Borrowers Are Going Underwater on Car Loans
wsj.comReading some of these stories makes you want to smack your forehead on your desk. A lack of basic financial literacy + materialism sometimes have some pretty brutal results.
One example:
> 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.
How do you go looking for a vehicle that's less expensive and end up with a vehicle that's nearly 2x the cost?
Americans make terrible decisions with cars.
The article includes two anecdotal examples. I suspect that my income exceeds both. I would never pay as much as they did for a car. Cars are terrible investments. Most should be purchased as the bare minimum cost to get back and forth to work.
I particularly dislike the common refrain, "the cost to repair it is more than the car is worth." It's the wrong mindset. The repair cost is always far less than the replacement cost. My old 150k beater that needs $1k of repairs every year is still much less expensive than the $25k+ it would cost to replace. I have no car payment (thus no interest), and property taxes are cheaper.
And people keep buying brand new cars. Why? Our culture doesn't properly identify brand new cars as luxury items. We should publish a new rule of thumb. Nobody should be buying new cars who can't already afford to fund an IRA.
I think many Americans make terrible decisions with money.
The really sad part: It's easily curable, with financial education. Why it's not part of middle school education, I'll never know.
This is a weird summary because everyone who buys a car on credit is always “underwater”. The cars are never worth the balance of the loan. People buy cars on credit not because the car has intrinsic value or is an investment, but because it gives them access to other things of value, like their job.
I’m concerned, of course, that Americans have built a society with so few buses that everyone has to buy a car on credit. But being “underwater” is not the main problem here.
> I’m concerned, of course, that Americans have built a society with so few buses that everyone has to buy a car on credit. But being “underwater” is not the main problem here.
More specifically, we've built cities that are pretty awful for bus (or rail) transportation, if you thrown any sane amount of money at the public transit system. Most of our cities have been relying on inefficient (i.e. very spread-out, low-density) growth patterns to cover costs, while the long-term expenses demanded by that growth (maintenance, for example) outpace the revenue it brings in. It's musical chairs, and when the music (growth) stops most of the cities in the US are going to be Detroit, with way too much city for their tax base to support.
Huge, low-density cities lead to shitty, expensive services (bus service being but one example) and crippling, indefinitely-ongoing maintenance expenses.
Buses are a relatively decent solution for a city lacking in public transportation infrastructure. For example, Phoenix (where I live) has a network of north-south and east-west buses that can get you, eventually, to anywhere in the valley (Uber/Lyft can fill in the gaps). I normally drive, like 4 million others, but several times I've taken the light rail from Sky Harbor to midtown, then a couple of buses to my destination many miles north of the airport, and I was impressed by how easy it is--and how underutilized.
Perhaps we can mitigate many of our urban problems--pollution & greenhouse gases, road congestion & traffic accidents, and consumer debt--by investing in electric or NG buses.
“Eventually” is the problem. I have a 35-minute commute if I wait out rush hour, but it's two hours by bus. Each way. If I get lucky with both transfers. Average speed: 11 MPH.
I've never checked but I don't think I've ever been underwater on a car loan - I finance but not 100% of the price - it's more like 50% - whatever the value of the trade plus at least a little bit of cash that I bring to the table.
That said I tend to agree that "underwater" isn't really the right concept for a car loan. Unless of course you total a car right after you get it. Sucks to be putting $ towards a car note with nothing behind it.
Yeah, you're definitely the exception. The vast majority of people are not putting 50% down on a car..
That’s just time-shifting. You paid in opportunity cost to move those payments backwards in time. This may have been rational for you, since it lowers the risk of the loan I.e. you can always walk away from such a loan when it is backed by a sufficiently valuable asset. But this doesn’t change the fundamental equation.
>everyone who buys a car on credit is always “underwater”. The cars are never worth the balance of the loan
In my early years I once took out a loan for a car. I've never once been underwater on my loan. You're only underwater at some point if you put down a small/no down payment and pay the minimum amount due every month.
The topic of this article is people rolling the balance of their previous car loan into their new car loan. So they are underwater before they drive it off the lot, sometimes by a LOT. That's scary! Its basically running on a treadmill that always accelerates.
Car loans are a relatively small component of overall consumer debt in the U.S.[1]
By far, the largest amount of money tied up in debt is in mortgages. The highest number of borrowers are credit card users.
Underwater car loans are a problem for some borrowers, maybe, and could portend a slowdown in car buying, but people have many options when it comes to cars. They'll buy used, if they hit a debt wall and simply can't afford new, then later trade up for a new vehicle.
It's unlikely that this is a sign of recession, in my opinion.
1. https://www.lendingtree.com/debt-consolidation/consumer-debt...
Two friends wanted to by a cheaper car, so their loan is now 66K?
Looks like WSJ is skirting around the issue of subprime loans made to rideshare (Uber/Lyft) drivers. lost track of the number of unhappy uber/lyft drivers I have chatted, because of the predatory nature of the incentives and car loans.
The drivers think they bought a new Camry, and while making a nice profit in the first few months. Then the incentives dry up, while principle due has barely moved. Now the predatory lender has a captive slave to make the monthly payment by giving ride, because there's a loss aversion mindset that prevents the driver from walking away.
At some point though, the drivers will realize it's not worth slaving it out for a car they don't own. With Uber losses continuing to pile up, at some point incentives will go to zero, their retention costs will go up, drivers will get fewer $$$ per mile.
If this happens on a large scale, there has to be some kind of a crisis with these subprime loans. There'll be glut of used cars, killing new car sales, thus affecting those car manufacturers/sales.
If you read the traffic on /r/askcarsales, the salesman all point to Chrysler/Jeep/Dodge/Ram as the last refuge of the credit-unworthy.
FCA will take much riskier clients (and much more negative equity) than other makers, even though their product depreciates way faster than almost every other brand on the market.
I'm underwater on my car loan. But my credit rating was low and I got to get a new car without anything down, extended payments. The interest rate is a bit high, but now my credit score is good. It works out. At least I got a car that will last as long as the loan.
Albert Einstein famously said that compound interest is the most powerful force in the universe. He said, “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't, pays it.”
While obviously not the best long-term financial decision, this situation works out for a lot of people. It's pretty risky to get a 6 or 7 year loan on a 3-5 year old car, but almost any car of almost any manufacturer should last 7-8 years minimum if purchased new and regularly serviced. Just like in the last housing bubble, being underwater is only a problem if you want or need to sell. If you are $15k underwater on your 3-year old car, that's not a problem if you plan on keeping it beyond the loan term. And even if you do need to get out of it, the best way is often not to purchase another car - it's to lease the cheapest car that will cover your negative equity and get approved by the bank. This lets you grin and bear it for 3 years and wipe out all your negative equity, while having a brand new car with service that is likely complimentary for the first 2 years if not the entire lease term (varies by manufacturer and incentives).
Thanks for sharing and good that it is working out for you. What would happen if you lose your job?
I think that is the big question for whether this would really affect people in a downturn. As long as you can keep making those payments, all good... but as soon as the jobs start to go, it cascades for a larger number of people.
Unless that car is involved in an accident and it becomes a total loss. Carrying gap insurance can protect you from this possibility.
Many banks will require it in lease agreements if they feel your income/payment makes you less likely to be able to cover a total loss early in the lease. It's been a while since I purchased a Toyota but I believe they require it for all leases regardless (from your insurer, not TFS).
Cars last a long time now. My car is 20 years old and it’s still far cheaper to maintain that car than to buy a new car.
The replacement cycle of cars has been getting longer since about 25 years ago. The average age of cars on the road is now about 12 years. This fact is often overlooked by folks who predict a rapid shift to electric cars.
Depends where you live - 20 years of salt nets you a frame that will break if you sneeze
I live near Boston.
No offense, but an honest question: What's to come after the loan? Even with a car that's cheap with repairs, the seven (or more?) years discussed in the article mean one has to pump a lot of money into maintenance, especially as the car gets older; even more so for people who do a lot of miles/km.
How does this have anything to do with anything that could be on topic for HN?
Because it might signal the beginning of a crisis, it signals that car are treated a lot like house were in the last financial crisis, under water means negative equity.
Lenders are willing to make the underwater loans, often charge with high interest rates. Many of the loans are bundled into bonds and snapped up by Wall Street investors therefore having supposedly a broader effect.
Related from Feb: https://www.washingtonpost.com/business/2019/02/12/record-mi...
It doesn't, but WSJ and NYT get pushed to the top regardless of relevance.
An impending loan crisis could be the canary in the coal mine for the whole tech “bubble” blowing up.
Sequioa shared the “Rest in Peace Good Times” presentation in 2008 with their portfolio companies: