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."
The MGB GT's weigh in at #2400lbs a copy. A true lead sled. It's why you can take a turn at full speed. That much weight that low to the ground isn't gonna budge from it's track. My GT6 has a supercharger and the 5 speed gearbox from a Toyota Supra. It'll do 140 on the open flat. God help you if you need to stop......not much braking and what there is applies itself unpredictably and at random, as do all fine British cars. You never know which way you're going to have to wrestle the steering wheel when you apply brakes in a hunk of British Iron.
Is that why household wealth is at an all-time high?
I have made implements and attatchments for my old Ford that do everything. Bale spears, middle buster rigged with a pipe laying form to dig/bury/and repack down water line installation, saw-rig, hoist, post hole digger, tandem puller for twin hayrakes(doing two swath's at a pass), snowblower, snowplow, front end loader, vibratory heavy roller(using an old LP propane tank filled with sand), Aircraft towing bars, various blowers, generators, and much more.
I'm done with cars.
When I was younger, I bought all the fun stuff I could "afford". After the kids arrived, I scaled back to new sedans. Now, I just bought a 1998 Lumina with 80k on it for $1800 cash. It'll get me to work and I'll put a new kitchen in my only asset that is appreciating.
consider the effects of the baby boomers moving towards retirement - they are pulling their asset base with them - back when people owned their cars, their homes, didn't have credit card debt, etc.
outside that demographic, most americans probably have negative actual net worth when you consider their mortgages, car debts, credit cards debts, education loans, etc.
Debt, its the New Wealth. Catchy slogan, don't you think? Maybe Greenspan could use that for the slogan at the Fed.
Just picked up a Lincoln Navigator with 22k miles for $20,000 cash.
Owned by a little old lady, it cost SIXTY GRAND brand new.
(borrowed the cash from the in-laws, who don't want to charge interest, hehehe)
How does one pull their asset base with them?
outside that demographic, most americans probably have negative actual net worth when you consider their mortgages, car debts, credit cards debts, education loans, etc.
Interesting theory. Anything to back up your probably?
Dang, you got the shaft on that. I still have my '99 ZX2 I bought new in grad school and use it as a commuter car. My payments were only $288/month for 4 years. I intend to keep it for at least 4 more years and get my money's worth out of it.
The ZX2 is the last car I will ever buy without the cash to buy it outright. In this case I found that as a broke graduate student the repair bills for my POS Chevy were adding up to a new car payment every month and it was easier and less expensive to finance a new car than a used one.
Another amen. We haven't made a car payment for at least ten years.
Six years ago we replaced our Audi with a 1984 Mercedes 300TD (station wagon). My husband is using it for commuting to the Bay Area here in California. Two years ago we bought a 1993 BMW 525i for our teenage girls to drive. I have been driving a 1978 Mercedes 300D (with 1985 engine and drive train), yeah mom gets the beat-up car. But then, last Friday, we picked up a 2000 BMW 528i with 60,000 miles, certified, in pristine condition except it needed two new tires. Got the tires on this morning so this mama is ready to rock and roll in the pilot's seat of this loaded car. Now if I could just figure out what all the buttons on this new-fangled computerized car does and how to find the best radio stations.
We paid cash for every single one of those vehicles. Of course, it helps that my husband is a fantastic mechanic of German autos and my father-in-law has a business with a partner who searches out good deals while my father-in-law checks the mechanics of the used cars they find. If it gets their seal of approval, we know we have a good deal.
Go with cash if you possibly can. There are great cars available.
Let me know how you like it.
That's a HECK of a lot of bike.
People will spout off ad infinitum about "how stupid it is to buy a car with cash - you know, due to depreciation" blah, blah, blah. Yeah, well, I'll tall y'all what. I go buy a car tomorrow with cash, and you go tomorrow and use your fancy financing. Then, one week later, we both sell our cars. Which of us comes away with the lower loss? [Econ 101 question ... ].
LOL... reminds me of a Sunbeam Alpine I helped rebuild. An old Ford Cortina/Lotus, too. Now *there* is an interesting little car.
Also, to your "home garage" post up above, I'd specifically include a pneumatic impact wrench to go with that air compressor. People who've never used air tools are amazed at how they make tough jobs seem easy.
It depreciates the same no matter how you pay for it. People fool themselves into paying banks rent on "their cars" with the foolish "depreciation" argument. The recoverable value of a car will be greater if you pay cash. It's a law of the universe ;)
I've been a mechanic since 1970, so I fix 90% of car problems too. The newer ones with the computerized systems are not so easy. Sure helps to be able to fix cars.
My neighbor works for one of the local Dodge dealers, and has access to various manufacturers' codes. He also keeps an eye peeled for those "sugar puffs" when they get traded in for new cars. He found a pickup for his son about 6 years ago, and that was a sugar of a deal if I ever saw one.
This is a good rule of thumb for people to use in all aspects of their finances. Vacations, for example, should be paid off immediately because they're "spent" by the time you receive your credit card bill. And there's nothing wrong with financing a car over five years if you expect to keep it for at least that long.
A lease is OK if you don't drive more than a little over the lease milage allowance. Otherwise you get nickel and dimed by milage, and hammered by the lessor being a prick about wear and tear.
A like nice cars, but I would never do more than a 48 month loan on a used car, and that only for a Porsche or BMW. If I can't wreck it without getting chest pains about what it will cost me, I can't really afford the car. Same goes for houses, about which I'm very glad I bought mine 15 years ago and refi'ed into a 15 year fixed when rates bottomed out.
I buy nice low milage luxury cars and own them outright in 3 or 4 years. Then I luxuriate in the money I'm NOT spending on them for another 5 years at least.
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