's called overextending. The folks at fault here are the customers for requesting something like this and the dealer for doing so (understandable given the lack of regulation).
hoov23 8:40AM (2/03/2009)
A dealer showing a title to a customer will not ensure that there will be no problem with it, just as not having a title to show will not mean that there is a problem. The dealer will not always have a title to show a customer - the logistics of getting titles sometimes means that it takes up to a few weeks, and the customer does not need the car registered for generally 6-8 weeks or so.
What I would suggest, though, is to ask the dealer when the traded-in car will be paid off and follow up on it; make sure the dealer knows when your next payment is due. Or if you can, if it won't alter the down payment you were planning to put on your new purchase, definitely pay the old car off yourself and make sure the dealer knows. And never leave the dealer with you owing them any more money after the time of sale, or they might not pay off your trade-in until they get all the dough. Follow those guidelines; you still may be running the very slim risk of the company closing up before their debts are paid (just look at OC Lambo), but at least you're minimizing it and being proactive.
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frozen canuck 1:13PM (2/04/2009)
I am a dealer and how I do it is I give the customer the check made payable to the bank then the customer knows that it has been paid off.
Throwback 8:42AM (2/03/2009)
This almost happened to me. The Dealer did not pay off my loan until 2 months after I closed on the sale of my new car. I had to confront the the dealer principle and threaten to tell every customer in the showroom about it if he did not pay off my old loan. 1 month after my loan was paid off the dealership was sold. As the owner of the original loan I had to keep making payments or else my credit would have been affected. Fortunately they had not sold my trade in so some no one else was affected. I expect to see more of these stories.
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Rocketboy 8:44AM (2/03/2009)
Well, who's the idiot getting a current car loan rolled into a new car loan? That's bad money policy right there.
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h8rain 9:01AM (2/03/2009)
To RocketBoy:
Happens with probably a very high number of car loans (well maybe not now, but say a year or two ago that was the norm). Negative equity was very common in auto loans. I am sure with the current situation with lending, I doubt banks are letting much through.
On the flip side though, say your car is worth $10k, and you owe $5k. No negative equity, $5k of "down payment" is applied to the new loan, but the dealer does not pay off the old loan, then the consumer is liable I believe. I would think though the contracts would be enough to show the bank that the liable part should be the dealer. It would be a giant headache in any case.
Throwback 10:06AM (2/03/2009)
I did not have negative equity, the issue is the dealer agrees to pay off your outstanding loan, equity has nothing to do with it.
Rocketboy 10:07AM (2/03/2009)
Oh, I know it does. But it's rather dumb. You're basically paying money on something that you no longer own/have possession of. That's just the type of fiscal irresponsibility that help lead us to where we are today.
Travis 10:13AM (2/03/2009)
Maybe you don't get it...lets say you take out a 3 year loan...2 years later you decide to buy a new car. Assuming you have equity (e.g.: loan = $5,000, car value is $10,000) you are putting money down on your new car, but still need to pay off the remaining balance on the loan.
Are you proposing that buying a new asset before the old one is fully paid off is a bad idea? How many people pay their 30 year mortgage before buying a new house. Same deal, different asset.
Rocketboy 11:29AM (2/03/2009)
Travis, I understand fully. When someone buys a new home, the goal is to pay off the current one, while being able to afford a new one. Not to get upsidedown on the new mortgage to start with. What you're doing by rolling the loans together is basically paying off one credit card with another. Always a bad idea. Are you saying it's a good idea to take out a loan on a loan on an asset that you no longer have possession of?
Hoov.. Exactly the point. When people over-extend themselves, housing markets drop, banks lose available funds, and the world economy goes to pot.
Tourian 11:49AM (2/03/2009)
@Rocketboy
Okay Mr. Trump. We understand that you pay cash for everything or always come out ahead on rapidly depreciating asssets even though the rest of America doesn't but imagine that this is a necessary evil with the car buying process for millions of Americans, and has nothing to do with being irresponsible or carelesss with money. What if your old out of warrantt car was financed on a 8.9% loan and you your negative equity is $3000 and you trade it in on a new car with 0% interest? You just got that $3000 refinanced for 0% plus you get a new car that is in warranty. Is it still a dumb idea in your eyes then?
Rocketboy 1:36PM (2/03/2009)
Tor... *sigh*...
Yes, OF COURSE if you can get something refinanced at 0%, it's a better deal. But that's not why most people do this. Most people do this due to wanting things beyond their means. For the record, I myself finance a car when I buy a new one. But the difference between me, and the people that that do it without thinking, is that I pay my car off before I buy a new one. I also buy a car that I can pay off within a reasonable amount of time at a payment that I can afford.
You know, like when I bought my house, I didn't get an adjustable rate mortgage.
Or I don't run up credit card bills on things that I don't need that I cannot afford to pay.
Wacky things like that.
Tourian 10:27AM (2/05/2009)
You don't have the informational resources available to you to tell me "why most people do this." So keep your "analysis."
hoov23 8:46AM (2/03/2009)
Not sure really what to say about the guy who gets his new car repoed because of an unpaid lien. I was mostly commenting on the customers who don't have their old car paid off in a timely fashion, if at all. I guess I should add that you should ask a dealer when you are buying a used car if it was acquired as a trade-in, and if so, then you should ask to see a title and lien release. If they can't provide it, it is probably in process and awaiting arrival to the dealership, so if you're really worried about it then you can tell them to inform you when it arrives so you can come back and complete the purchase.
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hoov23 9:02AM (2/03/2009)
about 25% of buyers. it's tough for people who get new cars every 2-3 years because depreciation has risen lately inversely following demand. people who may have owed about what the car is worth, or less, are now "upside-down," sometimes very badly, like tens of thousands of dollars. buyers of new luxury cars are significantly affected, because they might owe 70,000 on a 90,000 car that they thougth would hold it's value fairly well, but is now worth 45k only 2 years later. then they might not be able to afford the payments anymore for the next 2 years on account of the economy, so they want to downsize to payments on something around 50k for the next 4 years, but they don't have 25k cash to make up the difference on their old loan. so they buy a 35k car, put 10k down, and tack on 15k of the old loan. unfortunately it happens all the time - people unknowingly overextended themselves in the past and are now paying the price.
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Gstill 9:02AM (2/03/2009)
When are people going to realize that you shouldn't trade in your old car to the dealer?
You're supposed to report it stolen and then torch it on the side of the highway at 3 A.M.
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hoov23 9:03AM (2/03/2009)
sorry, above comment was to rocketboy
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TitusTetricus 9:03AM (2/03/2009)
I'd kind of have to agree with the folks saying you shouldn't roll an old loan into a new car loan. Doing things like that is a good portion of how the economy got so wrecked in the first place, people living well beyond their means in most cases. I know there are a few exceptions out there as far as rolling the loan and being able to afford it, but generally that's not the case. I waited to buy a new car until my old loan was paid off, by me, and it was worth it. Unless you're in some serious trouble with transportation, rolling the loan over is pretty silly.
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