Oliver Eikenberry was initially very happy with the slightly used 2009 PT Cruiser he bought three years ago. He got a car he liked and a monthly payment that fit his budget.
He went to a dealer who promised to pay off his old car loan, freeing him up to buy the newer car. The whole process went smoothly, he said. But after the deal, the Pinckney, Mich., resident took a closer look at his paperwork and realized he'd been scammed. The car was priced at $9,000, but in the end Eikenberry's loan amount was closer to $12,000 and lasted 78 months.
The dealer had rolled his old car loan into his new loan, instead of paying it off as promised. Although Eikenberry met his monthly payment, he'll be paying for the new car -- and his old car loan -- for more than a year longer than he hoped.
"At this point, I don't feel like I have much recourse," Eikenberry said.
The Federal Trade Commission said Wednesday it is cracking down on dealers who make big promises about paying off loans and then find ways for consumers to foot the bill. The sales pitches sound the same: "We'll pay off your loan no matter how much you owe!" "Even if you're upside down, we'll pay off your trade!" "Need a new car? We'll pay off your loan."
Unscrupulous dealers make that big promise and then, hidden in loan paperwork, they add the cost of the old car loan onto the price of the new loan. The buyer often ends up with a much longer loan than expected, paying off the old car and new car at the same time. In some cases, dealers forced customers to pay off the old loan in cash before they could get their new car.
In the past, dealers could promise to pay off loans because the trade-in car was usually worth more than what the owner owed the bank. But over the past decade, car loans terms have stretched, sometimes approaching seven years. That means people can owe more than their car is worth. That's called negative equity, or being upside-down. So if you own a car that's worth $5,000, but you owe $7,000, you would be $2,000 upside-down.
The FTC forced five dealers to sign settlement agreements saying they'll stop the practice, which the agency called deceptive. Because it was the first time the FTC has cracked down on these kinds of transactions, the dealers weren't fined. The agency promised continued monitoring of dealers who use loan payoff promises to hook potential customers.
"It's a practice the industry is learning for the first time that the FTC finds deceptive," said Malini Mithal, assistant director of the FTC division of financial practices. "We're starting to take it seriously."
The FTC said four dealers rolled negative equity into new car loans. They included Ramey Motors in Princeton, W.V., Key Hyundai of Manchester, Conn., Hyundai of Milford LLC, also in Connecticut, and Billion Auto in Sioux Falls, S.D. A fifth dealer, Frank Myers AutoMaxx, of Winston-Salem, N.C., made buyers pay off their old loans in cash before releasing their new cars, the FTC said. Frank Myers AutoMaxx advertises itself as a consumer advocate, promising to teach customers how to spot scams. Wearing red, white and blue outfits and an American flag top hat, dealership owner Tracy Myers appeared in commercials promising the dealership would pay off old car loans.
Myers said he never meant to deceive customers. But explaining the trade-in process and negative equity is difficult in a 30-second commercial. When the FTC approached him and said his ads may be deceptive, he agreed to remove five commercials from the Internet. The FTC said those ads made it seem as if customers buying from the dealership would not be obligated to pay off their old loans. Instead, many customers were presented with a bill and told to pay in cash before they could get their new car.
'We're a full-disclosure dealership, so we would tell the customer how much they owed," Myers told The Huffington Post. "I was fairly naive and thought the customer understood" the process, he said. He said he'll comply with the FTC rules. "It's like driving the speed limit," he said. "You might think it should be 65, but if it's 55, you abide by that."
Dealers often try to sell customers based on a monthly payment, not the final price of the car. It's a trap that unscrupulous dealers use to get car buyers to pay more than they were expecting. Salesmen will often ask -- "What do you want your payments to be?" -- because they know they can massage the final numbers to hit a monthly budget. All they have to do to reduce the monthly payment is to extend the life of a loan from 36 months to 48 months, or keep going to 60 months or 72 months.
But that increases the overall cost of the car, because interest rates are higher for longer loans and because buyers pay that interest for more months.
Buyers who want to protect themselves from trade-in scams or other unforeseen problems should always negotiate on the final sales price of the car, not the monthly payment. Calculators like the one at Kelley Blue Book or at BankRate.com can help you determine how much you can afford per month before you even head into the dealership.