Failure To Pay Off Vehicle Trade-In Loans

Your local car dealership’s ad says, “Bring us your trade-in! We’ll pay off your car no matter what you owe!” You head to the showroom and find a car. The salesperson promises to pay off the loan on your trade-in. A while later, your bank calls to ask why you missed the last monthly payment on your old car. Eventually, you learn that the dealership never paid off the loan. 

We discuss the options for car buyers when a dealer fails to pay off the loan on a trade-in vehicle. However, consumer protection laws can be complex. If you have further questions, discuss your situation with an auto fraud lawyer near you. 

Auto Financing and Equity

Equity is the amount your car is worth versus the amount you still owe. For example, if you owe $10,000 on a car worth $15,000, you have $5,000 worth of equity. You have positive equity if your car is worth more than you owe. 

However, it’s also possible to owe more than a car is worth. For example, your car is worth $12,000, but you owe $16,000. This is called negative equity or being upside down in your loan. 

Can I Trade in a Car Before It’s Paid Off? 

While you can trade in your car, beware of two potential pitfalls. 

First, asking a dealership to pay off your auto loan is risky. Most dealerships behave ethically, but some accept trade-ins with no plans to pay off the loan. Even reputable car dealers may not act immediately. Some states’ laws limit the time dealers have to pay off trade-ins. California, for instance, gives them 21 days.

In states without legal deadlines, there’s no way to know when the loan will be paid. In these states, a contract is your best protection. But even then, outside factors like financial hardships or clerical errors could cause a delayed payment. 

Any delay in your loan payment is cause for concern. Remember, your car loan is a contract between you and your bank, credit union, or finance company. So, the lender will hold you – not the dealership – responsible for any payments until the loan is completely repaid. So, if the dealership takes a long time to pay off the loan on your old vehicle or fails to pay it, you’re still on the hook. As such, you must make payments on the current vehicle and the old one until the trade-in loan is repaid.

If you miss any payments on the old vehicle, your lender will report them to the credit bureaus. One late payment can lower your credit score by up to 100 points. Worse, after several missed payments, the lender can repossess the car. The repossession will also appear on your credit report.

Second, negative equity creates other issues. Assume that you owe $15,000 on a car worth $12,500. Even if the dealership pays $12,500 toward your old vehicle, it won’t pay the additional $2500. Most dealerships add this negative equity to the loan for the new car. Considering interest rates, the length of the loan, and other factors, even a tiny amount of negative equity can quickly raise the total cost of your new vehicle.

How To Avoid Dealership Trade-In Payoff Scams 

Dealership trade-in scams can cause severe financial consequences. But there are ways to protect yourself. First, whether you have positive or negative equity, it is best to wait until your trade-in loan is repaid. 

If you can’t wait until your car is fully paid off for safety or other reasons, here are some tips: 

If You Have Negative Equity…

Delay your car purchase as long as you can. Use the time to pay down your loan balance until you reach positive equity. 

If you can’t completely erase your negative equity, give the dealer substantial money toward it. This amount is in addition to, not instead of, your down payment. Finally, be clear about how negative equity will affect the new loan. 

If You Have Positive or Slightly Negative Equity…

Sell your car yourself. You’ll probably get more money than the dealership will offer. Research your car’s trade-in value to counter any lowball trade-in offers. You can do this by visiting the Better Business Bureau’s website to investigate the dealer’s reputation. 

Get everything in writing. Make sure that your sales contract clearly states that the dealership is supposed to pay off the loan on your trade-in and that it also says when the payment must take place. Keep all sales contracts and other dealership documents in a safe place. 

What Can I Do if the Dealership Doesn’t Pay Off the Loan on My Trade-In? 

First, follow up with the dealership. Remind them of the contract’s deadline. Most reputable dealerships will accept a simple phone call or email. 

Second, talk to your lender. Show them the documents stating that the dealer promised to pay off the loan by a particular date. Again, the loan is in your name, so the lender can legally hold you responsible. However, some lenders will work with you to protect your credit history if you prove that the dealer promised to pay the loan. 

If the dealership still refuses to make good on its verbal or written promises, it may be violating state or federal laws. In this case, you may need legal advice. If you need legal help because a dealership failed to pay off your loan, find an auto dealer fraud lawyer near you.