If you're trading in a used car on which you still owe money, it can be convenient to have the car dealer take care of paying off your old loan, as many car buyers do. But it also can be dangerous. And so can buying a used car without making sure any outstanding loan has been discharged. A recent case by the New York attorney general shows why.
The state recently obtained a $339,000 judgment against a Rochester area used-car dealer that the attorney general accused of selling used cars that had remaining loan balances. The dealer was required to pay $289,000 in restitution to 46 consumers, and $50,000 in fines and other costs to New York State.
We've seen this many times before. Here's how it can happen. As part of a new car sale, a dealer agrees to pay off the customer's loan on an existing car, using the vehicle's trade-in value and possibly additional money obtained by increasing the loan amount for the new car. But instead, the dealer sells the used car with the loan instact, issuing the new owner a temporary registration (since states won't register a vehicle in a new owner's name until the debt is paid). Sometimes this occurs because the dealer is in financial trouble and decides to use the money to continue its operations. In other cases, the dealer goes belly-up before the loans are satisfied.
"It usually happens when a dealership is starting to fail financially," Daniel Blinn, managing partner of the Rocky Hill, Conn-based Consumer Law Group, said. Blinn has represented consumers in both scenarios, those who have been victimized when trading in a car with an outstanding loan or buying one.
In such cases, those who trade in their cars find out to their horror that they still owe money on the old loan, as well as on the one for the new vehicle. Those who buy the cars discover they can't register them, even though they too probably now have a loan obligation for the very same vehicle. This is exactly what the attorney general said happened in the New York case, and it's not the first time. For instance, the Illinois attorney general brought a similar case against a dealership in 2009. Consumer officials in Georgia and Michigan have issued warnings about this problem and offered advice on how to avoid it.