NEW YORK–A little-discussed but “open secret” at many car dealerships is growing and causing losses to credit unions and banks that make auto loans, as well as the borrowers who are already in trouble, according to one new report.
What many car dealers have been doing, according to the Wall Street Journal, is telling borrowers who can’t afford their current loan that they should just turn their car in and the old loan will be forgiven, with the borrower then put into a new loan for a different vehicle. The borrower then discovers he or she is then on the hook for two car payments.
The Journal profiled several borrowers and at least one credit union that have found themselves in that situation, including Joyce Parks, who told the Journal she was struggling with payments on a Kia Soul when a dealership encouraged her to stop making loan payments.
“Ms. Parks, 63, says employees told her that she couldn’t trade in the Soul, but that she could buy another car. To get rid of the Soul, the dealership told her, she should have the lender repossess it, Ms. Parks said,” the Journal reported. The practice, said the Journal. Is known among dealers as “kicking the trade.”
‘Difficult to Estimate’
“It is difficult to estimate how often this happens. Auto-sales veterans say the practice is an open secret in some showrooms,: the Journal reported. “Broadly, vehicles are getting more expensive and Americans are struggling to afford them. Dealerships now make more money arranging financing than selling vehicles. If a car loan goes bad, it typically isn’t the dealership on the hook—it is the borrower or lender.”
The National Automobile Dealers Association told the Journal there is no evidence to suggest “kicking the trade” is prevalent, and added dealerships “could not sustain carefully cultivated relationships” with lenders “if they were to engage in the type of behavior alleged,” a spokesman said.
But consumer lawyers told the Journal they have seen more such cases. Five years ago, “it happened two or three times per year,” Daniel Blinn, a Connecticut-based attorney who has sued dealerships and auto lenders, told the Journal. “Now, we hear it at least once per month.”
‘Quick Souring’
The Journal report cited data from TransUnion that nearly 24 million U.S. vehicle loans were originated in 2018. About 300,000 of those vehicles were repossessed within 12 months, up 17% from 2014. “Such a quick souring of the loan can be a signal of some sort of auto fraud,” the Journal reported. “Roughly a fifth of people who have had a car repossessed over the last several years take out another auto loan within a year of the repossession, TransUnion says.”
The Journal noted Connex Credit Union sued Connecticut dealership Barberino Nissan in 2016, alleging the dealership “repeatedly told customers to just deliver the keys to Connex.” Barberino denied the accusations but agreed to a settlement roughly a year ago, the dealership’s lawyer, told the Wall Street Journal.
Another Borrower’s Story
The Journal report also shared the story of Whitney Davis, whose Hyundai Sonata was having mechanical problems in 2016. When she returned to the Connecticut dealership where she bought it, the Journal reported the dealership told her it would take the car and sell her another one, she said.
“But after she signed a loan for a used Nissan Altima, she was told she couldn’t trade in the Sonata, she said. When she explained she couldn’t afford two car loans, an employee (of Car Nation) told her to have the Sonata’s lender take it back, she said,” the Journal reported. “The Sonata’s lender took back the vehicle and soon informed Ms. Davis she still owed nearly $9,000. Her credit score plummeted.”
Davis has sued the dealership, but it has shut down. She recently got a loan for a used Jeep Grand Cherokee, the Journal reported.