FTC Cracks Down on Car Loan Scams
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UPDATED: Mar 16, 2012
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We’ve all seen the commercials: a schmoozey car salesman dressed in a nice suit, maybe wearing some sort of patriotic accessory, just begging viewers to come in to his lot because he wants to “give” away his vehicles. A growing trend in those commercials is the dealership’s promise to pay off existing car loans on old vehicles if consumers are willing to trade them in for a new vehicle.
But such promises are little more than veiled scams that have drawn the ire of the Federal Trade Commission (FTC).
Unsuspecting consumers see and hear such commercials and believe they can simply trade their current vehicle in, relive themselves of an old car loan payment, and pick up a brand new vehicle. But instead, they are surprised to see their auto loan amount as substantially higher than what they thought they were agreeing to.
That’s because these dealerships don’t really “pay off” old auto loans. Instead, they take the negative equity in an old automobile and attach that to the total of the new car loan a consumer agrees to.
For instance, if a borrower has an old vehicle with an appraised value of $3,000, but he still owes $5,000 on the loan, that borrower has $2,000 of negative equity. After seeing one of these advertisements that negative-equity-holding consumer strolls into a dealership and finances a new vehicle for $10,000. After smooth talking, the salesman gets the consumer to sign a contract—and it’s not until after both parties are legally bound together that the borrower finds he has agreed to a $12,000 car loan: $10,000 for the new loan and $2,000 for the negative equity remaining in the old one.
“It’s a practice that the industry is learning for the first time that the FTC finds deceptive,” explained Malini Mithal, assistant director of the FTC division of financial practices, to the Huffington Post.
Regardless of whether or not the FTC has viewed it as deceptive, the dealerships ought to have realized their misleading actions themselves.
Particularly when their advertisements are worded with such phrases as:
- “We want to pay off your car.”
- “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.”
- “We’ll pay off your loan no matter how much you owe and get you into the car of your dreams.”
The FTC has recently forced five dealerships to sign a settlement agreeing to stop such practices since the dealerships are deceiving customers. Those dealerships include Ramey Motors in West Virginia, Key Hyundai in Connecticut, Hyundai of Milford LLC in Connecticut, Billion Auto in South Dakota, and Frank Myers AutoMaxx in North Carolina.