Thinking of buying a car? Before you trade in, make sure your dealer isn't on the brink of financial ruin.
aren't the only ones suffering as the economy weakens. More than 5,000 dealerships closed in the U.S. last year, and there will likely be more this year. Desperate dealers are offering all kinds of incentives to lure customers.
It seems like a good time to buy, but if you're still paying off a loan for your car, you should hit the brakes. Trading in your car when purchasing a new one is rarely a smart move, especially now.
When you trade a car you don't completely own, the dealer agrees to pay the outstanding loan before it resells the vehicle. However, if a dealership is struggling and trying to save cash, it might not pay off the loan immediately.
If the dealer goes bankrupt before it pays the loan, the original lenders can go after the previous owner, who assumed the debt was already paid. If you're the buyer, you'll be responsible for paying the loans on both your new and old cars.
Used-car buyers can also fall into this trap. If you buy a traded car before the dealer has paid its loan, the original lender can repossess it.
The best way to avoid trouble is to sell your vehicle yourself. Dealers typically offer less for trade-ins than private buyers because they want to profit from reselling them. They're offering even less now because the weak economy has caused a used-car glut, making them harder to sell.
It's easier to give the car to a dealer than to find a buyer yourself, but it's a costly convenience. If you decide to trade in your car, remember these rules:
1. If you're buying a car that was traded in, ask to see its title and make sure its previous loan was paid and that there are no liens against it.
2. Pay off your car loan before you trade it in. This eliminates the potential for payoff problems if your dealer goes out of business.
3. If you can't pay the loan, ask about the dealer's finances. This might not be easy, but buying from a dealer who is stable can save you a lot of headaches and money later. In most cases, dealers who are part of a larger group are safer than independent dealerships.
4. Don't tell the dealer that you plan to trade in until you've negotiated a price for the new car. This will make it easier to evaluate the offer for your old car. When dealers factor the two together, the trade-in offer might seem better than it is.
5. Find out your car's trade-in value before negotiating. The
Web site will tell you how much a dealer might pay and what you could get by selling it yourself.
Jeffrey Strain has been a freelance personal finance writer for the past 10 years helping people save money and get their finances in order. He currently owns and runs SavingAdvice.com.