It’s very easy to get confused about how the pay-off is handled in a car deal. Almost everyone who trades a car into a car dealer on a new purchase has a pay-off on their trade.
The pay-off is how much you owe the lender for your trade. It in no way reflects how much your trade-in is worth, and most often the pay-off is higher than your trade-in’s actual value.
When you buy a vehicle this is how the numbers break down:
Selling price of the new vehicle
+ Any Add-ons like extended warranty, protection package, etc.
+ Sales tax, title, documentation and registration fees
– Trade-in allowance
– Cash down and rebates
+ Pay-off on trade
= Total Amount Due
Now adding the pay-off back on to the “Amount Due” tends to throw a lot of people for a loop! They have a hard time understanding why the pay-off has to be added back on once the dealer agrees to a trade-in figure.
You must remember, the loan on the trade-in is yours — not the car dealers — and it must be paid off so the dealer can get a clear title to the trade-in. In essence, the car dealer is buying the trade-in from you, and you can’t sell it to him if there is an outstanding balance owed on it. So the pay-off gets added on to your “Amount Due,” and then the dealer takes that money and pays off the loan. The lending institution in return sends the car dealer a clear title and everyone is happy.
Remember, the pay-off is your responsibility not the car dealer’s. The dealer is actually doing you a service by simplifying the way you pay off your vehicle. It also allows the dealer to control the process so they don’t get stuck with a trade-in that has a lien and an outstanding loan on it.
Now having said that, remember that most car dealers are honest and do business in a legitimate way, and they will pay off your outstanding loan promptly, or as soon as they get the funds on the car deal. It’s to their benefit to pay it off right away so they can then sell the car. If they don’t have a clear title for the vehicle they can’t legally sell it.
However, there have been occasions when a car dealer waits to make the pay-off, or in rare cases doesn’t pay it off at all. This is illegal and can get a dealer in a lot of trouble, but sometimes they are having cash flow problems or, in very rare cases you come up against a crook.
If the car dealer doesn’t pay-off you loan within a reasonable amount of time (one to three weeks) the lender is going to be looking for you to make a payment when it comes due. I have even seen cases where the customer didn’t know for several months that the pay-off hadn’t been made, and it was actually causing late payment entries on their credit report.
Remember . . . I said this was a rare occurrence, so don’t panic if you have a trade-in with a pay-off. There are steps you can take to protect yourself. If you trade a car with a pay-off get a written statement from the dealership signed by either the Sales Manager or the Finance Manager stating that they will in fact pay off your trade-in, and by what date. The statement should include the following information:
- The date of the document
- The amount of the pay-off
- By what date will the pay-off be made by
- How long the pay-off amount is good for (because the amount changes as interest accrues)
- The year, make, model, mileage and serial number of the car being paid off
- The name and mailing address of the lending institution
- The name of the person at the lending institution who verified the pay-off amount
- The signature of either the Sales Manager or the Finance Manager
Any reputable dealership should be happy to accommodate your request for this form. In fact, a professional dealership will have such a form as a routine part of their paperwork.
This way if anything goes awry you have something in writing to protect yourself, and to prove the car dealer agreed to make the pay-off. As I said before, most dealers are honest, but it’s always a good business practice to protect yourself.
If a dealer refuses to give you a written statement on the pay-off you should not complete the deal. To me this would be a big red flag! Go do business with another car dealer who will accommodate your request. There are too many honest car dealers out there for you to waste your time with a questionable one.