New car buyers owe more on loans than trade-in value of their vehicle

[Bush_Eats_Beef]

More car buyers find trade-ins stuck with debt
Long-term loans, lower resale values seen contributing to problem

http://www.msnbc.msn.com/id/7345690/

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 amounts consumers are upside down 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.

[Nicholas D Wolfwood]

1. Yeah, I'm "upside down"

It was my first car, and now I'm probably stuck with it another 3 years.

[Jamison]

2. That's why it's best to...

just try and find some fairly reliable used car for about $4,000 or so and pay straight cash for it. That's what I did in buying my used '92 Acura Integra.

[Stryguy]

33. That's why it's best to LEASE

Just Lease.. I mean geeze... These people with the upside down trade-ins are continually making a payment anyway, why not just lease the darn thing, it will always be in warranty, you'll make lower payments and get a new car every couple years.

When I turned 22 I resigned myself to always having a car payment for the rest of my life. I get a nice new car every 3 years, never have to worry about maintenance, brakes, tires, trade-in, being upside down in my loan or anything else.

When that moron with the WWJD bumper sticker rear ended me (and then tried to lie to the cop and say it was my fault) at the stoplight last year I didn't have to worry about if the repair would be perfect cause I have to keep the car another 5 years to pay off the loan.

Nope, just lease. That's my 2 cents.. I know many won't agree but I've found it to be a savior!

[HereSince1628]

3. Anyone here actually have a 7 year loan on a car?

I had no idea. No wonder there are $20+K SUV's everywhere.

[Nicholas D Wolfwood]

4. No. I got a 6 year though.

Stupid move on my part. At least my warranty will cover it the entire time.

[HereSince1628]

7. You answered one of my questions...the warranty....did you

have to pay extra to get a warranty that went that long?

[Nicholas D Wolfwood]

9. Yeah, $7/month

Well worth it, in my mind.

[HereSince1628]

14. actually, that seems almost reasonable a little over $500

for the 6 year period. In my experiences Almost any power train problem would exceed that. Maybe you did ok, I don't mean to be judgmental.

[Nicholas D Wolfwood]

16. It's fine, I don't blame you.

I'm not thrilled by my situation. Like I said below somewhere, I've also got a nexus around my third year where my resale is just about the same as my remaining payments. I plan on getting rid of it then. It won't even have 35k miles on it at that point, based on how little I drive, and it will still have 3 years of warranty left. I just don't like how I can't get out of the payments UNTIL that point, but I suppose that would go for any car.

[elare]

6. I can't believe that anyone

would actually take a 7 year loan on a vehicle. When I bought my last new vehicle in 1995, I was reluctant to take financing for 4 years ... my personal preference would have been 3 years. Bottom line for me is that if I can't pay for it in 4 years or less, I'm finding a cheaper vehicle to buy. Why do so many people insist on making purchases above and beyond what they can reasonably afford?

[AlCzervik]

10. 7 year car loan is more like a mortgage w/o the tax write off.

[flvegan]

22. Except a mortgage would be on an asset that won't depreciate like a car.

[AlCzervik]

23. very true. Everytime i see articles like that i want to hug my Honda

[Chef]

15. Terrorist

You must be some sort of terrorist or communist. Don't you know that the American way is to go heavily in to debt to keep the treadmill running. Bankruptcies are at an all time high as is personal debt and home foreclosures while real wages have remained stagnant. And, this is at a time when the economy isn't in recession. Can you imagine what would happen if interest rates and unemployment went up?

[durablend]

17. Yeah, the NERVE of some people

Insisting that they give up their GOD GIVEN RIGHT to drive something big enough to run everyone else off the road (if not run right over top to them) while holding the cell phone in one hand and a jumbo cup of Starbucks in the other.

SHEESH!

[elare]

18. It may be the American way ...

but it's not this particular Canadian's way. I happen to be one of the most risk averse people you'll ever meet. My house was paid off in 10 years (original cost was $130,000) and my credit cards are paid in full every month. If I can't afford it, I don't buy it. I'm not alone in my thinking. I ran into someone I used to work with, and she's the exact same way; she & her husband put every penny into paying down their mortgage, with the same result ... it was paid off in 10 years. Yes, you do have to forego some other things, but in the long run, you're miles ahead.

[Nicholas D Wolfwood]

12. I should note this though:

I bought a 2003 Mitsubishi Eclipse RS new for around $18k with 6 year financing. I did my research on this model though. The current resale value of a 2000 Mitsubishi Eclipse RS is around $8,500. After 3 years worth of payments are completed, my resale/trade-in value will be at just about the same amount of what I owe.

That was part of the reason why I agreed to own instead of lease, because I will be able to trade in after 3 years anyway. It just sucks right now because I would like to get out of my payments, but I can't.

[flygal]

13. $20+K SUV's - more like $30-40K SUV's

In Montana I see a ton of newer Suburbans that three years ago went for $42K fully loaded. I guess if you can really afford that - ok, but I can't imagine financing something so expensive.

[tammywammy]

28. I work at a car dealership

(I'm a receptionist) and they only go up to 66 months...but most people do the 48 or 60 months.

I've never heard anyone financing past 66 months, but I'll ask when I get in today.

[LynzM]

5. We are in this scenario

And we didn't even buy new cars.... Upside-down sucks. Our loan terms ranged from 3.5-5 years, probably too long for used cars.

As for the insurance/accident thing, if your financer offers 'gap insurance', get it. It's probably $200ish dollars, and will cover the difference between value on the car and what you owe, should the car be totalled.

[bullimiami]

8. my bus may be a piece of crap to some

but im proud to drive it everyday. and proud it has lasted 37 years and counting.

[LynzM]

31. Awesome

I wanted to buy this lavender bus that was for sale near me, as my first car. It really 'fit' who I was... my dad shot that down fast. I still think about that occasionally when I drive by the spot where it was for sale! Glad you love your bus and that it's lasted you so long! How's it do on gas these days?

[MostlyLurks]

26. Wish I had known about gap insurance circa 1993

LynzM,

Your point about gap insurance is well-taken.

I got a new-to-me car in late 1992 and it was totaled (while parked, by a hit-and-run drunk driver without insurance - it still pisses me off) about a year later. I was WAY upside down on it and young, so I had a hard time getting financing. Finally, I found a Hyundai I could get financed. Sadly, it was a complete lemon and I dropped 100's of dollars into over the next four years. This was back in college, so an extra $150 monthly was basically the extent of my wiggle room on finances.

As a result of the constant repairs to the car, I was consistently short on money, so I was using credit cards for food. Of course, I couldn't make those payments, so I defaulted and went into collections for a year or so.

The gap insurance would have saved me about thousands of dollars all told with repairs to the Hyundai (which I wouldn't have had to buy), finance charges and then late fees on the credit cards, higher finance rate on my next car as a result of my deteriorated credit, etc.

So for anybody listening: take Lynz advice and get the gap insurance.

Mostly

[LynzM]

30. Thanks

It's something I didn't even know about until we bought our third vehicle... that's a whole 'nother long story, had a buyer back out, etc. Anyway, the bank explained it to me, and I'm glad they did. I don't think I'll ever buy another car without that option!

[Extend a Hand]

11. We recently bought new cars

with five year loans. We "drive them until they drop" so we don't plan on trading in.

[4_TN_TITANS]

19. I'll never own a new car....

as soon as you drive it off the lot, they loose thousands off the value yet you're still financed for the full amount. I don't, but I could spend $1000 per year repairing my old Jeep and never come close to what new car payments would be.

[Berserker]

20. My friend likes

to drive new trucks and when he buys them he gets cute little graphics painted on them and stripes because as he says:
It turns lots of heads!
Yup it sure does impress people you dumb shithead now go make a payment while I drool all over your paint job.

[UdoKier]

21. I bought my 1995 Escort wagon 5 years ago for $3000 cash

In the last 5 years, I've spent a total of about $2500~3000 in repairs & maintenance, so let's say a total of $6000 over 5 years. No WAY I could get off that cheap with a new car. It gets 30mpg hwy too, so that's another big concern these days. Costs me $25 to fill up here in pricey SF. I hate to think what the SUV drivers must spend for a fill-up...

[MissB]

24. I just don't understand the whole "new car" thing

I avoid consumer loans (except the ole' mortgage) like the plague. I cannot imagine buying a car on a 7 year loan, or ending up "upside down". It would suck.

[Art_from_Ark]

34. Yeah, new car loans suck

The problem is, it's really hard to get a good used car in the US. I think Udokier above was lucky with his Escort wagon-- every used car I ever bought in the US (with the exception of a 50mpg Chevy Sprint) was a total 100% lemon. So, a lot of people opt for a new car because they figure that they'll have the fewest mechanical problems and the extra bucks they pay will be worth it.

Meanwhile, over here in Japan you can pick up a good used car (with a warranty!) at any used car lot for $3000 or less. Most of them don't even have 40,000 miles on them. I bought my car 9 years ago for the price of the paperwork (the owners were ready to junk it), and it didn't even have 36,000 miles on it! Nine years later, it's just getting "broken in"-- and still hasn't reached the 70,000 mile level. I wish I could start an export service that would sell soon-to-be-scrapped-but-in-perfect-condition Japanese used cars to the States.

[flvegan]

25. Same ole consumer mentality, quite often

If Average Joe has a budget of say, $600/mo for a car payment (not including insurance, gas, maintenance, etc), rather than looking for a good car that he can pay off in 3 years at $600/mo, he'll say "I want whatever can I get for this much?" and he'll be shown to the most expensive thing on the lot that can be extended out at $599/mo for 60 months. So, rather than a Honda Accord/small suv/midsize sedan, he'll walk out with a 3-series BMW, Excursion or luxo-barge, cuz, well, he can "afford" it.

Then, since he's paying practically nothing but interest on it, the vehicle depreciates like a rocket and he's left holding the bag...er, wheel.

[SoCalDem]

27. DUH.... That's what happend when you finance a $25K car for 8 or 9 years

at "low, low interest rates".. The second you drive that baby off the lot, it's depreciated a BUNCH.. That's why we like to buy cars that are a year or more old, and well taken care of :)....

If used cars were higher valued, and cost as much as a new one, why would anyone buy a used car anyway?? ...

Want to hear something that will make you ill?? My husband's 68 GTO that he bought new, was financed for only 3 years..and the payments were about $150 a month.. People USED to be able to pay off a new car in under 4 years :) That was it was not a junker before you paid it off :)

[tammywammy]

29. The resale value also depends on what kind of car your getting to

My 2001 Cavalier, is blue book trade in at $1800, but I'll probably get $1000 for it, unless I go over 100K miles then it'll be $500.

If you're buying a Kia, you should know that there's not much resale value to it, as say a Volkswagen.

From what I know, you shouldn't finance out a car longer than 4 years, 5 max.

And instead of financing out for 6 yars, put more money down. More money down, less monthly payment.

But take what I say as a grain of salt, I work at a dealership, but these are just generalities I've learned.

Edited to add, plus where I work we have demo and service loaner cars. They're new cars, with about 5K miles on them, so they're sold used, but are in great condition.

And if you do buy used, make sure you get it checked out by a mechanic first. We had a used Kia on the lot, sold as is, we didn't have it checked my our mechanics, but the buyers were explicity told it's "As is." They take it to a mechanic a couple of days later, and find out the engine is cracked. You're told it's "as is," but there's nothing stopping you from taking it to a mechanic before you sign on the bottom line.

[Fescue4u]

32. Not really news

Been this way for at least 20 years.