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As dealers fold, customers stuck with debt on trade-ins

Inga Randle of Sacramento, Calif., faced problems after buying two autos from a dealer who did not pay off old loans on them.

Associated Press

Inga Randle of Sacramento, Calif., faced problems after buying two autos from a dealer who did not pay off old loans on them.

SACRAMENTO, Calif. — The national wave of auto dealership closures has come crashing down on thousands of people who are on the hook for used-car loans that dealers were supposed to absolve.

When a car buyer still owes money on a vehicle he is trading in, the dealer promises to pay off the outstanding loan, then resell the vehicle. But as more dealers go out of business, some are sticking consumers with the bill. Lenders can then go after the previous owner who thought the debt was paid, or repossess the car from the new owner who assumed it came with clear title.

"It's devastating for people when it happens because they have two car payments and they can't afford them," said Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a Sacramento-based nonprofit that lobbies on behalf of vehicle owners. "Their credit is destroyed through no fault of their own because the dealer defaulted."

Regulators in California, Florida, Iowa and Washington state are seeing a surge in consumer complaints. They warn the problem is sure to grow this year because of the deepening recession and continued trouble in the auto industry.

About a quarter of all car buyers are vulnerable because they still owe money on their trade-in or lease when they buy another vehicle, according to industry tracker Edmunds.com.

Between March 1 and Sept. 1, 2008, Florida officials deemed valid 103 complaints regarding auto dealers' delinquent loan payments. By comparison, there were 37 confirmed complaints during the same period in 2007.

Florida also received more than 1,886 confirmed complaints of delays in title transfers during that period in 2008, compared with 900 a year earlier, said Ann Nucatola, spokeswoman for the state's Motor Vehicle Department.

Trade-in tips

• If you owe on your old car and can afford to pay off the loan, do so before trading in. Otherwise, look for high-volume dealers who are part of a larger dealership group.

• If you are buying a trade-in, make sure the title is in the dealer's name — not the former owner's.

• Check the vehicle's history. Many dealers provide them for free.

• If you run into problems, complain to the agency that regulates auto dealers in your state, often the Department of Motor Vehicles.

• Hire a lawyer. But if the dealer goes out of business and is bankrupt, there often is no money left.

As dealers fold, customers stuck with debt on trade-ins 02/02/09 [Last modified: Monday, February 2, 2009 10:13pm]
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