A $45,000 Loan for a $27,000 Ride: More Borrowers Are Going Underwater on Car Loans

[mahatmakanejeeves]

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A $45,000 Loan for a $27,000 Ride: More Borrowers Are Going Underwater on Car Loans
As cars become more expensive, buyers are getting hampered by burdensome loans

By AnnaMaria Andriotis and Ben Eisen
Nov. 9, 2019 5:30 am ET

John Schricker took out a loan to buy a car in 2017. Then he took out another. And then another.

In two years, the 40-year-old electrician signed up for four auto loans, each time trading in the previous car and rolling the unpaid balance into the next loan. He recently bought a $27,000 Jeep Cherokee with a $45,000 loan from Ally Financial Inc. ALLY -0.75%

Consumers, salespeople and lenders are treating cars a lot like houses during the last financial crisis: by piling on debt to such a degree that it often exceeds the car’s value. This phenomenon—referred to as negative equity, or being underwater—can leave car owners trapped.

Some 33% of people who traded in cars to buy new ones in the first nine months of 2019 had negative equity, compared with 28% five years ago and 19% a decade ago, according to car-shopping site Edmunds. Those borrowers owed about $5,000 on average after they traded in their cars, before taking on new loans. Five years ago the average was about $4,000.
....

Borrowers with negative equity at the time of purchase tend to get longer loan terms, higher interest rates and higher monthly payments, according to Edmunds. The higher rates and longer repayment periods mean a smaller share of their monthly payments goes toward paying down principal in the first few years of the loan. The result for some consumers is a cycle in which each new trade-in leaves them deeper underwater.
....

Nicole-Malia Tennent and Shyanne Fernandez, both in their early 20s, wanted to trade in the car they shared for something less expensive last year. The friends, who live in Hawaii, ended up splurging on a new vehicle and moving the unpaid loan balance of $12,500 from an older GMC into a new loan for a 2018 GMC Sierra truck.

The rollover debt helped drive up the new loan balance to more than $66,000. The friends now split the payment of more than $900 a month, which they owe to Pearl Hawaii Federal Credit Union for 84 months. Their old loan was about $500 a month.

Pearl Hawaii said in a statement that the dealership and the borrower worked out the sale agreement. The dealer, Cutter Buick GMC, declined to comment.

The friends have had to cut back elsewhere to pay for the truck.

Write to AnnaMaria Andriotis at [e-mail] and Ben Eisen at [e-mail]

[SWBTATTReg]

1. All of this debt just to have a fancy set of wheels. Something is wrong here...either the...

borrowers are way off base in getting themselves into so much debt for a fancy set of wheels and the auto dealer for piling on the debt, regardless of the debtor's ability to truly pay off the debt. This is almost a house payment. Ridiculous.

If these borrowers don't do something to get this debt under control, it'll soon get them / force them to get it under control, especially when they eventually default and / or still lose the car, and still owe the remainder of the loan payments too.

[badhair77]

2. I know schools still teach arithmetic. This isn't even basic

Mathematics. It’s all about the need to impress themselves and others, lack of planning for the future and not using common sense.

[customerserviceguy]

3. Ok, who needs

four new cars in two years?

My 2012 Hyundai Sonata was paid off in just under five years (zero percent financing) and it's just broken in. I expect it could be the last car I ever buy now that I'm retired, until self-driving vehicles become affordable when I'm in my eighties.

[NBachers]

4. I'm happy with my 2005 Ford Focus 5- speed stick with 210,000 miles.

Best car I’ve ever owned.

[catbyte]

5. Why do people feel the need to get a new car every couple of years anyway?

But then again, I'm still using a purse I bought in 1984 and wearing shoes I bought in 2008, so I'm not one for new and blingy stuff anyway.

[exboyfil]

6. 2002 Cavalier and 2009 HHR

That was how I was able to completely pay for both of my daughter's BS degrees. I have had no debt in over 30 years besides my sub 3% mortgage.

[PoindexterOglethorpe]

7. Anyone who trades in a car not already paid for, is an idiot.

And the example in the article demonstrates that most people don't really buy a car, they buy a loan payment.

I have not had a car loan since my very first car that I bought in 1967. A '59 VW Bug. Convertible. It cost me $150 and I financed it through my credit union for about a year. Every other car I've owned since then I've paid cash for.