The trade-in, where a buyer hands a car back to a dealership and uses it as credit toward another one, is often a crucial step in car buying. But some dealerships are instead telling buyers to give their old cars back to their lenders—and selling them new ones—in a practice known as “kicking the trade,” The Wall Street Journal reports.
It is difficult to estimate how often this happens. Auto-sales veterans say the practice is an open secret in some showrooms because if a car loan goes bad, it typically isn’t the dealership on the hook—it is the borrower or lender, and dealerships make money off of arranging financing.
The National Automobile Dealers Association says there is no evidence to suggest “kicking the trade” is prevalent. However, consumer lawyers say they have seen more such cases. Five years ago, “it happened two or three times per year,” says Daniel Blinn, a Connecticut-based attorney who has sued dealerships and auto lenders. “Now, we hear it at least once per month.”
Credit-reporting firm TransUnion calculates 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.
Roughly one-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.
Dealerships typically don’t make loans. When consumers need financing, a dealership electronically sends their loan applications to banks, credit unions and other lenders. They, in turn, decide whether to fund the loan.
Problems often begin with consumers who buy cars they can’t afford or sign loans they don’t understand. 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.
Lenders generally say they will cut ties with dealerships that do this. Often, though, the lenders aren’t aware it is happening. Read the full story.
