Home » Lots Of Car-Buyers Are Now $10,000+ In Debt On Old Loans: Report

Lots Of Car-Buyers Are Now $10,000+ In Debt On Old Loans: Report

A Buy Here Pay Here Dealer
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Here are some fun facts for you to think about late at night when you can’t sleep: In the U.S., private-sector wages rose about 4% to 5% annually during the pandemic, on average. That trend is projected to cool to a more “normal” 3%-4% this year, returning to pre-pandemic levels. In the same pandemic period, Bloomberg reported this week, the cost of new cars rose 20% and used cars went up a whopping 37%, thanks to inflation, weird supply issues, dealer markups and other factors.

It’s no wonder, then, that people are struggling to make their car payments. Moreover, given the paltry supply of cars and their commensurate price increase, the practice of rolling in negative equity—when you combine what you still owed on your trade-in with a new loan of some sort—has been skyrocketing as of late.

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Dealers who spoke to the business-focused news outlet say they’ve seen an uptick in people owing $10,000 or more on their trade-ins, taking out loans for seven years or more and stretching their budgets beyond what’s comfortable — all in order to deal with sky-high new and used car prices.

That Bloomberg story opens with an anecdote from a couple who needed a bigger vehicle after their fourth baby was born, but they still owed money on their two current cars. So they did this instead, but they don’t have a good feeling about it:

The couple proposed an unusual two-for-one deal with an Atlanta-area auto dealer in 2020: trading in both of their vehicles so they could afford a three-row Ford Explorer. Their total loan after factoring in negative equity, a service contract, fees and other costs ballooned to $66,000 on the $49,000 Explorer.

Despite a lot of progress on the debt, he feels uneasy. “I don’t want to be paying interest on cars that I don’t even have anymore.”

“The cars are too damn expensive” is a trend we’ve been covering for a while now. You probably know the issues, and you’ve possibly even had to deal with some version of this yourself. It’s best to keep a vehicle as long as you can, maintain it, then pay it off completely, but as with that couple above, life sometimes throws curveballs your way. And the longer your loan term, the longer you’re on the hook for a car if something unexpected happens to you and your family.

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My biggest piece of car-buying advice always used to be “Don’t ever buy above your budget,” meaning that above all else you should make sure you get something you can actually afford. But let’s be real: That’s gotten pretty squirrely in recent years, with new (and then used) car prices being all over the map. Sometimes you have more kids and need something bigger. Sometimes your current ride has too many problems you’re sick of paying to fix, and it’s time to move on. Stuff happens, is what I’m saying. Lately, it’s just not that easy to figure all this out.

Amid all this Economic Uncertainty® and rampant layoffs across multiple sectors, people’s financial situations can change rapidly, but deep debt isn’t going anywhere. In fact, it’s getting worse, and those high prices are quite the trap:

In January, severely delinquent auto loans hit their highest rate since 2006, based on Cox Automotive data.

One wild card for consumers is the fluctuation in used-car values. After a historic climb during the pandemic, values fell 13% from their peaks as of January, but suddenly climbed again in February, according to the Manheim Used Vehicle Value Index. If they fall further, anyone who bought at the top of the market will fall further into the trap of negative equity.

So what actual advice can I offer people right now, who may be facing this situation? I’m not so sure. It’s a bizarre car market and I don’t think it will normalize all that much in 2023, and again, I try not to judge people’s situations when our systems are designed to trap users in debt.

However, I can say that generally, negative equity should almost always be avoided, especially if it’s anything more than a few thousand dollars (and even then we’d probably agree that isn’t great.) If you can hold off on making a car purchase you really don’t need, or want to pay down what you have in the meantime, that’s the best path. And as always, start the car-buying process with what you can actually afford and work back from there.

At least these increasingly automated cars can’t repossess themselves yet if buyers fall behind on payments. Oh, wait. Shit.

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What’s your car-buying advice to your friends, family and associates in 2023? If you’re reading this site, I bet you’ve been asked that. Share your wisdom with the Autopian crowd, if you’re so inclined.

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Russ Toelke
Russ Toelke
11 months ago

No real advice here. I can’t imagine having to deal with this car market right now.
I have three cars, a ’69 Malibu ragtop, a 2000 Corolla, and a 2007 Corolla. I toyed with the idea of replacing the ’07 with a new car and keeping the old ’00 beater around, but the pandemic happened and the search lost steam. Keeping the casual search up mainly online, my jaw dropped seeing the prices and availability change drastically. Then the ’00 died. Burned a valve in cylinder #3 a year and a half ago.
Wasn’t driving much, and the ’07 is in pretty good shape, so the search picked up a little but at least it wasn’t a dire emergency. A year of persistent searching yielded very few leads. I almost pulled the trigger on a low mileage 2020 Corolla for 23K, but I just couldn’t get past that garish half white/half black interior.
I decided since the ’07 seems like it’s gonna run forever I’d look around for a motor for the ’00, just for grins. Found one from an ’04 Corolla with 95K on it and got to hear it run, so I’m putting 5 figures into an old car now and I figure I’ll have enough Corolla around to last a lifetime.
I could have bought a used car for the money I’m spending, but who knows what problems an unfamiliar used car will have at that price? That old Corolla was in excellent shape for 220K miles, and I know every whim, mood, and mechanical quirk the thing has. I’m fixing it just ‘cuz I wanna.
I feel for anyone who’s on the spot for new transportation these days. I’m lucky. I’m working from home, everything I could want to buy is either online or within walking distance, and I’ll now have two cars with the most bulletproof 4 cylinders ever built.
Yeah, I could have junked the old dog, but I couldn’t bear to part with it. This way, if the market returns to halfway normal maybe I can get into something newer to replace the ’07 and have that old friend around to drive forever.

MikeInTheWoods
MikeInTheWoods
11 months ago

It would seem the average consumer has poor financial sense. Borrowing loads of money, paying high interest, GAP coverage and high insurance to drive the New and Shiny vehicle.
You could buy a $5000 Camry, set aside $500/month in imaginary car payments and when the Camry dies, buy a replacement vehicle without being upside down on value, having high bills and other things.

Also, we need consumers to start demanding base models again, but I know that won’t happen. I’d love a Renault Twingo from the 90’s. That is all the car most people *actually* need.

Thx1138
Thx1138
11 months ago

I did a loan with NMAC that was under what my credit union would give for a 2022 Rogue (with the 1.5 triple). I did have to pay list price, but got more back on a 2019 VW Jetta base model than I would have expected. Loans aren’t always great, but they do have their place, especially since my wife wanted to have a CUV and something a little nicer than a stripper model VW.

Boxing Pistons
Boxing Pistons
11 months ago

I got EXTREMELY lucky with my last purchase. We had kid #2 on the way and knew we wanted a 3rd. I wanted a minivan, but my wife wasn’t having it. I ended up scoring a low mileage 2017 Toyota Highlander AWD V6 that had just come off a lease for $25k. Then everything went to complete shit in the car market. Then, my wife wants a minivan all of the sudden because she is convinced we will need to use the 3rd row with 3 kids. I said “hell no!”, found some car seats that fit 3 across, and called it a day. She still hates that we replaced the two big car seats we had with the slimmer units because they cost $250/pc. Heck of a lot cheaper than paying sales tax again, and signing on for a longer loan! Jeez.

Ilikecarsandbikes
Ilikecarsandbikes
11 months ago
Reply to  Boxing Pistons

I am glad you won this for financial reasons. I hope your relationship can hold up to your wife not getting here way either time, this sounds like something I could very easily experience and it would not be smooth. Hat tip to your efficient use of money. And I am sorry to hear you didn’t get the minivan originally, you were ahead of the curve.

Shinynugget
Shinynugget
11 months ago

All these factors, wages not keeping up with inflation, market shifts, COVID, chip shortages. Then add in that many car makers have eliminated their cheapest, most affordable models. Chevy’s cheapest vehicle now starts above $20K. Ford $22K. Honda $23+K. Dodge $30K(only 4 models total! WTF?) Hyunda $24K. Mazda $23K.
Of the major brands only Kia has anything left in their new lineup under $20K. The Rio, Forte and Soul. And those are starting MSRP’s. Good luck finding anything close to that at most dealers. Then we can talk about mark ups, dealer add ons, deceptive financial practices, etc, etc.
Probably hasn’t helped keep the car market affordable to many buyers.

GreatFallsGreen
GreatFallsGreen
11 months ago
Reply to  Shinynugget

I think Chrysler banks on it being a full CDJR dealer where the Renegade at $25k is the entry point. But if you’re just a Dodge-Ram dealer, it’s the latter they’re banking on anyway.

You left out Nissan, which has the Versa well under $20k still, and the Corolla is $22k which isn’t bad. Hyundai I’m guessing you saw the Elantra Hybrid price if you went to their site – the Venue is actually cheapest at $19.5k plus destination*, regular Elantra a grand more than that.

Really a lot of those models have just kept pace with inflation, it goes back to wages not keeping pace like you said. Sure the Yaris, Fit, Sonic, Fiesta stickered for less but the next class up you could usually get for the same price due to better margins or, incentives. Except…those are harder to come by too…

*And destination charges have jumped significantly too which inflates prices more. Is there any brand who isn’t over $1000 in destination now?

Boxing Pistons
Boxing Pistons
11 months ago
Reply to  Shinynugget

Throw in the big EV push. Carmakers’ response to that is “OK, we’ll make electric cars, but they are going to be our most profitable body styles from our prestige brands.” I have said it a million times, but I’ll say it again: this is just going to hurt poor people. We need more reasonably priced PHEVs that don’t require huge, resource-intensive, pricey batteries that require people to change their lifestyles. That is what will make a real impact now, and not leave so many people in the dust.

Sklooner
Sklooner
11 months ago

I worked in the bankruptcy industry up to 2018 and saw this a lot, one that sticks in my mind was a guy with a Mazda 3, I got the loan statement and he owed just under 60k on it. He had bought 3 cars in one year, didn’t like them and kept trading them in to the dealer who would write up a new loan. His credit history was good and he made tons of dough so he got approved. Then he lost all his overtime and couldn’t swing the payments on all his toys. The guy wasn’t the sharpest lightbulb in the litter but man did he get screwed. Lucky the car was on a conditional sales contract so it was a case of ‘seize or sue’ and it got repossessed so that debt was gone. It is a symptom of people not looking at the actual price and looking at the payment. If they can make the payment they are happy, not realizing that they are paying forever

SYT_Shadow
SYT_Shadow
11 months ago

I have to disagree with the editor’s comments about “when our systems are designed to trap users in debt”

People’s choices traps them in debt. We are talking about cars. If you don’t have much money, buy a cheaper car, new or used.

Eslader
Eslader
11 months ago
Reply to  SYT_Shadow

Except that they are designed to trap people in debt. The people in the article who bought the Explorer are idiots, but the system is designed to lure in idiots. Salesgoobers intentionally keep the conversation focused on monthly payments rather than total cost, which those of us who are a bit more sophisticated in financial matters can see for the bullshit it is, but many don’t know that thinking in terms of monthly payments can wind up making that Explorer cost as much as a Jaguar.

People make bad choices which is not good, but preying on the stupid is also not OK.

Vetatur Fumare
Vetatur Fumare
11 months ago

Wooooordddd. And no matter what, he could have traded one vehicle in for a lightly used three-row vehicle of a lesser brand.

Baron Usurper
Baron Usurper
11 months ago

“What’s your car-buying advice to your friends, family and associates in 2023?”
I don’t have any.
Our friends that rent are barely getting buy due to double-digit percentage increases on rent the past few years. They can’t afford to save no matter how much they cut back, and I know they’re cutting back. They’re pouring money into fixing what they have because, to them, it’s still cheaper than a monthly payment.
Our friends that own had to blow their savings on the down payment and closing costs. We bought in 2018 and had only just gotten a good amount of savings until our kids were born and my wife’s 2009 Mazda 3 needed to enter hospice.
Bottom line: we can all hand out as much advice as we want, but on a macro level something is very much wrong and won’t be fixed any time soon.

Baron Usurper
Baron Usurper
11 months ago

ITT: people with no kids explaining to people with kids about how their kids were a mistake.

Good job everyone.

Steven Fales
Steven Fales
11 months ago
Reply to  Baron Usurper

I find the advice about buying used cars to be interesting. I used to buy used cars when they were cheap and I didn’t have four kids. It’s only been recently that I’ve actually been in the position to pick up a used car again. The change is that I have enough sleep to deal with a semi reliable car breaking again now that the kids are older and I actually have some cash after paying off my gargantuan student loans ($150k is not for the faint of heart). I wouldn’t recommend doing what the Explorer buyer did, but I understand it.

Ben
Ben
11 months ago
Reply to  Baron Usurper

If you can’t afford the things you need to take care of the kid, then yes, having another kid was objectively a financial mistake. Nobody here is saying that kids are inherently bad, just that having them when you can’t afford to is irresponsible.

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