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Rolling over car loans could signal disaster for car sales
As bad as the whole sub-prime loan fiasco has been in the mortgage industry, there was at least some rationale to it. Over time the value of real estate generally increases and if someone buys a house they have a reasonable expectation of being able to sell it for more than they paid. Of course that presumes you don't ridiculously over-pay in the first place. However, aside from some rare classic cars, no car ever goes up in value. In fact, many people refuse to buy new cars for the very reason that they depreciate as soon as you drive them off the lot.Given that, how could anyone who owes more on a car loan than the car is worth ever expect to rollover the extra debt to a new loan and ever get ahead? How could any bank or credit company ever expect such a deal to be a good idea? Apparently, such deals where people apply the upside down difference on a loan toward a subsequent loan have become common in recent years. Even if the real estate market weren't in the process of imploding such deals would inevitably lead to a situation where the buyer could no longer afford to keep buying. If carmakers have kept their sales volumes going on this kind of financing, sales that have already been sagging could go into complete free fall.
[Source: Detroit News]
Reader Comments (Page 1 of 3)
JBoogey 6:08PM (3/14/2008)
I have a question. I am a relatively new consumer being that I just turned 22 and my wife and I are just becoming financially stable.
Having said that, I bought a 2000 BMW 323i in 2007 that was a lemon from a "certified pre-owned" BMW Dealership. In hindsight, this was a raw deal, seeing how i paid 19k for it due to my 4k negative roll over from my previous car. The car lasted 3-4 months nad having the need for reliable transportation had to trade it in. I just bought a 2008 Nissan Altima with moon roof, spoiler, alloy wheels, MSRP on the car was slightly over 24k.
The BMW which was appraised by toyota, honda and nissan all gave me the same quote 8k. I was 11k negative! Me being a green, stupid spender am in the hole! Lesson has been learned by the way. However, how is that i came out (after 8 hours of haggling no lie) with 4k down and my entire loan being $30,020.00 for 6 years (72 months)!!! I know i fought and fought but truly don't know how this happened. I know i got screwed by bmw the first time, and had to get out of the car, but did i screw myself a second time?
I do plan on keeping this car for the next 4-5 years. I will pay off the negative balance. Again, lesson learned. Could someone with financial credibility or even auto loan financing experience explain this to me.
interest rate was 8.5 % on the Altima. I currently hold 4.7 years of credit history and a fico of 704.
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Noidor 6:22PM (1/01/2008)
This is the same post I put on carspyshots site, I think it's applicable here as well.
Look, the US economy is going into an inflationary recession which is going to be way worse than the one this county experienced back in the 70's. This means that US car sales are going to plummet, so on top of the shrinking market, manufacturers will have to deal with additional CAFE legislation, and eat the costs at first rather than passing them to the consumer. Surely I don't see this being good for GM, it will really hurt Ford, and will kill Chrysler. Yes, I strongly suspect that next year Chrysler is going to be dead in the water.
Also, people who buy American cars are predominantly the lower middle class Americans (up to $45k income) who are probably already upside down on their cars. Days of EZ financing are over, meaning no more zero percent loans, no more taking existing balance and rolling into a new one. So good luck getting credit, in turn this means American cars will not move as well, if at all. Also with the legacy costs, retirement costs, defaults on mortgages, credit cards, and auto loans will also drive domestics further down.
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Tim 10:07PM (1/01/2008)
Your right on. Finally a voice of reason and not blind optimism. Everyone better have a safety net.
Tim 10:10PM (1/01/2008)
Your=You are
AZMike 12:54AM (1/02/2008)
oh, please give me a break!!
it's always nice to know that everyone who buys an American car is a toothless, knuckle-dragging idiot!
I hate to disappoint you, but my yearly income is about three times the amount you've listed...and I now buy domestic vehicles exclusively. do you think that all of those Escalades and Navigators are going to those 40K folks you're talking about? and skip the drug dealer/rapper inferences; the majority of the large SUVs are going to soccer moms and folks who live on the nice side of town.
why?
among other things, I'm well aware from personal experience that imports don't hold their value any better than domestics do. ignore what the blue book or any other value guide says; just ask any dealer who sells your make how much "back of book" your model is...and that goes for any vehicle.
I think the two personal examples that really stood out are on a Lexus and a Mercedes-Benz that I've owned.
the Lexus was a new LS400, one of the first sold; September, 1989.
I lived in Hawaii at the time, and this was my "LA car", which I drove when I was there every two weeks.
I decided to take a trip to visit some friends in Florida, and took the Lexus. by the time I got to El Paso, I was ready to burn it...it made my last Lincoln Town Car look like a Ferrari. it had abolsolutely no soul whatsoever.
when I got to Florida, I stopped at a few Lexus dealers to get an idea what it was worth. now bear in mind here that the MSRP was right around 40K; it had a sunroof, leather (both options then), and the Nakamichi stereo system, and 6,000 miles.
the best buy bid? $24K.
I traded it in at Bayview Cadillac in Fort Lauderdale on a new black deVille. it was rather funny, because my Lexus was the seventh one they took in trade that week.
when I moved to Arizona in 1991, I bought a new Mercedes-Benz 350SDL (kept the Cadillac). it was truly the absolute worst car I've ever owned; Mercedes spent over $27,000 in warranty repairs in the four years I owned it. it was one of those cars that was absolutely beautiful to look at; teal with cream leather, and chrome wheels. just don't drive it.
I traded that one on a new deVille Concours in the summer of 1994; again, the best buy bid from a Mercedes dealer (Phoenix Motor Company, Phoenix, Arizona) was $10,000 back of wholesale book. this was a 38,000 mile car without one flaw.
you're also wrong about zero percent loans disappearing, too. this isn't a mortgage; it's a car loan. you're also forgetting that the "captive" finance arms (GMAC, Ford Motor Credit, Chrysler Credit, and much to your disdain, Toyota Motor Credit, Nissan Acceptance Corp, Mercedes-Benz Credit Corp, et al) are there to move the metal, not say no. this applies in both good times and bad. the only difference is, I'm sure the import captives speak with teeth firmly clenched closed (just like their customers, since they are so well-informed and educated), when they approve the loan on the 560 FICO customer for a new Benz.
I don't believe that everyone who walks into (and drives out of) an import dealership has a college degree, and an 820 FICO score.
like many folks on this blog, I go with a lot of people when they go to buy a vehicle.
I always get a kick out of all the import lovers telling me how their resale value is SOOO good. it's always interesting to see their faces when reality hits.
I have one simple question: if the price of the next year's model doesn't go up much (and it's usually only a few hundred bucks), who in the world would want a second-hand car (with miles) for $1,000-$1,500 less??
the answer is no one. would you?
I also love the Chrysler comments! I was a Dodge dealer for ten years, and can remember all the speculation back in the early 80's...and the 90's...and two years ago...and Chrysler still here.
Cerberus isn't run by short-sighted idiots; if you knew anyone that's a Chrysler/Dodge/Jeep dealer principal (and I do), the best is yet to come.
all of the changes implemented will begin to be seen by March, and when you see the changes, you'll be surprised. I'd like to say pleasantly, but it seems a lot of deluded folks are hoping for their demise.
it won't happen.
AZMike
stealth 1:29AM (1/02/2008)
AZ,
Go buy a Camry and a Malibu.
Wait five years.
Then call me and tell me which is worth more.
617-861-3962 ;)
Richard 6:47PM (1/01/2008)
Something else to think about... Even the longest loans offered these days are for 7 years. Your average balloon deal is for 3 with an optional 3 to do the excess, so that's even less.
Anyway, that's 7 years, call it 105k miles. For a modern car, even MY2000, that's pretty usable.
The only reason we need to roll over a note would be to get a new car long before the note is paid off. For most people, most cars, there is no real need fit this.
May car sales slow? Sure. But with cars getting better, cheaper, and more durable, maybe this is both good and in fact desirable from a green standpoint?
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John 6:49PM (1/01/2008)
While I think it is interesting to read about the possibility of numerous people rolling over car loans.
Noidor, I'd be surprised if your outlook for the US economy turns out to be true. Mainly due to the fact that almost no one is ever able to make an accurate economic forecast.
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Eddy 7:04PM (1/01/2008)
HA! I sold cars for nine years, and somewhere around 2000-2001 I began preaching the end of car sales as we knew it. 60 month used car leases were the first harbingers of disaster, then came the $3,000+ rebates that were being used to offset the negative equity that most consumers invariably have, but I knew it was time to get out from behind the fan when 84 month loan quotes were the norm from my bosses. This problem is much worse than the story could possibly convey. There is much more to financing a car deal than is seen from a consumer standpoint, used car "book sheets" are loaded with all the value adding options that are available (even though they may not be present), all in hopes of raising the vehicle's book value enough to force the negative equity into the contract. Then there's the little matter of taxes that may or may not be required of the dealer to collect, a pleasant surprise for any owner at the county registration office. It's been a problem a decade in the making, but hey, it's all about how many car deals are on the wall at the end of the day. Not the legitimacy or soundness of the deal...
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Black 7:06PM (1/01/2008)
Right now, if you go to Las Vegas, you can place a bet that says Chrysler will go bankrupt by January 1st, 2009.
The odds you get: 20:1
That means if you bet $10,000.00 on your belief, and Chrysler does belly-up, you get $210,000.00 back.
So you need to run right down to Vegas and dump your life savings on the nose. They'll be glad to accommodate you.
Just remember...Vegas never loses.
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iSpec 7:07PM (1/01/2008)
This has been going on for year and its called create financing with the finance manage, who meets with the trade manager. Inflate the trade, raise the price of the new car and find a buyer of the deal via multiple faxes.
If the finance manager puts the deal together where it appears the bank can't lose, or an apparent equitable position, you'll have a new car. Happens all the time.
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Richard 7:25PM (1/01/2008)
And when people have less free access to equity in general, and banks start looking more conservatively since they can't count on finding another buyer or a pool for the note... Then what happens? No bubble lasts forever.
Bert 7:24PM (1/01/2008)
Maybe people are hoping they will buy a classic and be able to sell it a Barrett-Jackson in 7 years for 1 million dollars!
This whole 'meltdown' stuff reminds me of the SNL Skit...
http://garritson.com/videos/pages/dontbuystuff.htm
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Jim 7:25PM (1/01/2008)
"Apparently, such deals where people apply the upside down difference on a loan toward a subsequent loan have become common in recent years."
This is news to you guys? You gotta get out more.
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Rick Watts 7:29PM (1/01/2008)
This has been a common practice in the auto industry for at least ten years. It is not uncommon to see a lender finance 125% of MSRP for 72 months. The buyer can borrow $43,750 on a vehicle with an MSRP of $35,000. The same vehicle might be worth $25,000 (probably less) whenever the buyer leaves the dealership. On the first day of ownership the buyer is upside down $18,750. Most buyers started this process of rolling negative equity over years ago. It started out as a couple of thousand dollars on the first deal, five grand or so on the next deal, and now they are rolling over eight to ten thousand dollars. Instant gratification between the buyer and the lender is out of control.
The worst part is the buyer tells the world the dealer screwed them. The problem is the buyer and the lender are both fools. I guess things will change whenever our financial institutions implode and that does not appear too be far off. Citigroup just received a cash infusion of 7.5 billion dollars from Abu Dhabi to replenish capital after record mortgage losses wiped out almost half its market value. Who's next Ford Motor Credit? GMAC?
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why not the LS2/LS7? 7:30PM (1/01/2008)
There's just no accounting for stupidity.
People want to spend more than they have, and others will help them do it.
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JimboNC 8:46PM (1/01/2008)
The real problem is people are buying cars they do not need. If their current cars are in good shape they have no business even considering a trade. The new car problem is with buyers who know they have no intention of paying the loan off and trash the cars before they are repoed.
I am driving a 2001 Mazda Protegé with 33K miles on it, think I need to trade? It's paid for and doing fine. Suits my needs perfectly. Sure, I'd like a new car, but I don't need a new car. In fact, I haven't seen a new car that's better than what I am driving considering my low mileage.
With gas headed for $3.75 a gallon this spring, and higher in some states, I saw the writing on the wall last spring. We are headed for something you have never experienced before. Call it a recession or a depression, I don't know which, but it is going to be hard times for many. Instead of a new car people should be circling the wagons and conserving resources, paying off debts and getting in to position to weather the financial storms.
Having a fixed, limited income I sold my townhouse and moved to an apartment close to all the places I get services: banking, pharmacy, supermarkets, gas stations. The price of gas won't be a problem. The cost of services won't be a problem because of other peoples' expenses. The cost of food and goods won't be a problem because I now have more descretionary income. My wagons have been circled.
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Aki 7:53PM (1/01/2008)
Consumers had but themselves to blame for the mortgage crash, and they have themselves to blame for roll-over car loans. You'd have to be pretty myopic to not forsee a disaster looming for variable interest rates (when you're barely scratching by on the low initial interest).
But ppl don't care to be responsible, and instead pile thousands upon thousands in debt to live a fake life of luxury, built on stuff they don't even own.
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jb 8:28PM (1/01/2008)
That's why my most recent car purchase was a $2000 '99 Protege. Works fine, gets good mileage, and cost me about 1/25th of my annual income. Feels good not to give any money to the greedy auto manufacturers, car dealers and bankers.
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Playdrv4me 8:40PM (1/01/2008)
Must be a slow auto-news week because this is not anything new.
The buyer who walks into a car dealership in an EQUITABLE position is the RARE bird these days. MOST car buyers are trading in and carrying negative equity. Dealers, especially dealers of slow selling new car brands COUNT on these lowballed used car trades as their BREAD and BUTTER profit makers.
Hell, if you KNOW HOW to work this system it can even work out marginally better than "red carpet leases" or any other kind of fleece program.
I have had over 30 cars since 2001 and actually paid OFF probably 2 or 3 of them at most. I purchase cars that I know will hold their value relatively well, then in 6 months to a year when I get tired of them, I find a dealer starving for a sale who will put the world in my trade and take a huge chunk out of the price of THEIR used car to make the deal work, especially when the bank makes a 90-100% LTV call and puts on a payment cap. Its a lengthy process, and most buyers would never go through all the hoops I go through to make a car deal happen, but then I am a car fanatic and this is my hobby.
I usually end up driving out of the dealership with my total financed amount being equal to or LESS than what the ADVERTISED PRICE of the car was to begin with! For example, I recently purchased a 2003 Navigator at a LM dealer (whose prices are obviously inflated anyway). The truck was stickered at 24999 on the window, and 22999 on the internet. I owed 18k on my 1998 Lexus LS400 (most boring car I have ever driven by the way). Most dealers were offering between 9 and 11k for the Lexus, but these guys really were aching for a sale. So when the deal was finally done, I got an ACV of 14000.00 for my Lexus, and I purchased the Navigator for 16. My total amount financed was in the low 20s, which was LESS than the car was stickered for to begin with.
I could NOT have purchased the Navigator for 16000.00 if I had just walked in and asked for a 9000.00 discount because the dealer had no motivation to do so, not to mention they always want to make money on the trade.
I do these deals all the time, sometimes I do have to put a little bit of money down, but its well worth the ability to drive something else every 6 to 12 months. In the end, 84 months or 24 months doesnt really matter, because I never keep them that long. The longer the term the smaller the payment for the short while I DO have the car. Eventually Ill find a car I really like and just pay it off, but for now this works for me.
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