The Expert Podcast

We're seeing more and more of these vehicle title problems popping up from people who bought cars at dealerships. This is not the same as buying a car from some guy on Craigslist, on the street corner, or on OfferUp or Facebook Marketplace, where the seller might be sketchy at best. These are people who purchased cars from licensed car dealerships and didn’t get a title. For example, one person bought a cheap Wrangler, but the dealer wouldn’t provide a title, making it impossible to get license plates. When they went back to the dealer, the dealer laughed at them. Now, they can’t drive their new vehicle because they can’t get titles and plates.

How does this even happen at a dealership? Well, it is happening. For instance, a new car dealership, Lefon Hyundai in Detroit, had its license suspended for selling cars without titles. They were selling vehicles without having the title in their possession or properly completing the state’s title application process. How does this occur? Here's a scenario that may explain it, which is essential for consumers to understand when buying a car from a dealer.

Dealers, like consumers, actually finance their cars. If you buy a car, you get a car loan and make payments. Similarly, dealers have loans on the vehicles in their inventory, called floor plan financing. The term "floor" comes from the cars on the showroom floor. Even if a dealer has 100 cars averaging $35,000 each, that's $3.5 million in inventory. For new car dealers with larger inventories, the financial scale is even greater. Even small mom-and-pop car dealers with just 10 cars worth $7,000 each face a $70,000 investment. They use floor plan financing to manage this.

Here’s how it works: when dealers buy cars—whether from an auction, the factory, or through a trade-in—they contact their floor plan lender. The lender pays for the car, holds the title, and the dealer then sells the car. The lender retains the title to ensure the dealer doesn’t sell the car, pocket the money, and fail to pay off the loan. For example, if a dealer buys a car for $22,000, sells it for $25,000, they are supposed to pay the lender the $22,000 to get the title. Once they have the title, they can apply it in the buyer's name.

However, problems arise when dealerships run short on cash. They may use a buyer's payment for other expenses like payroll or rent, delaying the title transfer. This creates a Ponzi-like scenario where money from one buyer is used to pay off another car's title. If a dealership falls behind on multiple cars, the lender can declare an "out-of-trust" scenario, which can result in significant financial issues for the dealer.

The consequences extend to buyers who finance their car purchases. If you buy a car for $25,000 with a loan from a bank like Chase, the bank pays the dealer. But if the dealer fails to provide the title to the bank, the buyer is left paying for a car they can't legally drive. The bank won’t waive the loan because it already paid the dealer. In some cases, the bank might convert the car loan into a personal loan with a higher interest rate, increasing the buyer’s financial burden.

To avoid these issues, we recommend that buyers ask the dealer to show them the title before finalizing a purchase. While the dealer won’t give you the title at that point, they should have it in their possession. If the dealer cannot show the title or claims it is with the floor plan lender, you should ask them to secure the title before completing the transaction. A dealer unable to do this may be cash-strapped, and it’s wise to reconsider doing business with them.

Ensuring the dealer has the title in their possession helps protect you from getting stuck with a car you cannot legally drive. If you have more questions about how titles work, feel free to click the link below for a discussion. If you found this video helpful, check out other videos on our channel for more insights into resolving your particular situation.