A $45,000 Loan For A $27,000 Ride: More Borrowers Are Going Underwater On Car Loans

Discussion in 'News - Breaking News & Political Forum' started by Leeda.the.Paladin, Nov 13, 2019.

  1. Leeda.the.Paladin

    Leeda.the.Paladin Well-Known Member

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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
    November 9, 2019

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    • TEXT

    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.

    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.

    Share of people who have negative equity whentrading in vehicles for new ones
    %2002’04’06’08’10’12’14’16’181520253035
    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.

    Rising car prices have exacerbated an affordability gap that is increasingly getting filled with auto debt. Easy lending standards are perpetuating the cycle, with lenders routinely making car loans with low or no down payments that can last seven years or longer.

    Borrowers are responsible for paying their remaining debt even after they get rid of the vehicle tied to it. When subsequently buying another car, they can roll this old debt into a new loan. The lender that originates the new loan typically pays off the old lender, and the consumer then owes the balance from both cars to the new lender. The transactions are often encouraged by dealerships, which now make more money on arranging financing than on selling cars.

    Consumer lawyers say borrowers are typically trading in their vehicles because they have to—often because their needs change, or because the vehicles have problems.

    “These aren’t Rolls-Royces,” said David Goldsmith, a lawyer who defends consumers in auto cases. “They’re Ford Escapes.”

    John Schricker adjusts his daughter's car seat in the back of his Jeep Cherokee. PHOTO: KRISTIAN THACKER FOR THE WALL STREET JOURNAL
    Mr. Schricker would like to get a new car because the Jeep Cherokee started having mechanical problems this year. He recently discovered the vehicle was in an accident before he bought it, a fact he said the dealership didn’t disclose. The dealership, Rotolo Motors, didn’t return requests for comment.

    Mr. Schricker hired a lawyer, who is trying to resolve the issue with the dealership. He estimates that even if he sold the vehicle, he would still owe Ally up to $18,000. Ally said it couldn’t comment.

    Mr. Schricker, who lives in Bethel Park, Pa., said he didn’t intend to cycle through so many vehicles. He replaced one because it had 100,000 miles and another when he went through a divorce, and he changed cars again when his family was expanding.


    [​IMG]

    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.


    Underwater car loans are more prevalent among subprime borrowers, according to ratings firms. That is in part because consumers with lower credit scores often don’t have the means to pay off the remaining balance on one car loan before buying their next vehicle.

    If borrowers default, lenders generally repossess the cars and try to resell them, then apply that money to the unpaid balance. Often, though, that isn’t enough to cover the borrower’s unpaid balance.

    Yolanda Finley drives a GMC Yukon with more than 188,000 miles on it. She still owes thousands on a car that was repossessed. PHOTO: MICHAL CZERWONKA FOR THE WALL STREET JOURNAL
    Yolanda Finley of Pomona, Calif., bought a used 2011 Chevy Traverse with a loan of $25,585 from Santander Consumer USA Holdings Inc. in 2014. The loan included a nearly $2,200 balance she owed on her Dodge Durango after she traded it in.

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    For a continuing reporting project about debt in America, we’d love to hear from you. Fill out this form and tell us your story.

    The Chevy broke down in 2017 shortly after Ms. Finley took it for an oil change and she couldn’t afford the repairs. She says that Valvoline installed a faulty oil filter and she is suing the company. Valvoline said it was aware of her allegations and had no comment.


    Ms. Finley, a 38-year-old legal-support assistant, stopped making payments. Santander repossessed the Chevy in 2017 and resold it for $2,400. The lender soon after informed her that she still owed around $27,000, which she hasn’t paid. Santander said it couldn’t comment on a specific customer’s experience.

    Ms. Finley currently drives a GMC Yukon with more than 188,000 miles. She bought it from a family friend for $3,500 out of pocket.

    Yolanda Finley drives her car to pick up her dad in Pomona, Calif. PHOTO: MICHAL CZERWONKA FOR THE WALL STREET JOURNAL
    She would like to buy another car, but the only loans she has been offered have high interest rates she can’t afford. Her credit reports state she defaulted on her car loan.

    Most auto loans are originated at dealerships, which assign loans to a variety of lenders, including banks, credit unions and the finance arms of car manufacturers.

    Lenders are typically willing to make the underwater loans, though they often charge high interest rates. Many of the loans are bundled into bonds and snapped up by Wall Street investors.

    The added debt can make it difficult for borrowers to stay current. Some 5.2% of outstanding securitized subprime auto-loan balances were at least 60 days past due on a rolling 12-month average during the period ending in June, up from 4.8% the year before and 4.9% two years before, according to Fitch Ratings.
     
  2. Cheleigh

    Cheleigh Well-Known Member

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    I read this article over the weekend. In every one of these cases (there's another story about a pair of friends from Hawaii that this version of the article doesn't show), the same issues were repeated:
    • John couldn't afford the first car. He replaced one because it had 100K. Not that it had mechanical problems. He just preemptively traded up. And after the divorce he either gave the car to the spouse and was given his half in cash, or they sold it and split the profit. And I'm pretty sure he didn't HAVE to get a bigger car (because he sure didn't get a smaller one or the same size) because of the new family add ons.
    • Yolanda couldn't afford the first car. She was already underwater with the Durango--why did she trade it in? And if she couldn't afford repairs on a car (for whatever reason), she had no business owning it. And what's wrong driving a car with 188K miles on it? People do that everyday, especially with smaller sedans. She wants a giant car (every vehicle she had was an SUV) but they cost more in gas and repairs than a sedan or CUV.
    • The Hawaiian friends couldn't afford the first car. They actually went into the dealership to trade DOWN their vehicle and came out with a $900 car payment and a brand new truck.
    All of these high-balance loans could have been mitigated if they had just kept the cars until they were paid off (or of course never gotten the loan in the first place). Just terrible decision making in each of these stories.
     
  3. HappilyLiberal

    HappilyLiberal Well-Known Member

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    I'm in this situation right now. I had a car that would have been paid off next year if I had just kept it. In my defense, when I bought my current car, I was a few months out of Chemotherapy and wanted to buy myself something big. But it was an extremely dumb decision and I don't even like the new car (it is smaller than the old one). I ended up getting a loan to pay for the new car and what I owed on the old car (underwater). So, now I am REALLY underwater on the new one. My current plan is to pay this one off tout de suite and drive it until the wheels fall off. I plan to pay cash for my next car!
     
  4. Keen

    Keen Well-Known Member

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    I just got a car and the dealership surely tried. I wasn't having it. Every time I told them the payment was too high, their solution was to extend the loan to 72 months instead of lowing the price. One company has a loan with a balloon payment. The idea is to roll the balloon payment into a new car payment when the balloon is due. So the future new car loan in 4 years would be New car price PLUS balloon payment minus trade-in equity. I told them that's too much math for me. That's how people end up with a $45K for a $27K car.
     
  5. Black Ambrosia

    Black Ambrosia Well-Known Member

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    I had a cousin who would’ve been in a similar situation. She ended up keeping the car she already had and getting a second car. I guess she could’ve avoided the insurance cost if she traded in the old car but she felt like “why give them the car if I still have to pay for it?”
     
  6. Black Ambrosia

    Black Ambrosia Well-Known Member

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    Not trying to make excuses for bad decisions but I think a lot of us on this board are savvier than the average person. And people that have bad credit tend to carry themselves accordingly because they don’t think they have a lot of options - “It’s not a great deal but I’m gonna pay a premium wherever I go so might as well...” type thinking.

    Honestly the bigger issue in my mind is the difficulty getting out of these situations. We all make bad choices from time to time (it’s called experience) but you shouldn’t need bankruptcy to be able to start over (which is what I’d be considering :look:)

    If you owe $5k extra you can charge it to the game and pay it off over time. If you owe over $20k extra you’ll probably be upside down on your next 2 cars because they’ll stop running before you’ve paid off the debt and you’ll be forced to get something else. This feels like something the CFPB should be regulating so that you can’t finance so much more than the car is worth.
     
  7. MizAvalon

    MizAvalon Well-Known Member

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    What is everyone's obsession with having new cars so often? I have been driving the same car for 15 years and it runs perfectly fine. Other than routine maintenance I think I have only had repairs done like twice.

    I'm looking to get something newer and nicer in the next few years but I will still keep this one as a run-around car.
     
  8. RoundEyedGirl504

    RoundEyedGirl504 Well-Known Member

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    I think this was posted in the finance forum. People want new cars and will end up paying for the new car AND the old car, and don't see how that screws them over until they have a noose around their neck for 7 years on a car that is worth scrap. And most people do not want to commit to paying cash for a car either. I have been foolish enough to do roll a loan into a new car. Never again. I am riding this current car into the ground LOL!
     
  9. 1QTPie

    1QTPie Elder Sim

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    I've never had a brand new car because I'm a champion of buying used, but I understand.

    I just found out that my car, prior to purchase, has had the fender replaced, the windshield and a bunch of other things and I've had that car for six years. I found out about the windshield when I finally took my car to the bodyshop to address the leaking roof. Found out that half of my car is after-market. Carfax didn't say anything about an accident. So I get it. Plus, new cars look and smell good.
     
  10. MizAvalon

    MizAvalon Well-Known Member

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    I totally get that because with a used car you truly never know how the previous owner cared for it. So I get wanting to buy new from a peace of mind standpoint. But what I don’t get is wanting a new car so frequently that you never pay anything off and keep going into more and more debt over it. That’s just crazy to me.
     
  11. Everything Zen

    Everything Zen Well-Known Member

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    It wasn’t the desire for a new car for just bc for me- it was the fact that I was a super commuter and often had to have an oil change every 3-4 weeks. I put 100,000 miles on a car easy in 3 years. For the first 10 years of my career that was just life. It was only a matter of time before you knew that major things were going to go wrong with the car. I hate cars because of that experience. The expense of repairs once your outside of the warranty is ridiculous. :nono:
    We got ours new from the dealership only bc Toyota that will cover the maintenance for so many miles once I got a job with a reasonable commute and FH is in car sales so we got them at cost :look:
     
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  12. Brwnbeauti

    Brwnbeauti Well-Known Member

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    Sold my car last December. Loved driving it. Love not having a car note more.

    Also, people ignore interest rates...had an associate who was paying 19%. Ma’am that’s a credit card- not a reoccurring bill for the next 3-5.
     
  13. Black Ambrosia

    Black Ambrosia Well-Known Member

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    That’s the game of dealerships. They know you walk in wanting to not get robbed but once they get you focusing on the monthly payment it’s a wrap. You don’t realize you paid too much AND they’ve added a bunch of fees.
     
  14. LostInAdream

    LostInAdream Well-Known Member

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    I know a few people in this situation and so just SMH. I hate the car buying experience, been through it 4 times. I’ve never had to rollover a loan. 2 brand new and 2 late model used. I’ve had my current car for 6 years, have no car payments and will ride this to the wheels fall off. My engine is covered for the life of the car so as long as that dealership stays in business I’m straight.
     
  15. LostInAdream

    LostInAdream Well-Known Member

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    Duplicate post
     
  16. Everything Zen

    Everything Zen Well-Known Member

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    I refuse to get involved in the car buying experience or even go in when it’s time to do a deal. My father bought my first car, he handled the second and FH handles everything and keeps them in his name bc he is out here straight :censored: customers :look:

    I tell folks he’ll do you a solid at another dealership on his day off but don’t come into his dealership during his shifts expecting a deal- We got bills to pay. :look:
     
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  17. Z-kitty

    Z-kitty Well-Known Member

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    My 2009 Acura has 196k miles and I’ve only had the standard maintenance done. I’m hoping my baby has at least another 3 years left in her. I refuse to buy a new car unless I absolutely have to.

    I know a few people on this situation and one them said she likes new cars and will always have car payment. SMH!
     
  18. Black Ambrosia

    Black Ambrosia Well-Known Member

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    If you lease, this is always your situation. Nothing wrong with that.
     
  19. CarefreeinChicago

    CarefreeinChicago Well-Known Member

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    I just got a new car this year I gave my old car to my friend it still worked but it was having trouble picking up speed on the expressway so my friend uses it in the suburbs it was a 1999 Mitsubishi I paid it off in two years and hope to do the same with my new car
     
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  20. CarefreeinChicago

    CarefreeinChicago Well-Known Member

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    Someone said if you have your own business you can write your lease off
     
  21. Z-kitty

    Z-kitty Well-Known Member

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    She doesn’t lease that’s the thing. She is upside down. She even rents a trailer in a trailer park. I don’t understand.
     
    Last edited: Nov 13, 2019
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  22. dicapr

    dicapr Well-Known Member

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    I commuted for years. Actually highway miles aren’t that bad on a car. I rode mine until it died (due to an accident) with minimum repair cost except for breaks, tires, and AC. High miles on a car doesn’t always translate into high repair cost. I was nearing 300K miles when a deer killed my car. I had a Honda. Plus it was paid for. So long as routine costs didn’t equal a monthly car payment I was fine.
     
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  23. Black Ambrosia

    Black Ambrosia Well-Known Member

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    I was just pointing out how the situation is the same with a lease even though it’s perceived differently.

    When I had my first summer internship I learned that people in corporate jobs lived in trailer parks. There was a white woman (I think she was an admin) who was proud of her little trailer. It had 3 bedrooms and she told me it was in a nice area. I think she was paying less than $400 per month.

    It’s not for me but it’s not the sign of poverty that I thought it was. Idk about the woman in the article though. It could be poverty for her. I think they’re all stuck in a predatory situation but because they aren’t perfect victims they aren’t getting much empathy.
     
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  24. Leeda.the.Paladin

    Leeda.the.Paladin Well-Known Member

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    This is how we decide whether it’s time for a new vehicle. Glad to hear your honda lasted so long. My honda just hit 180k. She’s had to have a few repairs here and there but it’s been a good vehicle. Especially since we bought it used from CarMax ( I think it had 20k miles on it then).
     
  25. Everything Zen

    Everything Zen Well-Known Member

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    Well I had two Hyundais and my costs were the equivalent of monthly car payments and more after the powertrain warranty ran out. My first one was paid for and the second, I was still making car payments. I rode them both to about 140k miles. I was also laid off in the recession so my finances were jacked up for several years before I felt a sense of stability and started making decent money to be able to make car payments on a comfortable level again.
     
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  26. Keen

    Keen Well-Known Member

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    Dealers make so much money on financing. The automaker dealers do offer better financing from my experience. After I negotiated my car purchase and trade in, the dealer ran my credit for a loan. He offered 4.1%. I said nope, another dealer offered me 2.9%. I'm going to find my own financing for 2.9% and get back to you. The dealer gave me an extra $1K for my trade to bring my payment down to what it would have been if interest rate was 2.9%

    Did I mention my new car is 2020 CERTIFIED USED. It had 500 miles. I got an extra year of warranty because it was certified use.
     
  27. B_Phlyy

    B_Phlyy Pineapple Eating Unicorn

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    I had every intention of running my first car until the wheels came off... then the wheels did come off when I moved and my little car couldn't handle the commute. It was at the point where despite repairs and maintenance, my check engine light was coming on at least once every 2-3 weeks. I had the car for 3.5 years and only put about 45K miles on it.

    I was underwater on the original loan by <4k and my interest rate on the new car loan is 1.9% so the trade up was worth it to me. The new car is bigger but the gas mileage is better so overall I'm paying less than I was for the smaller car. I suspect I'll put 40k miles on it this first year alone. But I think this car will last me the long haul. A few people at my job have the same car as mine, just older. One provider said his has lasted him all through undergrad until now (he's in his 3rd or 4th year being an attending). Easily 280k miles on it but it runs super smooth. This is my dream for my car.

    DH is someone who always wants a new car. I think in the almost 7 years we've been together, he's had 5 cars. He's never underwater when he trades up, but I'm still like dude, you could have picked one and paid it off in all this time.
     
  28. dicapr

    dicapr Well-Known Member

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    That’s fine. To me so long as the yearly total of repairs is less than the yearly total of payments I’m good. Once those 2 things are equal I start looking for a new car. But paying 2.5K once a year isn’t enough to make me jump ship. A car payment over a year is more than a one time cost.
     
  29. Crackers Phinn

    Crackers Phinn Either A Blessing Or A Lesson.

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    You don't have to own the company, cars can be leased for employees as well. The way it works is the car is leased and insured in the company's name and makes the payments and get a tax write off. The owners/employees are listed as authorized drivers on the auto policy. There's no problem as long as the company makes enough money to pay the lease and insurance. Me and the old man's cars are leased through our shared company.

    Sidenote: A couple of my in-laws are interior designers and not only do they lease their cars through the businesses, they bought their house in a separate business name and leases it out to their other business as a "Showroom". Basically a "Showrooms" is a fancy way to say instead of having a home office, their office is a home that they can show their clients their decorating style. As long as the addresses match the tax documents, it passes the IRS smell test.
     
  30. Brwnbeauti

    Brwnbeauti Well-Known Member

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    I always use credit unions. Back in ‘10 my rate was 4.8 with a credit score in the 500s
     
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