SACRAMENTO, Calif. — The national wave of auto dealership closings has come crashing down on thousands of people who are on the hook for used-car loans that dealers were supposed to absolve.
When a car buyer still owes money on a vehicle he is trading in, the dealer promises to pay off the outstanding loan, then resells the vehicle. But some dealers going out of business are sticking consumers with the bill. Lenders can then go after the previous owner who thought the debt was paid, or repossess the car from the new owner who assumed it came with clear title.
"It's devastating ... because they have two car payments and they can't afford them," said Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a Sacramento-based non-profit that lobbies on behalf of vehicle owners. "Their credit is destroyed for no fault of their own."
Regulators in California and other states, including Florida, Iowa and Washington, are seeing a surge in consumer complaints. They warn the problem is sure to grow this year because of the deepening recession and continued trouble in the auto industry.
About a quarter of all car buyers are vulnerable because they still owe money on their trade-in or lease when they buy another vehicle, according to industry tracker Edmunds.com. It's become more common for a driver to owe money on a trade-in as people stretch their car payments over six or seven years to make them more affordable.
Inga and Brian Randle of Elk Grove, near Sacramento, are among those who got burned.
In 2006, they bought two 2001 Mercedes vehicles, but they later found out that the small Sacramento dealer had not paid off the previous owners' liens. Creditors called, and the Randles found they owed $40,000.
"I couldn't afford to keep paying. It's a huge stain on my credit — and I had very good credit," Inga Randle said.