Trading in a car you still owe money on is a common but sensitive issue. What if the auto dealer fails to pay off your trade-in vehicle’s current loan? We’ve been warning customers about the perils of trading in your old automobile when you go out to get a new one since we started in the late 1990s. This article will share some thoughts about trading in a car you still owe money on.
Trading in a car you still owe money on: Points to consider
Unfortunately, most automobile buyers make extremely costly and unpleasant blunders, such as trading in their current vehicle while purchasing a new vehicle, or even worse, trading in a vehicle on which they still owe money.
1. What happens when you trade in a car that has an outstanding loan balance?
You should never trade in a car on which you owe money, so what is intended to happen is that you are not supposed to trade in a car on which you owe money, so that was a trick question.
In an ideal world, your vehicle salesman would find out the current 10-day payback amount from the lender through which you received your car loan so that they may pay it off and finish it out.
2. What are some excellent reasons to avoid trading in a car on which you still owe money?
Keep in mind that the majority of auto purchasers are underwater on their loans, meaning they owe the bank more than the trade-in value offered by the dealer. In this situation, you are liable for the difference in value, which is normally added to your new auto loan.
Most people would have second thoughts about a vehicle payment that reflects two automobiles when they believed they were only buying one car, thus car salesmen don’t go out of their way to advise you of this.
Most automobile buyers mistakenly believe that once they trade in a car, it is no longer theirs, along with all payments and obligations. Any remaining balance on the prior vehicle is always padded into the payments on the new vehicle. It frequently puts you in debt on your new auto loan from the start. This is a circumstance you must avoid at all costs.
3. Within 10 days, your dealer should pay off your trade-in.
When you call a lender for your payback amount, they usually offer you a payoff number that is good for 10 days, after which time interest begins to accumulate and they have to recalculate the amount and give you a new payoff figure that is good for 10 days from your current request date.
This is the most important aspect of the whole deal. Your trade-in vehicle must be paid off within 10 days, and it must be paid off before your next monthly auto loan payment due date. If they fail to do so, you will be considered late on your payments, and you will be charged a late monthly payment fee; they don’t care if you sold your automobile; you still owe them money.
4. When the dealer fails to pay off your trade-in automobile loan, things become nasty.
Over the years, we’ve heard from vehicle buyers who traded in their automobile with outstanding loan debt to buy a new car, and the dealer was meant to pay off the loan but failed to do so. The buyer then goes on to enjoy their new automobile, believing that the old car is no longer a part of their lives until they begin to get threatening letters and phone calls from the lender holding the note on their prior car.
These car buyers are now a month late, according to the lender, and they must pay penalties and late fees. This smacks a lot of people in the face, catching them completely off guard, because, as they all tell me, “The dealer now owns that car, not me! It was about a month ago when I sold it to them.”
5. Your old auto loan was not paid off by the dealer, and now the lender is pursuing you.
While you were enjoying your new automobile, you were unaware that the interest on your previous car loan was still collecting since the dealer had not paid off the loan as you had assumed. This is when everyone makes the mistake of assuming that because they signed documents, the deal is done. They are completely incorrect, and the meter is still running.
6. It’s not a done deal just because you trade in your old automobile for a new one.
The most common blunder made by automobile purchasers is that they believe that simply because they traded in their previous car and no longer own it, they are no longer responsible for it. The issue is that, as the old adage goes, no project is complete until the paperwork is completed.
While you may no longer own the automobile, you are still responsible for the loan until it is fully paid off. You may dispute with the bank all you want about how you sold your automobile to a car dealer. The bank is unconcerned because they have a contract with you to repay the loan, which is written between you and the bank, not the auto dealer.
Typically, the auto dealer does not assume your role as a borrower; instead, they assume your role as the car’s owner. They pay off the debt on your trade-in, which should be less than your trade-in value because they don’t want to take your position as the borrower. However, the bank just sees you as a client who is responsible for repaying the loan until it is completely paid off and the lien is fulfilled.
The contract between the bank and you, not the bank and the auto dealer, is what matters to the lender. Over the years, we’ve heard from folks whose credit has been damaged as a result of this, because the lender will put a black mark on your credit report for being 30, 60, or 90 days late, on top of all the late fees and interest they will charge you.
It is your responsibility to ensure that the loan was paid off by the dealer days after the transaction was completed. Continue phoning your lender to clarify when and whether the loan was paid off, as well as to ensure there are no outstanding balances.
7. You now understand why you should not trade in an automobile on which you owe money.
This scenario depicted above occurs more frequently than you may imagine, and many automobile buyers have complained about it over the years. This is why we’ve been advising you for years not to trade in your automobile if you owe money on it, since the danger of the car dealer not paying off your loan is too great, and you’ll be stuck paying additional interest, your credit report will be ruined, and you’ll suffer emotionally.
8. Is this permissible? Is there anything that can be done to make the dealer pay?
Because there are no regulations requiring the dealer to pay off your auto loan, there isn’t much you can do. There was no written statement on the dealer’s documentation that they would pay off your auto loan, and you failed to compel them to do so.
9. If the auto dealer fails to repay your loan, register a complaint with the appropriate authorities.
You may only make an online complaint with the Better Business Bureau or your state’s attorney general, as well as a public critique of this vehicle dealer’s shady dealings on the Ripoff Report website. Anyone looking up the auto dealer on the BBB or Ripoff Report will see your concerns.
Even if the salesman or finance person ignores your phone calls, the Better Business Bureau and Attorney General’s office are agencies that auto dealership management must pay attention to. They will lose points if they do not respond to Better Business Bureau complaints.
10. How to ensure that your existing auto loan is paid off by the dealer.
You need to strike first, forcing the dealer to state in writing exactly how much they are offering you for your trade and that they will pay off your auto loan in full within 10 days or they will be responsible for 100% of all charges incurred as a result of their failure to do so. If the dealer refuses to provide you with anything in writing, leave immediately because your life will soon be a living hell.
It’s very bad there aren’t any rules in place requiring dealers to provide a standard form of disclosure that itemizes the trade-in value, the amount owing on the trade-in, and who is responsible for the loan payback if one exists. You might also have the dealer put in “Dealer agrees to pay off trade-in automobile loan in full within 10 days” where the signatures are listed on your paperwork.
Any car dealership that refuses to honor your minor request by adding that one tiny little phrase to the paperwork is unethical because they don’t want to protect your rights while giving them carte blanche to commit a variety of scams against you, and as a result, you should leave immediately; this is a deal killer, and the deal is over at this point.
If the dealer says you don’t have to worry since it’s already started in the fine print that they’ll pay off your auto loan, demand to see the precise language; otherwise, they’re lying. If they’re intelligent enough to tell you it’s already in the contract, they’re also intelligent enough to show you where it is.
This is where you should be extra vigilant throughout your transaction since you want the dealer to specify precisely how much they are providing you for your trade-in on your paperwork so there is no mistake.
These two photographs show genuine new automobile paperwork showing where the dealer noted how much they are providing the buyer for their trade-in vehicle. This is where the rubber meets the road, since if they say they’ll offer you $8670 for your trade-in, it best be listed on the paperwork as such, with no gimmicks.
11. What should you do if you still owe money on a trade-in?
If you still owe money on your existing used car loan, we recommend that you try to pay it off yourself. This way, you get the title in a week, you don’t have to worry about who will pay the loan, and you have a car that is easier to sell to more potential buyers, both private buyers and car dealers because many used car buyers will refuse to buy a vehicle from you if it has a loan balance or unless you have the title.
Because you no longer have to trade in your car, you can simply sell it privately first and use the higher amount of proceeds as a down payment on your new car. This is a far better financial and logistical position for you to be in than taking a chance and hoping the dealer pays off your auto loan on time.
Another advantage of paying off your old car loan first is that you avoid dealing with a car salesperson who tries to undervalue your trade-in. Remember that you might possibly make $3,000 to $6,000 more if you sell your used car privately because dealers must give you far less than the Kelly Blue Book used car market value in order to recondition it and sell it at a profit.
12. What if you are unable to repay your auto loan because you are in default?
What should you do if you are upside down on your existing vehicle loan, and trust me, many of our CarBuyingTipos.com site users tell us they are thousands of dollars in debt, and you don’t have the money to pay it off? You’re not going to appreciate my recommendation in this situation.
The problem is that you’ve dug yourself a hole and created a worst-case financial scenario, leaving a massive trail of destruction in your wake, so our best advice is to ride out the storm, keep the car you’re upside down on and try to get ahead of the curve by making extra principal payments whenever you can until you’re back on track.
Most automobile purchasers have a ridiculous lack of forethought, and many make the error of putting no money down when we recommend 20%, and of breaching our 48-month maximum loan recommendation in favor of 84-months instead. All of this adds up to you spending a lot more money in interest over time and driving off the lot with your auto loan upside down.
Get a shorter automobile loan, such as 48 months, to avoid this used car loan balance trade-in scenario. If you decide to trade in your current vehicle in five years, your auto loan will have already been paid off. It’s truly that simple; you just have to plan forward five years to understand what hurdles you should avoid.
Notify all of your friends, and do not allow this to happen to you.
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