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February 18, 2020 | Auto Dealers Suggesting Customers Default on Old Loan to Buy New Vehicle

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel (www.venablepark.com) Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog: www.jugglingdynamite.com

As auto sales slump worldwide, desperate dealers–many of whom built out large showrooms and overhead 2007 to 2017–are trying new tactics to drive sales amid a shrinking pool of customers with the resources, appetite or ability to take on more debt.

With many customers owing more on their auto loan than the vehicle is worth, trade-ins are not helping.  So, the latest trick is to encourage buyers to take out a second loan for a second car and then stop making payments on their original auto loan and ask the lender to repossess the first vehicle.

It’s called “kicking the trade”, and as the Wall Street Journal reports the impacts on credit scores, cash flow, lenders and financial stability is, of course, highly destructive.

Booking sales in one sector at the expense of everyone else is a model that must end.

Wall Street Journal reporters AnnaMaria Andriotis and Ben Eisen explain more in this audio report.

Problems often begin with consumers who buy cars they can’t afford or sign loans they don’t understand. But dealerships can compound the trouble. Some dealerships are inflating borrowers’ incomes on loan applications so they can sell them bigger or more expensive cars, according to lawsuits and interviews.

When dealerships kick the trade, they typically get a lender to approve a loan for the buyer’s new vehicle. Next, the buyer generally goes home with two vehicles and two loans. It is only then the buyer asks the original lender to repossess the original car.

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February 18th, 2020

Posted In: Juggling Dynamite

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