Makes "According to the IRS 85% of those reaching age 65 do not have $200 in the bank" look a little low.
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."
"Good used cars are good too as long as you know how they've been maintained."
I'm planning on my next car to be a used one.
What should I be looking out for in a used car?
How would I know how a used car has been maintained if purchased from a dealer?
Thanks.
According to the IRS 85% of those reaching age 65 do not have $200 in the bank and that 87% retire on less than $250 per week for life.
Does do not have $200 in the bank mean they have $20,000 in the bank? That's not $200. Do they mean to say less than $200 in the bank? If you have a $400,000 house that's paid off, $200 in the bank might be enough. If you have a $300,000 stock portfolio on top of that, well that's not "in the bank"
there are good American cars out there....just have to get past the flash.....
Down in Colombia SA, the government encourages the wealthy to buy older cars.
Keeps down the kidnap rate.
Makes "According to the IRS 85% of those reaching age 65 do not have $200 in the bank" look a little low.
The purpose of insurance is to protect you against losses you cannot afford to pay. The theft of a $20,000 bought with cash is not going to break anybody, because it can be replaced with a $2,000 car bought with cash. A theft would put you back in the clunker again for a couple of years, but that is nothing you have to pay insurance to avoid.
Of course, if you live in an area where auto theft is a major problem, you may want to consider going with a meticulously maintained ten-year-old car. These can provide the same level of safety and utility as a new vehicle, but theives ignore them.
This is just my opinion but I'd go for a private sale rather than from a dealer. When trading in to a dealer you usually can't get as much for the car as if you sold it yourself so a lot of people will trade in their "problem children" cars just to get rid of them rather than try to sell them on their own. They're willing to take less money just to get it off their hands.
The exception to this can be when the dealer offers a warranty on the used car. If the dealer is willing to put a 2 or 3 year warranty on it then there is a better chance that the thing isn't junk. You will probably pay more than you would in a private sale because of the dealer markup (they "buy low, sell high", no surprise there).
Have someone who knows cars well go with you to test drive them. Check all the oil and fluids before you start it up - see what color the oil is and if everything has been filled correctly. Don't let them warm it up for you before you get there. I won't buy any vehicle that the owner "warmed up for me" because I want to see it start and want to check all the stuff before I do that.
Run your finger around the tailpipe - is it sooty? Greasy? The exhaust and tailpipe mung can tell you a lot about the engine.
Ask the owner if he/she has the maintenance records on the car. Good owners will keep a log or all the receipts of when the car was serviced. I always save mine because it's a good selling point if I ever want to sell the car.
Review them thoroughly before making an offer.
Test drive it then have your knowledgeable partner drive it too. Then bring it back, let it sit, then check the fluids again, engine, the ground underneath where it was sitting, the color of the exhaust (blue means it's burning oil, black can mean a lot of different things but could be running rich because of bad maintenance or carbon buildup, white that smells like burning sugar is a very bad thing because your head gasket could be going), etc.
Best yet, have it checked over by a reputable mechanic before you buy it. This isn't always possible but do it if you can. If the owner severely balks at it you may want to walk away - there may be something bad you would discover if you do that.
Never fall in love with a car, there will always be another one out there to look at so if anything is fishy with it walk away.
It's still a crapshoot but you can minimize your risk by checking it out thoroughly. The younger the car is the better chance that it hasn't been trashed yet.
Always ask the owner why they are getting rid of the car. If someone is selling what looks like a perfectly good minivan that is 2 or 3 years old only to buy another minivan it makes me wonder if the one he's getting rid of was a lemon and he's had problems with it. A lot of times you can get good small cars from families who just added another child and now have to trade up to a minivan because they need the room.
Good luck, I hope that helps (others here can probably add alot more),
LQ, eternally grateful that my father was a gearhead
see post 108
Don't! A clutch job is far more expensive than a brake job.
I do no think that ARMS are necesarily a bad thing. For instance, if one got an ARM say in mid 04-say a 3/1 or a 5/1 the rate was really low, like 4%. So that person has a ridiculously low rate locked for 3 or 5 years. Good. Then the rate adjusts, but it can only adjust 2 points per year with a max of 6. So long term the homewoner is paying very low rates for a fixed period, then the rates adjust--eventually (perhaps) hitting market rates. Whats the big deal??? The prinicipal will have been reduced via the very low up front rates and the homeowner pays current market rates--which he can always refinance into a conventional loan. As long as the homeowner can afford it, I see no problems wiht ARMS and would say they can be advantageuos.
I guess the problem is that people get in over their heads...which is a seperate issue from ARMS. If you buy something you can't afford, too bad.
LOL!
On many new front wheel drive cars, replacing the clutch is a major job. On my Saturn L-100 -2001 with 98K on the clock, just the clutch parts alone (plate, disk, slave cyl/w throw out bearing) is about $450.00 assuming it is a do it yourself job.
To install the clutch, the subframe has to be removed which means disconnecting the suspension. I estimate it will take me about 3 days to replace the clutch. Then I will have to have the wheels aligned.
As a note of interest, on this and many other new FWD cars, you cannot remove the engine by lifting from the top, rather the engine has to be lowered and removed underneath the car, making it very difficult to do without a lift.
Tom
they should pay off their cars with a 110% home equity loan from DiTech.
picked up my Bonnie (black and white scallop) a few weeks ago.
Toddster must travel in wealthy circles to know all these people under 45 with little debt and lots of positive net worth. Unless they all just inherited their parent's money. Which is another factor we could talk about - I know alot of people for whom their retirement plan is inheriting their parent's money.
oh, and another big trend I see - people borrowing against their 401Ks.
Henry Manney said that on Triumph motorcycles the electics would short out in a crosswind.
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