How to Spend $45,000 on a $27,000 Car

-edited

As cars become more expensive and trade-ins worth less and less buyers go deeper in debt on new cars.

Please consider taking a $45,000 Loan for a $27,000 Ride.

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 car’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 aren’t Rolls-Royces,” said David Goldsmith, a lawyer who defends consumers in auto cases. “They’re Ford Escapes.”

Some 5.2% of outstanding securitized subprime auto-loan balances were at least 60 days past due on a rolling 12-month average during the period ending in June, up from 4.8% the year before and 4.9% two years before, according to Fitch Ratings.

Examples to Consider

The Journal cited the case of Mr. John Schricker who kept rolling over loans to the point that it took a $45,000 loan from Ally Financial Inc. to buy a $27,000 Jeep Cherokee.

Also consider the case of Yolanda Finley. She bought a bought a used 2011 Chevy Traverse with a loan of $25,585 from Santander Consumer USA Holdings Inc. in 2014. Finley could not afford the payment. Her car was repossessed. She now owes $27,000 on a car she does not even have.

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. Instead they splurged on a new 2018 GMC Sierra truck, moving the unpaid loan balance of $12,500 into a new loan. The new loan balance is over $66,000. The old loan payment was $500. The new loan payment (I presume for longer), is $900.

What the hell do two friends need a $66,000 truck for? How will they allot the time between them?

This is how crazy it's gotten.

Three personal anecdotes don't constitute data but other evidence suggests the problem is widespread.

Car Dealers Make More Profit On Loans Than Selling Cars

A third of auto loans in 2019 had a term period over six years. People cannot afford the cars they are buying.

For discussion, please see Car Dealers Make More Profit On Loans Than Selling Cars

Families Go Deep in Debt to Stay Middle Class

On September 9, I noted Families Go Deep in Debt to Stay Middle Class: Revolving Credit Jumps 11.2%

These are all signs of a "Late Stage Credit Bubble"

Ability to buy things one cannot really afford does not make or keep someone in the "middle class".

Wages are not keeping up with needs and desires.

Collectively, these reports show a late stage credit bubble the Fed desperately wants to keep inflating.

Mike "Mish" Shedlock

Comments (136)
No. 1-32
DFWRealEstate
DFWRealEstate

Sick and twisted financial industry. It should be illegal to roll negative equity onto a new car purchase, particularly when the new car depreciates the minute you drive it off the lot.

CzarChasm-Reigns
CzarChasm-Reigns

The NEW truck sales people lost me YEARS ago when the cool ones were 50k+. However, I be abbey normal: the F150 I bought new in 2000 is now 19 years old.

Country Bob
Country Bob

Seems like the education system should teach people how to do basic math.

It should be illegal to charge taxpayers for an education that apparently was not received -- or else the persons taking these neg equity loans perhaps should be declared mentally incompetent. Probably some of both cases.

In any event, the finance industry can't force a buyer to sign a dumb loan for a $66K truck. There are lots of affordable cars that buyers could purchase instead

These loans wouldn't be happening if the buying public could do simple math.

Geometer
Geometer

This sounds like the "In the long run, we are all dead" kind of thinking. Isn't that what Keynes meant when he said that? Instead of buying the thing outright, we just take out a loan and pay it till we die? Or no?

Felix_Mish
Felix_Mish

"Wages are not keeping up with needs and desires."

That's new?

Casual_Observer
Casual_Observer

This is just another version of extending and pretending. In Texas where disposable income is high, is where there are the most $ per capita outstanding debt on car loans. There will be a big repo market there soon when the party ends. More than any other state during this economic boom, Texas represents the place that will blow up on the downside.

Blurtman
Blurtman

Exactly why we need negative rates. :>))

thimk
thimk

its the "new" economy": vendors don't make money on the item they are selling. They make money on the add on fees. i.e. extended warranties, loan servicing fees, points, ridiculous title insurance , admin costs ,credit checks ad nauseam. try to buy just a tire for your car. as far as the sub prime loans , let the losses incur. the system will stop on a dime. oh i forgot we have the fed .

Greggg
Greggg

When will the US's foreign used car market slow down enough to clog Uncle Sam's arteries with cars coming off lease?

Realist
Realist

I am constantly amazed at Americans. The culture of “living beyond one’s means”, “not saving for retirement“, “borrow and consume”, seems to be encouraged by both business and governments.

Both Governments and individuals have tremendously high debt levels. This short-term thinking is one reason why economic growth rates will slow in the future towards 1% and eventually zero.

Webej
Webej

I recall being astonished when I was in the States (after GFC, don't recall the year) about the wall to wall advertising on the radio for 1. loans to go to college; 2. loans for cars. All of them were saying it doesn't matter how much you earn, even without work, bla bla. Astonished was I. In Canada and Europe I had never once heard advertising for financing cars/college, let alone for people without income. Negative car equity. I'm sure there would be a few takers here, but nobody is crazy enough to be offering. Seems like a losing business.

abend237-04
abend237-04

If I were caesar, the following warning in 50 point type, red lettering would be the mandatory front page of every car loan:

I hereby formally acknowledge fair warning receipt that any car loan for greater than 36 months is dangerous to my financial health and, although legal in every state, the attachment of negative equity to any loan document I ever sign is a sure sign of cosmic scale ignorance and stupidity.

caradoc-again
caradoc-again

Another example of a sick extractive financial system, exploiting people lacking education/common-sense, supporting an industrial complex that is about to collapse.

caradoc-again
caradoc-again

A union of debt slaves would have considerable leverage if they all voted one way or simultaneously decided to step off the merry-go round and sto paying.

The law courts wouldn't cope and the financial-industrial complex would implode. Quickly.

Latkes
Latkes

The buyers probably have double digit IQs, so they naturally make bad choices. Education would likely have very limited effect on them.

In a sane world, if a lender behaved this way, it would mean that they were not very bright either. But they know that they will get bailed out if they screw up and the marketers and sales people all get their commissions, so why should they care, right?

Maybe making this stuff illegal is not such a bad idea. We all know that neither lenders nor borrowers will start behaving responsibly any time soon.

Sechel
Sechel

Elizabeth Warren's CFPB was targeting this abuse but the auto lenders with Republican help gutted the agency and emasculated it. This and pay-day lenders are where working and middle class people who aren't savvy and perhaps a little desperate get taken to the cleaners. It's not caveat emptor . It's worse

Democritus
Democritus

The concept of unlimited contracts... Governments spending resources enforcing any crap that 2 parties agree upon at a point of time, under the assumption that adults always take wise decisions... Happy to be in the Netherlands where there are limits to what our gov will enforce, especially in these cases.

Six000mileyear
Six000mileyear

The stock chart for Credit Acceptance Corp (CACC) shows its bubble has burst. This company specializes in subprime at the border of loan denied. Their proprietary algorithms help then rationalize taking risks. It is my understanding they use only their money and hold loans until maturity, but I don't believe it.

numike
numike

A Michigan Man Underpaid His Property Taxes By $8.41. The County Seized His Property, Sold It—and Kept the Profits. A state law allows counties to effectively steal homes over unpaid taxes and keep the excess revenue for their own budgets.

Snow_Dog
Snow_Dog

“What the hell do two friends need a $66,000 truck for?”

They’re doing their part to keep Kentucky’s pension plan solvent for another year or two.

ReadyKilowatt
ReadyKilowatt

There's a sweet spot for cars built in the mid-1990s to early 2000's. Vehicles built then seem to be tanks. The manufacturers figured out fuel injection, clear coat paint (and galvanized dips), V8 engines able to make a lot of power, OK fuel economy, and still able to be repaired by anyone. Few airbags. Reasonably simple automatic transmissions or hydraulic assisted manuals.

These days with all the edicts and regulations from the "leaders" cars are basically disposable. The feats of engineering involved to make a straight 4 punch above its weight class are amazing, but will probably come at a cost of longevity and expensive repairs. 10 speed transmissions with 6 overdrive gears. Dubious "features" like automatic stop-start (where the engine stalls at red lights, intentionally). And of course a dozen or more airbags, any one of which will basically total your car if it goes off (if it doesn't kill you in the case of the Tanaka recall). And all those electronics, which need software updates, aren't replaceable, and will tattle to the manufacturer, the insurance company, and the police.

Cars don't need to be as expensive as they are, but you're not buying a car, you're buying a "transportation system," that includes the vehicle, the manufacturer, the state and several different private industries.

ksdude69
ksdude69

I was an idiot when I was a bit younger making the big bucks and dodge hotrod trucks come out. I had to have 2 of them. Good news is I still have them both and one only has 33k on them. I'm pretty sure they were the last brand new vehicle ill ever buy ( unless we go full on tard and have AOC require everyone to have an 80k electric pile of **** in the drive). Right now my main driver is a $1000 95 honda accord with over 200k on it. Of course, it helps to know some basic mechanic stuff I just redid all the brakes and calipers. Off topic, but im waiting for HOA's(which im no part of) to start requiring all electric lawn equipment in order to cut down on noise pollution and those dreadful emissions. The riders are only a few k and stay charged for an entire hour and a half or so. What a joke. I wake up everyday wondering what planet im on I hate it.

ksdude69
ksdude69

BTW idiots going in debt on cars has been going on for a long time it's just worse now. I can remember more than once my drunk dad going to the car lot in the 80's and then crying in his beer when the coupon payment book showed up. I am just blown away by prices on things these days its insane.

Country Bob
Country Bob

Look at what the so-called "leaders" are doing at the state level, its not hard to see the citizenry just following the leaders (or maybe other way around?)

The poop for brains in California just approved a $3.2 BILLION municipal bond issue to fund Richard Branson building a train from outside LA to Vegas (where Branson, a multi billionaire, owns the Hard Rock Casino/Hotel). Why doesn't Branson pay for his own train? Why don't the casinos in Vegas pay for a train together, so all the math challenged Californians can lose their money gambling? BECAUSE, the people of California are extra stupid and will pay for both.

On top of the "high speed" (which can't get up to speed on such a short track) train from the middle of nowhere San Bernadino to the middle of nowhere else...

The morons are now going to pay Branson to build a train from the middle of nowhere outside LA, to Branson's casino in Vegas. Maybe it never gets finished (like the other high speed disasters), and CA spends $3.2 billion to dig a trench -- or just maybe they pay to send more customers to Vegas to lose their money at the tables. Its too stupid and pointless to even be labeled "fiscal stimulus".

California has become a 3rd world country, with a 3rd world education system and voters who can't balance a checkbook. Basic addition and subtraction eludes them. They actually believe they can get something for nothing.

Is it any wonder they are befuddled by a seven year car loan on a machine that devalues in only five years? None of these participation trophy winners knows the first thing about car maintenance, so after years of neglect the cars are pretty much garbage in practical terms, not just depreciation terms. Changing the oil and inflating tires are white privilege according to college indoctrination staff.

Despite the highest taxes in the country, California is in debt, has the highest income inequality, rampant homelessness, poverty, garbage uncollected, rats and medieval diseases, used syringes and human feces all over their cities. And they keep voting for the likes of Maxine Waters, Adam Schiff and Nancy Pelosi (and Gov Moonbeam isn't extreme left wing enough for them). They leave dry kindling underneath neglected high tension power lines, and then wonder how forest fires start.... well lets be honest and mention some fires were started by a California college grad dropping their lit marijuana joint into the kindling.

The hillbillies, allegedly not that bright, know how to change their oil. The allegedly educated Californians have absolutely no clue. Time to update our stereotypes

Carl_R
Carl_R

When it comes to lending, there are really only two positions. One is that everyone should have access to loans. That position has consequences, those being that, in order to make lenders willing to lend to the non-credit worthy, debtors must have no easy means to escape paying. At the other extreme, you can have a system where bankruptcy can allow people in over their heads to get out. The consequences of that are that lenders are unwilling to lend to risky borrowers, and only the most credit worthy people can borrow.

Whichever system you have, people will complain. We used to have the latter system, and Chapter 7 was easy, and you could even get out of student loans. The consequence was that the poor had no easy way to get loans, and when they did, the interest rates were high. As far as education, anyone with high academic qualifications could get a scholarship, if needed, but marginal students could otherwise only go to college if they could afford to pay. Colleges had to be fiscally prudent in order to keep tuition as affordable as possible, so that they could get enough students.

Now we have gone the other way. Lower income people have much more access to loans, and at much more competitive interest rates, but can't get out of them. Anyone can go to college now, so long as they are willing to sign the papers obligating them to a lifetime of debt. Colleges have gone on a huge building boom, building tons of modern, new buildings, and increased salaries dramatically, and tuition has skyrocketed, since there is no longer a need to keep it affordable.

Which system is better? You decide. However, if you decide that we should have a system where everyone can borrow money easily at low rates, but then get out of it easily if it becomes challenging to repay, you are living in dreamland. That isn't a possible choice.

ColoradoAccountant
ColoradoAccountant

Working at CDOT in the 80's we were discussing the housing boom in Colorado due to a spike in oil prices. I argued it was all about financing, but our auditor (from Kansas oil), said financing didn't matter. I said why? He said "People will just pay cash for their houses if they can't get financing." I said: "Who can do that?" He said: "All my friends can."

Sechel
Sechel

Auto lenders have every incentive to cheat the borrower. Interest rates are routinely marked up in subprime auto lending and the borrower is never told. These are also the same people who may not have the best credit or access to banks so its easy to tell them the loan requires a higher rate and not disclose that part of that is a kick back to the car dealer and has nothing to do with their credit risk.

Large numbers of car buyers around the country pay thousands of dollars extra because of the dealer markup, which is invisible to typical buyers and little understood by them. Though the markup is often paid by car buyers of all ethnicities, it can be most pronounced for minorities, in which case it runs afoul of federal law that prohibits discriminatory lending practices. 

frozeninthenorth
frozeninthenorth

I don't understand, don't you have car leasing in the US? I mean you lease a car for 5 years and at the end you return the car and walk away. Why would anyone take the residual risk on a vehicle? Buy the insurance, and lease a car! sure its probably a few dollars more but the implicit insurance of "returning the car at the end of the lease" is worth it, and doesn't give rise to this kind of insanity.

It could be that all these people have such terrible credit that they cannot afford to "lease a car" and then the issue is why would anyone lend to these people?

Je'Ri
Je'Ri

Picture a child in a candy store that extends credit ... that pretty much sums it up for many people.

Rvrider
Rvrider

What’s going to happen to all those vehicles when the repossession bonanza goes into high gear?

Guinny_Ire
Guinny_Ire

This is what happens when the "stock market" becomes the de facto health of the economy. Delaying the business cycle, propping up company profits to maintain a "healthy" market. The car cycle has been artificially maintained to the point we have to shift technologies (gas to electric) to maintain the illusion.

MickLinux
MickLinux

I used to think people who purchased way beyond their means would get in trouble, and those who saved would do better in the long run. But what I have seen is that when you have enough badly behaving people, their political clout increases, and the government bails out the bad actors on the backs of the good actors. Theoretically, it can't go on forever. In practice, it is likely to go on longer than I will live (but I'm thinking my life expectancy is short.)

So I really have no idea how this is going to play out.