Dear Terry,
I’ve been approved by a lender for up to $33,500 on a new car. I already have a car that I still pay a note on and I’d like to keep it. In fact, I’d like to roll the balance owed on the first car into a single loan with the new car purchase. Can a dealership offer me such a deal whereby it will pay off the first loan and combine the leftover balance with the amount of the loan on the new car?

Jean J.

Dear Jean,
A car dealer desperate for a sale can pull off almost any financial sleight of hand if it wants to make the sale — though the lender may feel there’s whiff of fraud in your proposal. The lender has extended you the credit to buy one car for a certain amount of money. Imagine the trouble that could ensue if you buy a car for $20,000 and, without the approval of the lender, find a way to use the rest of the loan funds to pay off the other car.

The lender thinks it has a lien on a car that at one point was worth more than $30,000 but finds out — should you default or the new car is totalled in an accident — that it holds an interest in a car that isn’t worth what you (and the dealer) said it was. In other words the collateral for the $30,000 loan is a $20,000 car. To make matters worse, the lender doesn’t have a lien on the car you paid off with its funds. In such a scenario, things are likely to end up in court.

Regardless, your plan is a really bad idea for you. Cars depreciate fast, and from the start of this deal you will owe far more on the new car than it’s worth. Even after four or five years, when you may start to see repair bills and might want to get a new one, you could still owe far more than the car is worth. And that car you’re maneuvering to own free and clear now will likely be worth almost nothing.