
Borrowers Are Going Underwater on Car Loans - zachperret
https://www.wsj.com/articles/a-45-000-loan-for-a-27-000-ride-more-borrowers-are-going-underwater-on-car-loans-11573295400?mod=rsswn
======
RankingMember
Reading some of these stories makes you want to smack your forehead on your
desk. A lack of basic financial literacy + materialism sometimes have some
pretty brutal results.

One example:

> Nicole-Malia Tennent and Shyanne Fernandez, both in their early 20s, wanted
> to trade in the car they shared for something less expensive last year. The
> friends, who live in Hawaii, ended up splurging on a new vehicle and moving
> the unpaid loan balance of $12,500 from an older GMC into a new loan for a
> 2018 GMC Sierra truck.

> The rollover debt helped drive up the new loan balance to more than $66,000.
> The friends now split the payment of more than $900 a month, which they owe
> to Pearl Hawaii Federal Credit Union for 84 months. Their old loan was about
> $500 a month.

How do you go looking for a vehicle that's less expensive and end up with a
vehicle that's nearly 2x the cost?

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metalliqaz
Americans make terrible decisions with cars.

The article includes two anecdotal examples. I suspect that my income exceeds
both. I would never pay as much as they did for a car. Cars are terrible
investments. Most should be purchased as the bare minimum cost to get back and
forth to work.

I particularly dislike the common refrain, "the cost to repair it is more than
the car is worth." It's the wrong mindset. The repair cost is always far less
than the replacement cost. My old 150k beater that needs $1k of repairs every
year is still much less expensive than the $25k+ it would cost to replace. I
have no car payment (thus no interest), and property taxes are cheaper.

And people keep buying brand new cars. Why? Our culture doesn't properly
identify brand new cars as luxury items. We should publish a new rule of
thumb. Nobody should be buying new cars who can't already afford to fund an
IRA.

~~~
RickJWagner
I think many Americans make terrible decisions with _money_.

The really sad part: It's easily curable, with financial education. Why it's
not part of middle school education, I'll never know.

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seminatl
This is a weird summary because everyone who buys a car on credit is always
“underwater”. The cars are never worth the balance of the loan. People buy
cars on credit not because the car has intrinsic value or is an investment,
but because it gives them access to other things of value, like their job.

I’m concerned, of course, that Americans have built a society with so few
buses that everyone has to buy a car on credit. But being “underwater” is not
the main problem here.

~~~
hackeraccount
I've never checked but I don't think I've ever been underwater on a car loan -
I finance but not 100% of the price - it's more like 50% - whatever the value
of the trade plus at least a little bit of cash that I bring to the table.

That said I tend to agree that "underwater" isn't really the right concept for
a car loan. Unless of course you total a car right after you get it. Sucks to
be putting $ towards a car note with nothing behind it.

~~~
derision
Yeah, you're definitely the exception. The vast majority of people are not
putting 50% down on a car..

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ttraub
Car loans are a relatively small component of overall consumer debt in the
U.S.[1]

By far, the largest amount of money tied up in debt is in mortgages. The
highest number of borrowers are credit card users.

Underwater car loans are a problem for some borrowers, maybe, and could
portend a slowdown in car buying, but people have many options when it comes
to cars. They'll buy used, if they hit a debt wall and simply can't afford
new, then later trade up for a new vehicle.

It's unlikely that this is a sign of recession, in my opinion.

1\. [https://www.lendingtree.com/debt-consolidation/consumer-
debt...](https://www.lendingtree.com/debt-consolidation/consumer-debt-
statistics-2019/)

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calvinbhai
Two friends wanted to by a cheaper car, so their loan is now 66K?

Looks like WSJ is skirting around the issue of subprime loans made to
rideshare (Uber/Lyft) drivers. lost track of the number of unhappy uber/lyft
drivers I have chatted, because of the predatory nature of the incentives and
car loans.

The drivers think they bought a new Camry, and while making a nice profit in
the first few months. Then the incentives dry up, while principle due has
barely moved. Now the predatory lender has a captive slave to make the monthly
payment by giving ride, because there's a loss aversion mindset that prevents
the driver from walking away.

At some point though, the drivers will realize it's not worth slaving it out
for a car they don't own. With Uber losses continuing to pile up, at some
point incentives will go to zero, their retention costs will go up, drivers
will get fewer $$$ per mile.

If this happens on a large scale, there has to be some kind of a crisis with
these subprime loans. There'll be glut of used cars, killing new car sales,
thus affecting those car manufacturers/sales.

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joezydeco
If you read the traffic on /r/askcarsales, the salesman all point to
Chrysler/Jeep/Dodge/Ram as the last refuge of the credit-unworthy.

FCA will take much riskier clients (and much more negative equity) than other
makers, even though their product depreciates way faster than almost every
other brand on the market.

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peg_leg
I'm underwater on my car loan. But my credit rating was low and I got to get a
new car without anything down, extended payments. The interest rate is a bit
high, but now my credit score is good. It works out. At least I got a car that
will last as long as the loan.

~~~
Finnucane
Cars last a long time now. My car is 20 years old and it’s still far cheaper
to maintain that car than to buy a new car.

~~~
MarkMMullin
Depends where you live - 20 years of salt nets you a frame that will break if
you sneeze

~~~
Finnucane
I live near Boston.

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neonate
[http://archive.is/jAsU2](http://archive.is/jAsU2)

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mdszy
How does this have anything to do with anything that could be on topic for HN?

~~~
phil_folrida
Because it might signal the beginning of a crisis, it signals that car are
treated a lot like house were in the last financial crisis, under water means
negative equity.

Lenders are willing to make the underwater loans, often charge with high
interest rates. Many of the loans are bundled into bonds and snapped up by
Wall Street investors therefore having supposedly a broader effect.

