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Car Shopping? Be Aware of This Sales Ploy

couple signing papers to buy a car“We’ll pay off your loan no matter how much you owe.”

Have you seen auto sales ads, often online, that promise this? This promise to pay off the balance of any loan you have on a vehicle you plan to trade-in is often misleading, the Federal Trade Commission warns in a recent alert. Why? Many people owe more on the trade-in vehicle than it is worth. This is called “negative equity” or being “upside down” in the loan.

If you plan to trade in a vehicle that is worth less than you owe, that difference between the trade-in’s value and the amount owed must be paid off. The type ads cited imply that the car seller will pay off this balance. But that’s not what happens. Usually, the sellers rollover the loan balance into the loan on the new car. The result of rolling over negative equity into a new car loan is that you usually begin by owing more on the new vehicle than it is worth and will also need a longer term loan in order to have an affordable monthly payment. That means you will be paying more interest on both the negative equity and the loan on the new vehicle.

What can you do to avoid falling into this trap? The best option is to wait to buy a new vehicle until you have paid off the loan or that you are in a positive equity situation. A second option is to think about selling your car yourself if you can retail it for enough to cover the negative equity. A third option is to save more money for a large down payment that will cover the negative equity.

If you are thinking about buying a new car, whether you have positive or negative equity in your trade-in, the first step is to talk to your credit union about your circumstances and the financing options they offer.

For more information

Negative Equity and Auto Trade-Ins, an FTC Alert

FTC Takes Action to Stop Deceptive Car Dealership Ads