11-12-2019, 06:27 AM
More Borrowers Are Going Underwater on Car Loans... $45,000 Loan for a $27,000 Ride.
https://www.wsj.com/articles/a-45-000-lo...1573295400
John Schricker took out a loan to buy a car in 2017. Then he took out another. And then another. In two years, the 40-year-old electrician signed up for four auto loans, each time trading in the previous car and rolling the unpaid balance into the next loan. He recently bought a $27,000 Jeep Cherokee with a $45,000 loan from Ally Financial Inc.
Consumers, salespeople and lenders are treating cars a lot like houses during the last financial crisis: by piling on debt to such a degree that it often exceeds the carâ€s value. This phenomenon—referred to as negative equity, or being underwater—can leave car owners trapped. Some 33% of people who traded in cars to buy new ones in the first nine months of 2019 had negative equity, compared with 28% five years ago and 19% a decade ago, according to car-shopping site Edmunds.
Easy lending standards are perpetuating the cycle, with lenders routinely making car loans with low or no down payments that can last seven years or longer.
Borrowers are responsible for paying their remaining debt even after they get rid of the vehicle tied to it. When subsequently buying another car, they can roll this old debt into a new loan. The lender that originates the new loan typically pays off the old lender, and the consumer then owes the balance from both cars to the new lender. The transactions are often encouraged by dealerships, which now make more money on arranging financing than on selling cars.
“These arenâ€t Rolls-Royces,†said David Goldsmith, a lawyer who defends consumers in auto cases. “Theyâ€re Ford Escapes.â€
https://www.wsj.com/articles/a-45-000-lo...1573295400
John Schricker took out a loan to buy a car in 2017. Then he took out another. And then another. In two years, the 40-year-old electrician signed up for four auto loans, each time trading in the previous car and rolling the unpaid balance into the next loan. He recently bought a $27,000 Jeep Cherokee with a $45,000 loan from Ally Financial Inc.
Consumers, salespeople and lenders are treating cars a lot like houses during the last financial crisis: by piling on debt to such a degree that it often exceeds the carâ€s value. This phenomenon—referred to as negative equity, or being underwater—can leave car owners trapped. Some 33% of people who traded in cars to buy new ones in the first nine months of 2019 had negative equity, compared with 28% five years ago and 19% a decade ago, according to car-shopping site Edmunds.
Easy lending standards are perpetuating the cycle, with lenders routinely making car loans with low or no down payments that can last seven years or longer.
Borrowers are responsible for paying their remaining debt even after they get rid of the vehicle tied to it. When subsequently buying another car, they can roll this old debt into a new loan. The lender that originates the new loan typically pays off the old lender, and the consumer then owes the balance from both cars to the new lender. The transactions are often encouraged by dealerships, which now make more money on arranging financing than on selling cars.
“These arenâ€t Rolls-Royces,†said David Goldsmith, a lawyer who defends consumers in auto cases. “Theyâ€re Ford Escapes.â€
