Don’t let dealer roll old car loan into new loan

I met a woman who was having trouble making her car payments. When I saw how much she was paying — more than $1,000 a month — I could understand why.

The woman, who earns about $40,000 a year, ended up with that eye-popping payment because when trading in her old car, the dealer rolled the remaining loan balance into a new loan. In describing why she would sign such a deal (because it didn’t make a bit of sense to me), she said the dealer promised to “pay off” her old loan no matter how much she owed.

Technically, the dealer did just that.

But was it misleading to ultimately make her responsible for paying the difference between the value of her trade-in and the balance left on her old loan?

The Federal Trade Commission thinks so and for the first time, under enhanced rulemaking authority courtesy of the Dodd-Frank financial reform act, is going after auto dealers that the regulator claims are duping consumers by implying they have no remaining debt obligation for trade-ins.

Using dollar figures, the FTC explains how this practice works. Say you want to trade in your car for a newer model. But you still owe $18,000 on your loan. Your car is only worth $15,000. This means you are upside down or have negative equity of $3,000, which has to be paid if you want to trade your vehicle. Although their advertising might promise to pay off the $3,000, some dealers will add the amount to the loan for your new car, deduct it from your down payment, or do both.

So even before someone drives his new car off a dealer’s lot, he could be upside down on his loan. About 14 percent of new car shoppers in 2011 traded in a car on which they had negative equity, according to CNW Marketing Research. The average amount per vehicle was $5,106 in 2011.

Five dealerships from four states, South Dakota, North Carolina, Connecticut and West Virginia, have already agreed to settlements that order them to stop running ads promising to pay off a customer’s loan on a trade-in.

Here’s what one dealer’s ad said: “I want your trade no matter how much you owe or what you’re driving. In fact I’ll pay off your trade when you upgrade to a nicer, newer vehicle.”

Said Malini Mithal, assistant director for the FTC’s division of financial practices: “If they tell people they will pay off their trade-in no matter what, then the customer should not be responsible for any amount of that loan.”

You might ask: But how could people be so naive to think they could walk away from debt from a previous vehicle?

“Dealers offer a lot of incentives,” Mithal said. “A reasonable consumer could believe this is just another incentive.”

Because buying or leasing a car is one of the most expensive financial transactions that consumers make, Mithal said the agency will continue to scrutinize dealer ads and seek settlements to stop deceptive practices. “We are putting people on notice,” she said.

The crackdown is part of the agency’s push to identify and address consumer fraud and deceptive practices that particularly target people who are financially distressed.

“We are looking at other auto finance issues,” the FTC official added. “This is a big priority for us.”

Last year the FTC held a series of roundtable events to solicit information on possible consumer protection actions concerning the sale, financing or lease of motor vehicles. The issue about trade-ins was raised by the Iowa Attorney General’s Office during one of the events.

If you think you’ve been deceived by an auto dealer, let the FTC know. The agency can’t resolve your individual claim, but the information is used to investigate industry practices, and the FTC is accepting public comment on the proposed dealer settlements until April 16. Other comments about the sale and financing of vehicles will be accepted until April 1. You can submit comments at tinyurl.com/FTCautodealers.

The FTC has also issued a new consumer alert (“Negative Equity Ads and Auto Trade-ins”) that provides tips and cautions for consumers. You can find the alert on the FTC’s website.

But here’s my quick tip. Don’t roll debt from a trade-in into a new loan. It’s a bad deal.

Michelle Singletary: singletarym@washpost.com.

Washington Post Writers Group

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