When Dealers Default

February 28, 2009

In the midst of the collapse of the North American automotive industry, a new crisis is occurring that is totally without precedent. In a development that is taking both analysts and borrowers by surprise, car buyers are being held responsible for old debts on traded in vehicles that were *supposed* to be the responsibility of the dealers who accepted the trade.

This provides yet another example of how the economic crisis is turning the tables on traditionally held maxims of financial practice and wisdom, and is proof positive that consumers in today’s market need to do all that they can to protect themselves from attacks on all sides.

So, what exactly is happening? First of all, across the country, auto dealerships are going belly up. This is common knowledge. What is also common knowledge is that when many people buy a new car, they first trade in the older car that they’re currently driving. Usually when this happens, the dealer takes on the responsibility for the remaining payments that are due on that vehicle, and gives a credit equal to the value of that vehicle to the buyer, which is then used to offset the cost of the new vehicle.

However, when many of these dealers are going out of business, they’re turning to an unheard of tactic to absolve themselves of debt: turning it back on the consumer who traded the vehicle in! This means that customers who have recently bought new cars are finding themselves stuck with not only the payments on those new cars, but also the remaining payments on the used cars they traded in that they were supposed to have been absolved of! The obvious result of this is that they’re paying for two cars they can’t afford, and people’s credit ratings are being totally ruined with little they can do to prevent it from happening.

It’s a terrible thing to have one’s credit destroyed. It’s even worse to have it happen when it’s not one’s fault in the slightest. So, what can one do to guard against this problem, or to fix it once it has happened?

First of all, recognize the overall trend that is allowing this to happen in the first place. Historically, car loans were usually paid over a two or three year span of time. Often, when they were traded in towards a new car, there were no payments left at all.

Nowadays, however, it is increasingly common for car loans to extend to as many as seven years, so that people can afford to pay their vehicle payments in the midst of a crumbling economy. Because of this, the whole idea of their being a lien remaining on a car that goes in for trade is relatively new, and that might explain why dealerships, for now, are able to “get away” with this kind of chicanery.

It’s almost certain that in the near future, measures will be put in place to guard against this kind of unethical behavior on behalf of auto dealers filing for bankruptcy. In the meantime, however, it is best only to do business with those dealers who have a reputation for quality, and who seem less likely to be filing for bankruptcy. This same principle, of course, applies not just to cars but credit-based transactions in general.