NEW YORK–Just how underwater some people are getting in their auto loans—including at credit unions–was made clear in a new report that illustrates the dangers of rolling one auto loan into another (and sometimes, another).
“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,” the Wall Street Journal said. “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. Those borrowers owed about $5,000 on average after they traded in their cars, before taking on new loans. Five years ago the average was about $4,000.”
$45,000 Loan on $27,000 Vehicle
As an example, the Journal profiled one borrower, John Schricker, 40, who took out an auto loan in 2017 and has 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, the Journal said.
“Rising car prices have exacerbated an affordability gap that is increasingly getting filled with auto debt. 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,” the Journal said, adding that in many cases dealerships are making more money on arranging financing than on selling cars.
Adding to the costs, the Wall Street Journal pointed to data from Edmunds that borrowers with negative equity at the time of purchase tend to get longer loan terms, higher interest rates and higher monthly payments, according to Edmunds. “The higher rates and longer repayment periods mean a smaller share of their monthly payments goes toward paying down principal in the first few years of the loan. The result for some consumers is a cycle in which each new trade-in leaves them deeper underwater,” the Journal added.
$66K Loan On GMC Sierra
As another example of a borrower underwriter, the Journal pointed to Nicole-Malia Tennent and Shyanne Fernandez, both in their early 20s, who 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 Journal reported. “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.”
Pearl Hawaii FCU told the Journal in a statement that the dealership and the borrower worked out the sale agreement.