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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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    • 1 Second Ago
      • 6 Years Ago
      Well, who's the idiot getting a current car loan rolled into a new car loan? That's bad money policy right there.
        • 6 Years Ago
        You don't have the informational resources available to you to tell me "why most people do this." So keep your "analysis."
        • 6 Years Ago
        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.
        • 6 Years Ago
        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.
        • 6 Years Ago
        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.
        • 6 Years Ago
        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.

        • 6 Years Ago
        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?
      Clyde Batter
      • 6 Years Ago

      What your story fails to mention is that a dealership is not going to pay off the original loan until the buyer has supplied all of her/his documents to the store: title, registration, proof of insurance, all monies, proof of income, proof of residence, and in some cases personal references. Only at that time will the dealership pay off the loan and order the new registration, title, and tags from the DMV.

      Quit bashing something you don't understand.
        • 6 Years Ago
        @Clyde Batter
        I've bought many new cars, and I wasn't able to take delivery of the car until all of that paperwork was provided. Occasionally a missing key, or a held check was allowed, but I always had to have all the documentation. Bottom line is the dealer should know what it needs to pay off a note and demand it at the time of trade-in.

        Besides, most of what you named is needed before you can even get credit approval, let alone drive off with the car.
        • 6 Years Ago
        @Clyde Batter
        The first common sense post in this string. In most cases, it is the consumer who causes the problems. The dealer shares culpability by "spotting" the car without all the proper documentation and "stips" needed to wrap up the transaction. But if they don't spot the car, some other dealer will. I find it amazing that after the consumer has taken delivery, they all the sudden forget that they owe a title(or secured interest filing in states where the bank holds the title) or registraion or some other piece of documentation to finalize the transaction.

        You call for two weeks and leave messages or email after email, and the only time they call back is when their temporary tag is about to expire! Of course, this is the exception and not the rule. Likewise for dealers not paying off previous car loans. BTW...many finance institutions require the dealer to pay off the old car loan. They are deemed MORE trustworthy than the average consumer. Many times, once consumers take delivery, their sense of urgency evaporates. I have also seen, more than once, where a consumer will take out a second loan on the car or use it as collateral for a "dip" loan after they trade the car in.

        I do feel for all those who got hammered by dealers filing BK without satisfying
        their previous loan. That does happen when small franchises and used car lots go belly up. But again, this is the exception and not the rule. In 19 years of auto retail, I saw very, very few cases of this. Put in percentages, it is absolutely miniscule. Although, I would hate to be the person in that very small percentage.
        Although many franchises and points are closing, the dealers own many other points and have made good on their commitments when they shutter a franchise. The shuttering of franchises is needed. Way too many dealer points.

        Lastly, politics are best discussed on political blogs. I prefer townhall.com. From what I read on this blog, many of you would prefer dailykos.com. For those who do not understand bankruptcy law, which is most(including myself), please feel free to be quiet. I have pulled thousands of credit reports. Most people with bk's got them all on their own. Taking out credit cards with no intention of paying them back. Buying homes they knew they couldn't afford. Buying the Biggie Smalls Bling Bling special when they could not afford an Elantra. Shame on the finance instituions who "bought" the paper. But in reality, the final decision is on you: the consumer. No one forces anyone to buy a car. The subprime mess was consumer created, plain and simple. Come sell cars in Baltimore for a few months and, with a straight face, tell me otherwise.
        • 6 Years Ago
        @Clyde Batter
        Clyde, if there is a loan on the car the bank holds the title and the loanee never gets to see the title unless he pays it off himself.
      • 6 Years Ago
      Wow, a useful post on Autoblog! Lets replace all future Knightrider posts with topics like this.
      • 6 Years Ago
      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.
      • 6 Years Ago
      Adds more justification for the term "stealership"
      • 6 Years Ago
      It's a good thing Republicans forced through bankruptcy reform so that businesses, but not tax payers, can file for bankruptcy easily.

      Yay for looking out for the little guy!

      Go Red!
        • 6 Years Ago
        The republicans were looking out for the little guy..,when you think long term. There used to be an epidemic of people applying for all the credit they could get, running their credit cards up to the max, and then delaring bankruptcy. When creditors are forced to absorb those costs it makes the cost of credit more expensive (read higher interest rates and fees) to those of us that play by the rules.
        • 6 Years Ago
        That travesty of a bank reform bill passed the Senate 74-25 and the House 302-126.

        Rs and Ds may disagree on the little things but when it comes to something important like letting giant banks screw the middle class (and, later, bailing them out with trillions in taxpayer money when they accidentally screwed other banks) there's not a dime's difference between them.
        • 6 Years Ago
        So make it easier for the little guy that consistantly gets in over his head with poor judgement to file bankruptcy every ten years leaving those that gave them credit in the first place to hold the bag.
        I believe in the bankruptcy law, it's just been so abused by so many that don't learn the first time. It's a good law meant for those that truly need help. Not those that think it's an open invitation for them to accumulate mass amounts of debt and live way beyond their means only to abuse it and laugh in the face of the creditor and then begin the cycle all over again.
        If anything, the law should be strengthened to allow only one bankruptcy in a lifetime.
        • 6 Years Ago
        Hate that politics is brought into everything when it needs to be discussed at it base, it fails us long before we get to cars. While I don't disagree with you, we need some major changes to how we pick politicians, The little guy will never get much. Republican or Democrat. Big business (lobbyists) pay to elect these people. You had 8 years of Clinton, I don't remember the poor or middle class getting any richer or being better off in any way. Until we elect competent people on ISSUES, the status quo will rule. Electing someone on one word, "change" is nothing but business as usual. Oh, the laugh they must have had when they saw people embracing "change". This year we had to pick from a miserable old woman that is hard to like, an old fart who would most likely die and his silly sidekick and an African American no one had EVER heard of. Think about it, what a lousy set of choices we were given, really! I had hoped the internet would help correct this and give us 3rd party canidates and maybe a viable Libertarian.

        Sorry to rant off, but please stop blaming the party or the President and maybe 1 by 1 we can eventually get someone qualified in there. You know, someone who is not a lwayer with experience balancing at least their own checkbook.
      • 6 Years Ago
      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.
        • 6 Years Ago
        It's not just if you owe more on your car than it's worth, this can happen even if you only owe $1 on the car. It all has to do with the dealer not paying off the loan on the car you traded in.
      • 6 Years Ago
      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.
        • 6 Years Ago
        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).
      • 6 Years Ago
      I don't think they should be able to repossess the car. What is the lesson on that for the person that had no clue and just went and bought a used car? Not to buy used cars? It just doesn't seem right. I think one thing people could do to prevent this is to make sure you aren't going to buy a car that is too expensive and will put you upside down. Make sure you are actually getting the amount for your trade in that you still owe. I found a good article that helps you figure out how much you can spend when buying a new car. http://www.autotropolis.com/wiki/index.php?title=How_Much_Can_You_Spend_on_a_New_Car%3F.
        • 6 Years Ago
        It's almost impossible to know, at the time of purchase, that your 3-4 year-old loan would be upside-down. Market demand changes, thefts of your model may increase, used-resale values, etc. all of which may affect future trade-in values.

        Of course, 5-10 year loans on average vehicles tend to always result in upside-down trade-in situations. Unless a model is HOT (and in demand) for more than 3 years straight, most people will be lucky to break even with their trade-in if it's on a loan period for maybe 4-6 years.
      • 6 Years Ago
      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....
      • 6 Years Ago
      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.
      • 6 Years Ago
      I've traded in a few cars that weren't paid off. In each case, the title holding (lienholder) company sent me confirmation letters that my loan was paid and no other charges were pending. It usually took 2-3 months after I purchased the new car.

      Now, if I don't receive one in the future, I would contact the company that held the loan for my old (traded-in) car to get updated information. If 6 months go by and I don't confirmation letters, I'd back-check with the dealership & the title holder (lienholder) and offer copies of my new car contract with fees paid and such to show evidence that the dealership took responsibility of my old car loan and should have paid it.

      ...sad that you can't trust anybody these days...
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