Let the Buyer Beware…

Last year I wrote in this space about people who are taking out auto loans large enough to cover not only the price of the new car they want to purchase, but also large enough to cover the remaining loan payments , and how unbelievably stupid I thought this was. Now, I don’t mean to offend anyone; I’m not talking about circumstances under which you really need to upgrade your vehicle and can’t afford to pay off your current loan before taking on another one. The thing is, those situations don’t happen all that often; unless your family is expecting one new baby and winds up with quintuplets or something, you’re not really all that likely to suddenly need a whole new class of personal transportation. And even then, you will probably have at least a few months warning…

The situation I just heard about is even worse, however – and in many cases, it’s not the fault of the people being screwed that their problems are happening in the first place. A story being reported this week by the Associated Press details several cases of people who purchased a new car from a dealer who promised to pay off their remaining auto loan, only to find out later that the dealer had gone out of business without making good on that promise, and that they were still on the hook for their old auto loan as well as their new one. Even worse are the cases of people who bought a trade-in car from a dealer, only to find out that the dealer had never paid off the existing auto loan and they are now on the hook for the original owner’s loan! And the worst part of all is that in most cases, there’s nothing they can do about it…

If the dealer you bought your car from has gone out of business without paying off the existing loans on the car, you can always sue them and try to collect enough out of the bankruptcy proceeding to cover your losses, but you’re probably going to be a fair ways down the list of creditors, and it’s unlikely you will recover enough to be worth the effort. Some of the states have laws on the books to prevent this – and many others, notably including California, as trying to pass them – but from the consumer’s perspective, that may just mean that your auto dealer is in prison on criminal charges as well as bankrupt. In which case, you will still have to pay for their criminal wrongdoing…

Meanwhile, state officials in California were investigating 309 cases of this fraud reported during calendar 2008 alone. Several other states (notably including Florida) also had three digits worth of cases last year, and I don’t imagine anything close to 100% of the actual events are being reported. And I don’t suppose this will end before the current financial crisis does; people who are obsessed with this sort of extreme consumerism are not likely to give it up just because there’s a chance they’ll get screwed. After all, there was a much higher probability they’d lose out in the real estate market with the sub-prime loans and predatory lenders, and that doesn’t seem to have stopped millions of people from making some really stupid choices…

In the long run, the only way to avoid this sort of issue is to pay off your entire car loan before you trade in your car. If you’re buying a used car you could always check with your state’s Department of Motor Vehicles (or equivalent) and make sure the title is clean – don’t take the dealer’s word for it; anybody willing to commit fraud is probably not going to mind committing forgery, too. And don’t assume that just because a dealer has been in business for a long time that they can’t go under in this fashion; it’s a dangerous time for anyone in business, and the old saying about “Let the buyer beware!” is more true now than it ever was…