Camaro5 Chevy Camaro Forum / Camaro ZL1, SS and V6 Forums - Camaro5.com
 
Hurst Shifters
Go Back   Camaro5 Chevy Camaro Forum / Camaro ZL1, SS and V6 Forums - Camaro5.com > Members Area > General Automotive + Other Cars Discussion

General Automotive + Other Cars Discussion Come chat about other cars.

Reply
 
Thread Tools
Old 01-01-2008, 08:13 PM   #1
Scotsman
Auto Pilot
 
Scotsman's Avatar
 
Drives: Gunmetal
Join Date: Feb 2007
Location: L.A.
Posts: 1,307
Americans increasingly going upside down on auto loans

This kills me as an auto loan should be the most simple debt (next to credit car debt) to manage. Like they say though, "common sense ain't so common anymore". Why would anyone roll residual debt from an old auto loan into a one for a newer car doesn't make sense to me at all.

Quote:
Tuesday, January 1, 2008
Auto loans have whiff of bad debt
Ken Bensinger / Los Angeles Times


When Jennifer and Bobby Post traded in their 2001 Chevy Suburban last year for a shiny new Ford F-350 turbo diesel with an extended cab, it seemed like a great deal. Even though they still owed $9,500 on their SUV after the trade-in value, they didn't have to put a penny down.

The dealership, near the Posts' home in Victorville, Calif., made it easy; they just added the old debt to the price of the new truck and gave the couple a seven-year, $44,276 loan.

The Posts were a little worried about taking on such a long obligation, but they couldn't pass up a monthly payment under $700. Now they're having regrets. "I didn't realize how much debt was in it," said Post, who since has moved with her family to Iowa. Now, she'd like to get rid of the truck but can't, because there's so much debt that she literally would have to pay someone to take it off her hands. "We have no options," she said.

Americans haven't been taking out only risky mortgages for homes in the last few years; they've also been signing larger automobile loans for significantly longer terms than they used to. As a result, people are slipping into a perpetual cycle of automobile debt that experts think could lead to a new credit crunch extending from dealerships to driveways and all the way to Wall Street.

Gone are the days of the three-year car loan. The length of the average automobile loan hit five years, four months in October, up more than six months from 2002, according to the Federal Reserve. And nearly 45 percent of loans written today are for longer than six years. Even some staid lenders owned by the carmakers, like Toyota Financial Services and Ford Credit, are offering seven-year financing, and a few credit unions, particularly in the West, are tinkering with the eight-year note.

At the same time, the amount of money drivers owe on their cars is soaring. In October, the average amount financed hit $30,738, up $3,500 in just a year and nearly 40 percent in the past decade, according to the Fed. More troubling, today's average car owner owes $4,221 more than their car is worth at the time it's sold -- up from $3,529 in 2002, according to industry analyst Edmunds.

The longer loans are directly related to the higher balances. By extending the length of loans, lenders keep monthly payments down. But because these loans take longer to pay off, a much larger piece of the principal remains unpaid at the time the car is traded in.

The response of the automotive finance industry? Extend loans further, and allow the indebted customer to roll what they owe into a new loan with little, if any, effect on their new monthly payment. In effect, the driver is paying a loan on two -- or more -- cars at once.

Richard Apicella, head of Benchmark International's auto finance division, published a report on car loans last month that called the ever-lengthening deals a "dangerous" problem. Combined with Americans' desire to drive new cars every few years, he said, the effect "is like a drug. Once you get hooked on it, it gets harder and harder to break the cycle."

From the point of view of people who sell cars and car loans, long-term loans are good for business and good for buyers. "The job of a successful dealer is to find a funding package that's acceptable to the customer," said Paul Taylor, chief economist of the National Automobile Dealers Association. "These loans allow them to get a luxury car rather than a more modestly priced vehicle."

Cindy Gerhardt has rolled over so much debt on successive vehicle purchases -- five in three years -- that she now owes almost $43,000 on two trucks worth no more than $29,000 and, she says, perhaps as little as $22,000.

Faced with car payments that exceed her monthly mortgage, she tried to trade in the pair for a single vehicle. But with so much unpaid principal on the vehicle loans, the only offer she got from the dealer was to trade in one truck on yet another new vehicle -- and increase her debt by another $25,000.

"It's our own fault that we traded in vehicles so many times, but we never thought it would get to this," said Gerhardt, a secretary who lives with her husband and two children in Clinton, Okla. She recently tried to refinance her mortgage, she said, but was declined because her car payments were too high. "Not one dealer ever said this was a problem. Ever. I never had a dealership say no."

It's not just individual consumers that are at financial risk. Nationwide, an estimated $575 billion in new and used auto loans are written every year by auto manufacturers, banks, credit unions and other lenders. About 30 percent of the loans that are originated by banks, and 100 percent of those issued by automaker financiers are, like mortgages, repackaged and sold as securities, according to the Consumer Bankers Association.

Analysts warn that just as investors didn't comprehend the risk inherent in some of the more exotic mortgages made in recent years, they aren't considering how risky these car loans are. If longer loan terms allow debt on the loans to grow too large, many drivers simply might default, leading to expensive repossessions.

And even people who keep paying their bills could reach a point, like Gerhardt, where they simply can't afford another car. That could send vehicle sales down the drain, a nightmare scenario for an industry that has taken a hit this year from slower consumer spending and higher gas prices.

It also could lead to serious losses among financial institutions that have invested in car debt. Among securitized auto loans, two-thirds have terms longer than 60 months, a fact that Standard & Poors, which rates auto debt for sale on the secondary market, calls a "credit concern."

This month, S&P reviewed its ratings on $113.5 billion in auto-loan securities it rated in the last two years out of concerns over growing losses. It didn't make any downgrades, but predicted that "rising losses will continue into 2008 across all segments of the auto loan market."

S&P has found that delinquencies of more than 60 days on car loans issued to borrowers with the best credit this year are up 20 percent compared to those issued last year, while delinquencies on loans issued this year to sub-prime borrowers increased by 16 percent. Delinquency rates on car loans are still far lower than on mortgages, but there is growing concern in the financial services industry. Indeed, Tom Webb, chief economist of used auto analysts Manheim Consulting said he expects the tally for 2007 repossessions to be up by 10 percent.

Mark Pregmon, executive vice president for consumer lending at SunTrust Bank, is among the worried. "Any time you extend the maturity of the loan, you take on more risk. The question is whether there's enough assessment of that extra risk," he said. "Obviously it's a problem. It's a house of cards."

(Begin optional trim)

In the 1970s and '80s, the length of a car loan hovered between 36 and 48 months, and drivers typically kept their cars longer than the life of the loan. A number of factors changed that.

One key was interest rates, which fell from a high of 17.8 percent in the early 1980s to lower than 5 percent today, according to the Federal Reserve. Another was affordability. According to an index tracked by Comerica Bank, cars have gotten steadily more affordable -- as compared to median family income -- since the late 1990s.

With less expensive money at hand for more affordable cars, the temptation to keep buying became huge. Today, according to Pregmon, financed cars are typically turned over in 24 to 36 months.

(End optional trim)

At the same time they extended loan maturities, lenders, competing with one another, began offering more money and requiring smaller down payments. Today, most lenders offer financing on 100 percent or even 125 percent of the sticker price, and some offer the most creditworthy buyers loans for twice the value of the vehicle they're purchasing. Last year, the average amount financed for new cars reached 99 percent, according to the Consumer Bankers Association, up from 95 percent in 2005.

Lenders are beginning to brace themselves for problems; many have said they intend to tighten standards and require increased down payments.

Despite warnings from S&P, the CBA, Lehman Brothers and others, there is little sign that the automobile industry is willing -- or, with consumers demanding low payments, even able -- to reduce the lengths of the loans they issue.

"For banks, it's a matter of meeting consumer demand: no money down and extend the term," said SunTrust's Pregmon. "But as a lender, you've got a moral obligation as well. Are we putting the clients in loans they can't afford?"
http://www.detnews.com/apps/pbcs.dll...71/1148/AUTO01
__________________
"Let the rest of the world dream of Ferraris, Lamborghinis and dinky little British two-seaters. In this country speed doesn't look like that." Got SS?
Scotsman is offline   Reply With Quote
Old 01-01-2008, 10:28 PM   #2
EllwynX


 
EllwynX's Avatar
 
Drives: 2010 Camaro SS
Join Date: May 2006
Location: Southern NJ
Posts: 2,260
It's common. I've only ever had one auto loan I wasn't upside down on when I traded for a new vehicle.

Just one more reason I'd prefer to lease.

There's little you can do to control being upside down unless you have a lot of xtra money. OR take a cheap car you're not really happy with.

When I went in for my current vehicle I knew I was upside down by $3000 on my last loan. It was one thing that limited the price of the car I was looking at. I just wanted/needed a car with a lesser payment (I went from $450 to $290).

But I'd prefer having a higher payment... This car is boring and no fun to drive.

I'm willing to go 'upside down' a little if it means I can have something I like over 'just what I need'.

I'm hoping to have this current vehicle about even by the time I trade for the Camaro. It's currently about $2000 upside down. But the rate of it's depreciation seems to have leveled out (I check kbb.com every so often). So in a little over a year I should have over $3500 more paid down. I doubt it will depreciate enough by that time to remain upside down. And if it does, it won't be by much. (It will help that I put VERY few miles on my cars. I've had my car 2 Years and 8 Months. I have 19,800 miles... I should still have under 30,000 by the time I trade it.)
EllwynX is offline   Reply With Quote
Old 01-01-2008, 11:15 PM   #3
Mr. Wyndham
I used to be Dragoneye...
 
Mr. Wyndham's Avatar
 
Drives: 2014 Camaro 1LE
Join Date: Jan 2007
Location: Buffalo, NY
Posts: 25,788
Send a message via AIM to Mr. Wyndham
Maybe I'm slow...but what does ''upside down" mean, exactly?
__________________
"Keep the faith." - - Read Before You Post.
SIGN UP for 2014 Camaro5 HPDE @ Gingerman Raceway!
Mr. Wyndham is offline   Reply With Quote
Old 01-01-2008, 11:40 PM   #4
Scotsman
Auto Pilot
 
Scotsman's Avatar
 
Drives: Gunmetal
Join Date: Feb 2007
Location: L.A.
Posts: 1,307
Quote:
Originally Posted by Dragoneye View Post
Maybe I'm slow...but what does ''upside down" mean, exactly?
In the context of this particular discussion, "upside down" means instead of people having their loans paid off by the time they take out another auto loan for a "new" car they'll have residual debt incurred from that last loan carried over to the new loan.

Ones key financial goal should be to have little next to no debt whatsoever. Otherwise focus on minimizing debt before any additional spending or incurring further debt. How you manage debt determines your buying power, both present and future. That's what I was taught at least.
__________________
"Let the rest of the world dream of Ferraris, Lamborghinis and dinky little British two-seaters. In this country speed doesn't look like that." Got SS?

Last edited by Scotsman; 01-01-2008 at 11:51 PM.
Scotsman is offline   Reply With Quote
Old 01-01-2008, 11:42 PM   #5
Mr. Wyndham
I used to be Dragoneye...
 
Mr. Wyndham's Avatar
 
Drives: 2014 Camaro 1LE
Join Date: Jan 2007
Location: Buffalo, NY
Posts: 25,788
Send a message via AIM to Mr. Wyndham
ahhhhh...gotcha! Thanks
__________________
"Keep the faith." - - Read Before You Post.
SIGN UP for 2014 Camaro5 HPDE @ Gingerman Raceway!
Mr. Wyndham is offline   Reply With Quote
Old 01-02-2008, 12:07 AM   #6
DGthe3
Moderator.ca
 
DGthe3's Avatar
 
Drives: 05 Grand Am GT
Join Date: Jul 2007
Location: Niagara, Canada
Posts: 22,181
Send a message via MSN to DGthe3
I believe upside loans are where the amount owed is greater than the value of the vehicle. So all car loans would start out as being upside down unless you pay 50% down or more. I think . . .

Maybe im missing something but if you are thinking of buying a new car and are upside-down on your current one, wouldn't it be best to stick it out for a while rather than get deeper in debt? Or is it possible that some people are completely clueless when it comes to these things?

My family has never bought a brand new car, always got something used. We have been fine, though I really want to buy a brand new Camaro. I won't do it until I can afford it. This summer I will buy something thats about 5 years old for $5000, thats all i can afford! I won't pay 27k over 5 years towards a car (the interest is a killer), I'd rather pay 5k then pay 2k in repairs for the same time period, gives me an extra 20 grand.

I anticipate that the Camaro will cost me up to 40k (Canadian pricing sucks!), and I will be able to make a 15k down payment. It may be 2011 or even 2012 before I can do this, but I will wait. Then, I pay off the rest of the Camaro over the next few years. Then keep it for a long time.
__________________
Note, if I've gotten any facts wrong in the above, just ignore any points I made with them
__________________
don't believe a thing you read about the next gen Camaro -- as history has proven time and time again:

WE DO NOT TALK ABOUT FUTURE PRODUCT PLANS PERIOD FbodFather
__________________

Camaro5 Fest sub-forum
DGthe3 is offline   Reply With Quote
Old 01-02-2008, 12:19 AM   #7
stevenm357
 
Drives: 98 Trans am 00 Trans am 01 corvette
Join Date: Mar 2007
Location: West Virginia
Posts: 380
you mention controlling credit card debt most Americans don't do that either, that's why our economy is in the state it is in.. most American families only talk about money when things are bad. it's not a skill that is taught in high school or many college degree programs.. common since.. but even that needs guidance some times.
__________________

2001 Corvette
Heads,Big cam, 4:11, Custom Exhaust, MGW Shifter Baer Eradispeed +2 2 pieces rotors, Hotchkiss swaybars. and a few other little things.

1998 Trans Am A4 ( was STS turbo until the turbo and oil pump died)

2000 WS6 Trans AM under the knife ( sadly turned into long term project.
stevenm357 is offline   Reply With Quote
Old 01-02-2008, 12:39 AM   #8
Scotsman
Auto Pilot
 
Scotsman's Avatar
 
Drives: Gunmetal
Join Date: Feb 2007
Location: L.A.
Posts: 1,307
^ Right on point DG.

I refuse to carry any residual debt of my current auto loan to one I'd use for my 5thgen. I'd cringe just that much more looking at my new Camaro everytime I'm walking to get in it, and I don't want that. Once my current car is paid OFF and I've saved 10k or more for my d.p. I'm good to go. Just have to wait for another 5.5 years or less to get there. A small and far better compromise to make compared to the alternative. There's absolutely nothing wrong with delayed gratification, a concept that seems all but long forgotten in todays society.
__________________
"Let the rest of the world dream of Ferraris, Lamborghinis and dinky little British two-seaters. In this country speed doesn't look like that." Got SS?
Scotsman is offline   Reply With Quote
Old 01-02-2008, 12:30 PM   #9
The_Stache
SoCal Race Team #13
 
The_Stache's Avatar
 
Drives: 2010 1SS:RS:LS3:SW
Join Date: Mar 2007
Location: Gilbert, AZ
Posts: 1,730
Quote:
There's absolutely nothing wrong with delayed gratification, a concept that seems all but long forgotten in todays society.
That is Americas biggest problem now.. using debt to get ahead.. its just long term bankruptcy..

Personally I never buy a new car unless the one I currently own is paid off.. Period.

At the moment my truck has payments until 2010, but with the extra payments I am doing it should be paid off mid to late 2009. Then it will get traded in. Oh and I refuse to do more than a 5 year loan on anything (except the house, and thats ALWAYS a 30 year fixed intrest loan, screw these interest only or arms that are now screwing over so many americans)

Smart financial management is such a lost skill to most people nowadays.
__________________
A.K.A - Diarmadhi (old handle) - So much to do.. So little money
Owner : Fast-Stache Industries LLC
The_Stache is offline   Reply With Quote
Old 01-02-2008, 12:54 PM   #10
Mr. Wyndham
I used to be Dragoneye...
 
Mr. Wyndham's Avatar
 
Drives: 2014 Camaro 1LE
Join Date: Jan 2007
Location: Buffalo, NY
Posts: 25,788
Send a message via AIM to Mr. Wyndham
Quote:
Originally Posted by diarmadhi View Post
Smart financial management is such a lost skill to most people nowadays.
Yup. Now combine that with these lenders who befuddle everybody with their mumbo-jumbo. Then say "sign here". That doesn't help. (cough, cough- variable rates -cough, cough)
__________________
"Keep the faith." - - Read Before You Post.
SIGN UP for 2014 Camaro5 HPDE @ Gingerman Raceway!
Mr. Wyndham is offline   Reply With Quote
Old 01-02-2008, 12:58 PM   #11
Silverado
GM Guy For Life
 
Drives: 2010 GMC Yukon XL
Join Date: Apr 2007
Location: Omaha, NE
Posts: 1,021
Being upside down on a loan...any loan...means that the loan is "outstanding" for more than the item (car, home, etc) is worth. If there was no downpayment or the downpayment was minimal, then the loan pretty much starts out upside down (unless there was a great deal to begin with...even then, on a car, it turns upside down pretty quickly.). Carrying any loan amount over to the next car is a terrible idea, period.

Credit card "debt" is easy to manage....my wife and I basically use the credit card to "build up good credit" and to keep from writing checks for everything...if we don't have the money in our checking account to pay for an item, we don't buy it. We just write one check at the end of the month to the credit card company and we're done with it. I even tried to "charge" my Silverado when I bought it (okay, not the full amount, just the balance after the two trade in's I had at the time and, I was using my GM card to build up for the next purchase....). The dealer just wasn't equipped to handle charging a vehicle.

I don't do car loans any more. If we can't write a check for it (again, the balance after counting the trade), then we don't get it. We just agreed yesterday, as a matter of fact, on the new Enclave. The dealer finally came down to our number. We had a set amount we were willing to spend (cash outlay) and that was it. So we are ordering an Enclave, trading in the Tahoe and paying some cash. In mid-February when we get our new vehicle, it will be paid off already.

But, not everyone can afford to pay for the entire vehicle...I get that...but even car loans are easy. Don't get more loan than you can afford to pay for. Yes, that almost always means getting less car than you want, but that's what you should do.

Of course, I don't think lenders should approve people for the most of the loans that they do anyway. When I was working at the Lexus dealer, the finance guy actually told me that 51% of the people that come in to buy cars can't afford them. If that's known ahead of time, why are the lenders allowed to approve them? That's ridiculous. I'm all for people being responsible for themselves, but because of what it ends up doing to the economy, because of what it ends up costing other people, I think there should be some tighter regulations on the loan process (cars, houses, everything).
Silverado is offline   Reply With Quote
Old 01-02-2008, 11:08 PM   #12
stovt001


 
stovt001's Avatar
 
Drives: 2006 Cobalt, 2004 Taurus wagon
Join Date: Oct 2007
Location: California
Posts: 3,817
That was a fantastic article. I saw stupid stuff like that so much when I worked at the dealership, and this is exactly what I have been warning so many people about. I'm not selling my Cobalt and getting my Camaro until I have a year or less left on the loan. I'll most likely just pay it off first. Not that much longer.
stovt001 is offline   Reply With Quote
Old 01-03-2008, 12:48 AM   #13
Myka
ritired suthern gentlman
 
Myka's Avatar
 
Drives: nothing now
Join Date: Sep 2007
Location: MO
Posts: 200
I just think that article is so funny. It actually makes me feel better. I still drive my first car that I paid $1300 cash for. I see stupid people with crap jobs driving very nice & new vehicles and I used to wonder why. I can sleep at night because I have a small amount of Student loans to pay. Not $30,000+.
Myka is offline   Reply With Quote
Reply

Thread Tools

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off

Forum Jump

Similar Threads
Thread Thread Starter Forum Replies Last Post
2006 TRAVERSE CITY AUTO CONFERENCE KILLER74Z28 Off-topic Discussions 2 09-18-2010 10:45 AM
Iacocca rips auto industry, warns: Don't sell Chrysler KILLER74Z28 General Automotive + Other Cars Discussion 6 04-14-2007 12:38 AM


All times are GMT -5. The time now is 09:11 PM.


Powered by vBulletin® Version 3.8.7
Copyright ©2000 - 2014, vBulletin Solutions, Inc.