Better MPG & a helluvalotta fun.
p.s. Gearheads....Picking up my new Triumph Rocket III tomorrow.
Posted on 04/05/2005 12:22:02 PM PDT by ex-Texan
Consumers often purchase a new vehicle while still owing thousands of dollars on their old one, which they use as a trade-in
NEW YORK -- A growing number of new car buyers are finding they owe more on their existing car loans than the vehicles are worth as trade-ins.
The phenomenon, known as being "upside down" on a loan, is the result of a confluence of changes in the ways Americans buy and finance their vehicles.
To begin with, the prices of new cars and trucks have been held down as manufacturers offer incentives and rebates to lure purchasers. As new car prices flatten, so do resale values. Buyers, meanwhile, are choosing increasingly longer-term loans, sometimes extended over 84 months, to reduce monthly payments.
The result is that a consumer who trades in a car that isn't fully paid for can end up wrapping the loan hangover into the financing for a new car, greatly increasing the cost. Or, if a car is destroyed in an accident before it's paid off, the insurance settlement may not fully cover the outstanding loan.
The consumers' upside down amounts are substantial, experts say.
"More than a quarter of buyers are upside down when they come in, and the average is nearly $3,800," said Bob Kurilko, a vice president with Edmunds. com Inc., an auto information publishing company based in Santa Monica, Calif.
This loan overhang has implications for both trade-ins and insurance recovery, he pointed out.
Here's the math: Say a consumer buys a $25,000 car and begins making payments of about $500 a month, based on a 6 percent interest rate. A tree blows over in a storm, flattening the vehicle. The insurance company agrees to pay, but values the car at $22,000; the consumer is still on the hook to the finance company for $3,000 more, which must be paid out of pocket.
Scott Jones, 43, a New York freelance photographer, said he was aware of the risk of becoming upside down on a car loan when he went shopping for a new vehicle last spring.
"I read about it on some of the Web sites, and I tried to shop carefully to avoid that trap," Jones said. His strategy, he said, was "to buy a reliable car and pay it off as soon as possible."
Jones' choice of a vehicle was a Honda Odyssey minivan, which he believes will hold its value better than some other vehicles. He made a cash down payment to reduce the size of his loan, and then financed the balance over six years, though he said he may try to pay it off earlier than that.
"I figure I'll be driving it for at least 10 years -- long after the loan is finished," Jones said.
Brian Reed, a vice president at Capital One Auto Finance, based in Plano, Texas, said a major contributor to the problem is that consumers have sought longer loans to hold down their monthly payments.
"In the late 1970s and early '80s, most loans were for 36 months," Reed said. "Now, the average term is about 58 months, and some lenders go as long as 72 months or 84 months."
Consumers with long-term loans who trade their cars frequently will have built up less equity and be more likely to be upside down, he pointed out.
The best strategy, Reed said, is "to try to match the term of the loan to the time you intend to keep the vehicle."
Rob Gentile, director of automotive information products for Consumer Reports, based in Yonkers, N.Y., said consumers who know they're upside down on loans often don't bargain well for new cars because they're distracted by how that unpaid loan is going to be handled.
"Consumers should settle on the price (of a new car) before anything else," Gentile said.
Gentile also recommends consumers finish paying down a loan before they trade a vehicle, especially if it's been a good, reliable car.
"If you roll what you owe into the new car loan, you're financing the old car at the same time you're financing the new car," he pointed out. "That will cost more in interest -- and your monthly payment will have gone up, too."
Always buy used cars.
Amen to that. Let somebody else pay for the depreciation.
Also make sure the new car you are buying is worth the combination of the new and old car(trade value).
Otherwise you might be stuck with two payments, like I am.
I just checked out the rate chart at my bank - we will go 72 months only if the loan is $25,000 or more. Otherwise, the maximum for a new car is 60 months. Used car loans will go up to 30 to 60 months, depending on the age of the vehicle.
Perpetual car payments are the "best strategy"?
Pay with cash. Decide to be satisfied with a car you can actually afford.
Ping.
"Always buy used cars."
Got my title in the mail yesterday for the new truck I finally paid off after 5 years. Never again, I say.
hey, I thought our standard of living was going up? now, hardly anyone actually owns their own car anymore - add that to their 40 year mortgage and credit card debt. the whole US consumer driven economy is built on debt, not wealth. debt is wealth for most americans now.
A lease is a good way to avoid this problem, too.
If you want to buy a new car, buy a car you can afford to pay cash for, and keep it for ten years.
Insure it for liability only, and save the extra money you would have spent on comp/collision for the next time you buy a car. After ten years, the amount of money saved is more than enough to purchase a nicer car as a replacement vehicle, also for cash.
If you finance a car, the loan holder is going to require that you get comprehensive insurance, which is murderously expensive. People actually wind up lowering their liability coverage limit to be able to afford the comprehensive insurance, so they are protecting the loan holder, but leave themselves open for a big claim.
I'm still driving a 93 Saturn SL-1--186,000 miles. Brakes aren't too good, but its a manual, so I downshift HARD.
Have a 2000 mazda pickup and the wife has a 99 Windstar-which is a piece of crap. Probably need to get a new family wagon within a year or two. I've though about getting a new commuter car, but I figure I'll drive the Saturn as long as I can.
Been looking at Suzuki's...yes Suzuki.
It is. People who previously would have been driving 7-year-old Chevys are now finding themselves driving all the bling-bling they can get their lender to agree to...
We buy new but pay cash for them then keep them for 12 years or so. We pay ourselves the car payment each month into an interest bearing account then pay cash for the car. The bank pays for part of the car, it's nice.
Good used cars are good too as long as you know how they've been maintained. Someone else eats the depreciation for you but they can also never change the oil and you inherit the problems.
By the time we get rid of our cars there's not much left other than some seats and a small pile of rust :lol: .
LQ
Some credit unions, such as mine, have guarantees on their car loans for those situations where insurance won't cover the loan value. They'll cover the difference. It's a good deal if you can get it.
Buy a car with a big ole tax refund and ptc.
Better MPG & a helluvalotta fun.
p.s. Gearheads....Picking up my new Triumph Rocket III tomorrow.
You got it figured out, LQ. Your first car should be a junker that you suffer with until you have enough money to plunk down to buy that first new car for cash. After that, figure what your loan and excess insurance payments would have been, and put half that into the bank, and you will always have more money than you ever need for repairs and new vehicles down the road.
Loans are economic slavery.
People would think twice about car loans if they saw how much they were paying for their cars, when all the interest payments are factored in.
I got into this trap...was paying $370 a month for a stupid ZX2 escort after trading in a year old Sanoma...Boy was that stupid. Ended up paying around $25,000 for a POS escort...UGH...
Have bought used ever since....and better for it.
Only if you drive the car very few miles a year.
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