WSJ: Underwater Car Loans

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Independent George
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WSJ: Underwater Car Loans

Post by Independent George » Sun Nov 10, 2019 11:31 am

Living in a big city my entire adult life (and now working from home on top of that), I've actually never owned a car. In fact, I own a parking space in my condo that I rent out for extra money. So when I read this article in the WSJ, I was a little shocked at the financial shenanigans that people are getting into for their cars:

https://www.wsj.com/articles/a-45-000-l ... 1573295400
In two years, the 40-year-old electrician 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 Inc.
...
Yolanda Finley of Pomona, Calif., bought a used 2011 Chevy Traverse with a loan of $25,585 from Santander Consumer USA Holdings Inc. in 2014. The loan included a nearly $2,200 balance she owed on her Dodge Durango after she traded it in.
...
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.
I have no experience at all with purchasing cars, so can somebody explain how you get in - and out - of this kind of financial mess? Are these loan balances typically enough to warrant declaring bankruptcy? These numbers just seem even crazier to me than the housing bubble - and having purchased my home at peak bubble 2007, I'm no stranger to crazy financial pitches. I just can't even imagine sinking that much into a car loan.

HomeStretch
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Re: WSJ: Underwater Car Loans

Post by HomeStretch » Sun Nov 10, 2019 11:34 am

No idea, I pay cash for my new car and drive it for a long time.

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RickBoglehead
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Re: WSJ: Underwater Car Loans

Post by RickBoglehead » Sun Nov 10, 2019 11:40 am

Independent George wrote:
Sun Nov 10, 2019 11:31 am
Living in a big city my entire adult life (and now working from home on top of that), I've actually never owned a car. In fact, I own a parking space in my condo that I rent out for extra money. So when I read this article in the WSJ, I was a little shocked at the financial shenanigans that people are getting into for their cars:

https://www.wsj.com/articles/a-45-000-l ... 1573295400
In two years, the 40-year-old electrician 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 Inc.
...
Yolanda Finley of Pomona, Calif., bought a used 2011 Chevy Traverse with a loan of $25,585 from Santander Consumer USA Holdings Inc. in 2014. The loan included a nearly $2,200 balance she owed on her Dodge Durango after she traded it in.
...
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.
I have no experience at all with purchasing cars, so can somebody explain how you get in - and out - of this kind of financial mess? Are these loan balances typically enough to warrant declaring bankruptcy? These numbers just seem even crazier to me than the housing bubble - and having purchased my home at peak bubble 2007, I'm no stranger to crazy financial pitches. I just can't even imagine sinking that much into a car loan.
Because you're on this forum.

A huge majority of people are clueless of finances. They often buy based on PAYMENT. "I can get you into a new truck for the same payment". What's left unsaid is that they're currently underwater, and that the 6 year loan they got 2 years ago has 4 more years to go, so they sign them up for a 7 year loan, adding 3 more years of payments.

To think that the consumer is being taken advantage of is to excuse them from basic responsibility. The guy that traded in his vehicle 4 times did that because he wants to drive what he cannot afford, so he did it. Who changes vehicles every 6 months?

I always go back to the term average. "The average consumer". That means that 1/2 the people are smarter, and 1/2 are not as smart. And some of the not as smart are really not as smart.

We read on this forum of relatives having no money to retire, yet spending like crazy. You see people with two $50,000+ new cars all the time, a boat, 2 jet skis, ...

The largest home in my neighborhood was owned by a younger guy, early 30s, who bought a fancy vehicle AT THE AUTO SHOW. No one buys the car at the auto show, but he did. I found him one day spinning his tires furiously on our entrance road, which has a small uphill grade. I pulled up (in 2 wheel drive) and got out. Told him to hit the brake, then slowly accelerate. He couldn't. I said "I could pull you up the rest, but there is no where to tow from." He smiled, and pulled out a screw in tow hook from the glove box. I had to tow him all the way home, even though the rest of the way was flat, because his fancy low profile tires had no tread. I mention this because in the housing crises of 2007/2008, he lost his home and went bankrupt.

Of course, those that insist on paying cash all the time lose the ability to make money. Many auto finance companies give rebates to finance at non-subsidized rates. Take the rebate, then pay off the loan the next week. Easy $500 - $2,000.
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runner3081
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Re: WSJ: Underwater Car Loans

Post by runner3081 » Sun Nov 10, 2019 11:41 am

Independent George wrote:
Sun Nov 10, 2019 11:31 am
I have no experience at all with purchasing cars, so can somebody explain how you get in - and out - of this kind of financial mess?
Very, very easy. I have some employees and friends who end up in this mess with perpetual car payments and underwater vehicles.

People look at loan payments, not cost of car :)

Step 1- Buy a car with a loan (very little, if any down payment).
Step 2- Somehow go to the dealer (based on fake "we want your car" flyers or for oil changes, etc).
Step 3- Show interest in an upgrade or newer car
Step 4- Take your current loan with say, 5 years left, get a more expensive car and extend it to 7-8 years and, just like magic.... New car, same loan payment (or, only a few more dollars per month).

Chicken Little
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Re: WSJ: Underwater Car Loans

Post by Chicken Little » Sun Nov 10, 2019 11:50 am

Independent George wrote:
Sun Nov 10, 2019 11:31 am
...so can somebody explain how you get in...this kind of financial mess?
I'll take this one...

You get into this kind of mess because people are giving you money that they shouldn't be.

In that article, it states that the dealers make more on financing than they do on the actual sale. As we all well know, the dealer doesn't keep the loans on their books, they push them through banks and credit unions and whatever (all in article). So why are those lending institutions so irresponsible? Because they don't keep the loans on their books. These loans are packaged and sold to "investors". Sound familiar?

So it's not the consumer who is stupid, it's the investor. TBM held some MBS back in 2008, so I'm pretty dumb and more-or-less caused that financial crisis with my stupidity.

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RickBoglehead
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Re: WSJ: Underwater Car Loans

Post by RickBoglehead » Sun Nov 10, 2019 11:53 am

Chicken Little wrote:
Sun Nov 10, 2019 11:50 am
Independent George wrote:
Sun Nov 10, 2019 11:31 am
...so can somebody explain how you get in...this kind of financial mess?
I'll take this one...

You get into this kind of mess because people are giving you money that they shouldn't be.

In that article, it states that the dealers make more on financing than they do on the actual sale. As we all well know, the dealer doesn't keep the loans on their books, they push them through banks and credit unions and whatever (all in article). So why are those lending institutions so irresponsible? Because they don't keep the loans on their books. These loans are packaged and sold to "investors". Sound familiar?

So it's not the consumer who is stupid, it's the investor. TBM held some MBS back in 2008, so I'm pretty dumb and more-or-less caused that financial crisis with my stupidity.
So you're blaming us? :P

I always take exception to people pointing at companies - whether car dealers, banks, etc. - for being predatory. Sure, it exists. Absolutely. And some should be locked up. But, adults need to take responsibility for themselves. The biggest dimwit in the world knows "if it's too good to be true, it probably isn't." We can all relate numerous tales of friends and family being taken advantage of financially. When you tell someone repeatedly to not do something, they say they understand, and they turn around and do it, they own a big part of that mistake.
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Chicken Little
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Re: WSJ: Underwater Car Loans

Post by Chicken Little » Sun Nov 10, 2019 12:02 pm

RickBoglehead wrote:
Sun Nov 10, 2019 11:53 am
But, adults need to take responsibility for themselves.
People are always asking for lessons on here. What's the lesson from 2000? What's the lesson from 2008?

I'll tell you what the lessons are...

1) The public-at-large are not going to take responsibility for themselves. Maybe in the past you could say..."Well, that's too bad, they'll pay a steep price". The problem in 2008 was they didn't have any money left to pay to learn that lesson, so I had to pay it for them.

2) Not only is the consuming public a willing partner in cultivating financial contagion, some of your LBYM allies are pretty dodgy company as well. I'm 40/60 right now, which is bond-heavy by age. Do you really trust me that I've sent that money somewhere wise? I'm probably building financial contagion as well?

Jags4186
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Re: WSJ: Underwater Car Loans

Post by Jags4186 » Sun Nov 10, 2019 12:12 pm

RickBoglehead wrote:
Sun Nov 10, 2019 11:40 am
I always go back to the term average. "The average consumer". That means that 1/2 the people are smarter, and 1/2 are not as smart. And some of the not as smart are really not as smart.
Goes back to an old George Carlin joke “Think of how stupid the average person is and realize half of everyone is dumber.”

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Re: WSJ: Underwater Car Loans

Post by RickBoglehead » Sun Nov 10, 2019 12:14 pm

Jags4186 wrote:
Sun Nov 10, 2019 12:12 pm
RickBoglehead wrote:
Sun Nov 10, 2019 11:40 am
I always go back to the term average. "The average consumer". That means that 1/2 the people are smarter, and 1/2 are not as smart. And some of the not as smart are really not as smart.
Goes back to an old George Carlin joke “Think of how stupid the average person is and realize half of everyone is dumber.”
Yes! That's why whenever you have the chance to be in a public-facing role - whether a retail business, working with a non-profit, being on an HOA board - you need to think long and hard about it. :D :mrgreen:
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Re: WSJ: Underwater Car Loans

Post by bighatnohorse » Sun Nov 10, 2019 12:16 pm

It's easy to sink that much money into a car loan.
We bought a new 1-ton pickup truck with diesel engine and lots of goodies - cost: $70,000. (in 2015)
The financing was pretty good - so we made a large down payment - and put the rest of our cash into investments returning more than the loan cost.

At about three years after purchase, the truck had a depreciated worth that was lower than the amount that we owed.
At which point we paid it off.
Other's who keep paying the loan incur the risk of a "total loss of vehicle" in an accident - finding that insurance will only cover the depreciated vehicle cost - leaving them truly "under water". (although, there is "gap" insurance for this sort of thing)

I believe that the general public makes a more "emotional" purchase.
A combination of "entitlement", "feel good" and low monthly payments make the sale.
The missing element for these folks is doing the math and thinking about the future.

Oh, and why do I have a $70K pick up truck? To carry my $40K truck camper, of course. :)

Lee_WSP
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Re: WSJ: Underwater Car Loans

Post by Lee_WSP » Sun Nov 10, 2019 12:24 pm

You get out by stop buying new cars and run the existing car into the ground as you pay off the loan. Or you surrender the vehicle and declare bankruptcy. Or you have gap insurance and your car is totaled.

RickBoglehead wrote:
Sun Nov 10, 2019 11:53 am
Chicken Little wrote:
Sun Nov 10, 2019 11:50 am
Independent George wrote:
Sun Nov 10, 2019 11:31 am
...so can somebody explain how you get in...this kind of financial mess?
I'll take this one...

You get into this kind of mess because people are giving you money that they shouldn't be.

In that article, it states that the dealers make more on financing than they do on the actual sale. As we all well know, the dealer doesn't keep the loans on their books, they push them through banks and credit unions and whatever (all in article). So why are those lending institutions so irresponsible? Because they don't keep the loans on their books. These loans are packaged and sold to "investors". Sound familiar?

So it's not the consumer who is stupid, it's the investor. TBM held some MBS back in 2008, so I'm pretty dumb and more-or-less caused that financial crisis with my stupidity.
So you're blaming us? :P

I always take exception to people pointing at companies - whether car dealers, banks, etc. - for being predatory. Sure, it exists. Absolutely. And some should be locked up. But, adults need to take responsibility for themselves. The biggest dimwit in the world knows "if it's too good to be true, it probably isn't." We can all relate numerous tales of friends and family being taken advantage of financially. When you tell someone repeatedly to not do something, they say they understand, and they turn around and do it, they own a big part of that mistake.
I disagree. People are dumb and should be protected from themselves. If they still decide to make bad choices after encountering a guardrail, so be it. But there should be a guardrail.
Last edited by Lee_WSP on Sun Nov 10, 2019 12:28 pm, edited 1 time in total.

Maven
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Re: WSJ: Underwater Car Loans

Post by Maven » Sun Nov 10, 2019 12:28 pm

Insane. I have a brother-in-law who refinanced his house a while back and pulled cash out to pay off two newish vehicles as well as pay off credit card debt. They are now in a bigger, more expensive house and just mentioned the other day that they're looking to replace their vehicles since "they're paid off." :oops:

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Re: WSJ: Underwater Car Loans

Post by RickBoglehead » Sun Nov 10, 2019 12:32 pm

Maven wrote:
Sun Nov 10, 2019 12:28 pm
Insane. I have a brother-in-law who refinanced his house a while back and pulled cash out to pay off two newish vehicles as well as pay off credit card debt. They are now in a bigger, more expensive house and just mentioned the other day that they're looking to replace their vehicles since "they're paid off." :oops:
Never said there should not be guardrails.
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chessknt
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Re: WSJ: Underwater Car Loans

Post by chessknt » Sun Nov 10, 2019 12:35 pm

This is a sensational title since literally every new car loan is essentially 'underwater' at the time of origination due to the rapid depreciation of new cars. Financing a car is not always terrible as portrayed here and can allow leverage of zero or low interest loans for a good you were planning to purchase. If you are engaging in reckless consumerism with bad credit then credit cards or cars or something else will get underwater so it doesn't really matter what it is as long as someone loans money.

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Re: WSJ: Underwater Car Loans

Post by Lee_WSP » Sun Nov 10, 2019 12:37 pm

chessknt wrote:
Sun Nov 10, 2019 12:35 pm
This is a sensational title since literally every new car loan is essentially 'underwater' at the time of origination due to the rapid depreciation of new cars. Financing a car is not always terrible as portrayed here and can allow leverage of zero or low interest loans for a good you were planning to purchase. If you are engaging in reckless consumerism with bad credit then credit cards or cars or something else will get underwater so it doesn't really matter what it is as long as someone loans money.
True, but did you read it? More Americans are rolling their old debt into a new to them or new car. Ie, their old car has negative equity.

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Kenkat
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Re: WSJ: Underwater Car Loans

Post by Kenkat » Sun Nov 10, 2019 12:46 pm

People get into this mess because they want stuff, buy based on monthly payments and don’t think ahead. Sub-prime auto loans - it’s a thing now.

My son just started a co-op job related to his college major. He said he was talking to a full-time co-worker who admitted that he and his wife were living paycheck to paycheck. He was happy that his wife had gotten paid because then he could order Domino’s. He got a hoagie and 8 wings and had it delivered. $20. My son told me, you know dad, you’d think if money was so tight that you had to wait to get paid to spend $20, maybe you would pack a lunch or at the very least, order one of those $5 two topping mediums and pick it up.

People who are good with money think about these types of decisions, but most people think “got money, spend money”.

Once you are upside down on debt or strapped for cash flow, it’s a very difficult hole to get out of.

SrGrumpy
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Re: WSJ: Underwater Car Loans

Post by SrGrumpy » Sun Nov 10, 2019 12:47 pm

Independent George wrote:
Sun Nov 10, 2019 11:31 am
In two years, the 40-year-old electrician 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 Inc.
...
Well, this guy went through a divorce, which doesn't help - and his family was "expanding" so jury's out on that. Less defensible is that he "replaced one because it had 100,000 miles."

It's hard to find any mitigating circumstances for the other folks.

grettman
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Re: WSJ: Underwater Car Loans

Post by grettman » Sun Nov 10, 2019 1:58 pm

Sounds like another bailout idea to me.

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scubadiver
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Re: WSJ: Underwater Car Loans

Post by scubadiver » Sun Nov 10, 2019 2:34 pm

There's nothing in this article that a good healthy recession can't fix.

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Re: WSJ: Underwater Car Loans

Post by Minty » Sun Nov 10, 2019 2:36 pm

Lee_WSP wrote:
Sun Nov 10, 2019 12:24 pm
People are dumb and should be protected from themselves. If they still decide to make bad choices after encountering a guardrail, so be it. But there should be a guardrail.
I agree with this. After some years of reading this forum, it seems there is wide agreement that the core business model of many players in major segments of our economy--whole life insurance sales, high-fee, low-performance active mutual fund managers, for-profit schools with low employment and high default rates, non-fiduciary self-dealing financial advisors, various consumer finance companies--is fleecing suckers, preying on ignorance. I find it remarkable that our educational system does not effectively teach young adults to avoid these negative expectancy propositions. Financially sophisticated parents teach their children how to spend and invest, who thereby gain a permanent advantage, and everyone else figures it out the hard way, or become sheep to be sheared.
Core Four with nominal bonds and TIPS.

Helo80
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Re: WSJ: Underwater Car Loans

Post by Helo80 » Sun Nov 10, 2019 2:37 pm

It's a bit sensationalist and over the top as Santander is one of the most predatory lending firms out there. They get a bad rap partly because they will accept really bad credit applications for huge APRs (e.g. 20% on up).

But, if you want examples of people with the most neggy eggy ---- Santander leads the way.

phxjcc
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Re: WSJ: Underwater Car Loans

Post by phxjcc » Sun Nov 10, 2019 2:42 pm

For all the "they had it coming because...." folks here, what are you going to say when you FI based fund goes belly up because they were buying ABS/ABO's paying 7+% ?

Because I will then say "awww, tooooo bad--what did you expect when you invested in a subprime batch of DO's!

Why the he(( should I be forced to bail YOU out when I put my FI AA into boring CDs?

It's coming.

I guarantee that a large number of funds are boosting their yields by holding these.
By just holding 10-20% of their assets in these, they can boost yields to double the Treasury rate.
Even at 25% default they are fine.
Until the debtors get laid off.

Yes, this is the next bubble...this or other articles on the subject will tell you that it is only "10% of the dollar amount of the housing crisis". The analogy does not work, because we don't replace 90% of our housing every ten years. That $70,000 pickup that is repo'd next year CANNOT be compared to the Malibu condo that was repo'd in 2009 and held by the bank for 6 years and sold for more than their mortgage. They made a profit on the held TARP assets. The pickup will be worth maybe 30% of the original debt obligation.

Lee_WSP
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Re: WSJ: Underwater Car Loans

Post by Lee_WSP » Sun Nov 10, 2019 3:00 pm

I agree. Debt is going to be the next bubble. But I don't think it'll be nearly as bad as the mortgage crisis.

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Nate79
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Re: WSJ: Underwater Car Loans

Post by Nate79 » Sun Nov 10, 2019 3:04 pm

There are a lot of broke ignorant consumers out there buying cars they can't afford with debt instead of saving and paying cash. But we also have a student loan crisis, credit card debt, etc. At least with mortgage debt there is a serious asset backing the debt that in general appreciates in calue.

Chicken Little
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Re: WSJ: Underwater Car Loans

Post by Chicken Little » Sun Nov 10, 2019 3:05 pm

Minty wrote:
Sun Nov 10, 2019 2:36 pm
Lee_WSP wrote:
Sun Nov 10, 2019 12:24 pm
People are dumb and should be protected from themselves. If they still decide to make bad choices after encountering a guardrail, so be it. But there should be a guardrail.
I agree with this. After some years of reading this forum, it seems there is wide agreement that the core business model of many players in major segments of our economy--whole life insurance sales, high-fee, low-performance active mutual fund managers, for-profit schools with low employment and high default rates, non-fiduciary self-dealing financial advisors, various consumer finance companies--is fleecing suckers, preying on ignorance. I find it remarkable that our educational system does not effectively teach young adults to avoid these negative expectancy propositions. Financially sophisticated parents teach their children how to spend and invest, who thereby gain a permanent advantage, and everyone else figures it out the hard way, or become sheep to be sheared.
Here’s the workaround for pay day loans (stretch out terms)...

https://www.google.com/amp/s/www.latime ... f_amp=true

Lot of bad occupations out there. On the lower end, maybe it’s the only job a lowly-compensated worker could land? On the higher end (I don’t know, maybe selling really intricate junk to a bunch of public pension managers who don’t know what they’re buying?), you tell me?

It’s just a money grab, the entire game.

regularguy455
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Re: WSJ: Underwater Car Loans

Post by regularguy455 » Sun Nov 10, 2019 3:06 pm

Is this really that big of a deal? Yes, the owners are underwater but it’s essentially a secured loan. The loss due to default is just the difference between the value and the loan. The leverage here seems to be relatively low and there can’t be a margin call. I mean, if people had a $100k loan on a $10k asset it would be bad but that’s not what we’re talking about here.

Chicken Little
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Re: WSJ: Underwater Car Loans

Post by Chicken Little » Sun Nov 10, 2019 3:10 pm

Lee_WSP wrote:
Sun Nov 10, 2019 3:00 pm
I agree. Debt is going to be the next bubble. But I don't think it'll be nearly as bad as the mortgage crisis.
I think the mistake is to look for the “one thing”. I’m going for the “Total-Debt-Driven-Financial-Crisis”.

There’s no capacity to absorb all of this; auto, student, new round of housing, municipal, state, federal.

This time around, the board is set up so that any domino that falls will knock down the others.

Some of us go to work every day and max out, and this is what we get?

illumination
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Re: WSJ: Underwater Car Loans

Post by illumination » Sun Nov 10, 2019 3:12 pm

If this sector blows up, I just don't see it having the same ramifications to the economy as something like subprime mortgage lending. Repo'd used cars flood the market and prices go down? People will keep paying a car payment so they can get to work before just about anything else.

It's definitely a sad state of affairs, cars are a weird "blind spot" when people decide on what makes financial sense for them to own. In the example, given where $45,000 worth of debt was rolled into a $27,000 vehicle, would it really be so awful to maybe drive a $10,000 used car for a while instead of another new car? There's a lot of consumer spending though that goes along the same lines, like dining out or vacations that seem really irresponsible, but it's not my money.

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Re: WSJ: Underwater Car Loans

Post by stoptothink » Sun Nov 10, 2019 3:13 pm

Lee_WSP wrote:
Sun Nov 10, 2019 12:37 pm
chessknt wrote:
Sun Nov 10, 2019 12:35 pm
This is a sensational title since literally every new car loan is essentially 'underwater' at the time of origination due to the rapid depreciation of new cars. Financing a car is not always terrible as portrayed here and can allow leverage of zero or low interest loans for a good you were planning to purchase. If you are engaging in reckless consumerism with bad credit then credit cards or cars or something else will get underwater so it doesn't really matter what it is as long as someone loans money.
True, but did you read it? More Americans are rolling their old debt into a new to them or new car. Ie, their old car has negative equity.
My brother owed ~$30k on his AMG E63s and he basically stopped driving it because it needed ~$9k in "maintenance", so he traded it in on a new Porsche C4s. That's basically what he's done over the last decade with cars. He was laid off about 10 days later, so now they have a payment on a $125k+ car on his wife's ~$30k income.

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Re: WSJ: Underwater Car Loans

Post by arcticpineapplecorp. » Sun Nov 10, 2019 3:37 pm

The second example in the article is telling:
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.

source: https://www.wsj.com/articles/a-45-000-l ... 1573295400
See what happened there? They thought they'd trade in for a less expensive vehicle, but "ended up splurging on a new vehicle".

Mistake number one.

Then they took an 84 month loan (7 year). Second mistake.

But because the second car is more expensive than the first even with a longer loan which "should" make it more affordable, they're paying $400 more...for 7 years. :oops:

and because cars are getting more expensive, loans are getting longer to make the car "affordable".

https://www.npr.org/2019/10/31/77340910 ... our-wallet

and yes, these people aren't on bogleheads or listening to Clark Howard on their new car radio:

https://clark.com/cars/beware-7-year-auto-loans/
https://clark.com/cars/auto-car-loan-ma ... -60-month/
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

Ivygirl
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Re: WSJ: Underwater Car Loans

Post by Ivygirl » Sun Nov 10, 2019 3:44 pm

The people look at their leaders to see what behavior is allowed. It has been tacitly accepted that the national debt will never be paid off - there is not even anybody in politics any more who even mentions the deficit, much less the debt. Those of us who cared about it fought the good fight and were overwhelmed by the snowballing power of compound interest on trillion-dollar bad decisions.

Some of the major policy proposals out there are so detached from the reality of what can be paid for, they seem to have come from a fever dream. Might as well propose colonizing Alpha Centauri while you're at it. Why not? We can roll it into another loan on something even bigger in a few years.

Looking for the next financial crisis is looking in the wrong direction, the next one will be a crisis of character. There is no "free money." That is the most degrading and harmful phrase of our day.

Helo80
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Re: WSJ: Underwater Car Loans

Post by Helo80 » Sun Nov 10, 2019 3:53 pm

regularguy455 wrote:
Sun Nov 10, 2019 3:06 pm
Is this really that big of a deal? Yes, the owners are underwater but it’s essentially a secured loan. The loss due to default is just the difference between the value and the loan. The leverage here seems to be relatively low and there can’t be a margin call. I mean, if people had a $100k loan on a $10k asset it would be bad but that’s not what we’re talking about here.

Yup.... and cars don't lose as much value as mortgages when SHTF, because cars are portable and less subject to local market conditions.

You take an extreme like a totally financed $100k 2020 Escalade... then a 2009 type recession occurs... and it gets repo'ed.... I mean, you'll probably find a buyer for at least $60k somewhere in the country. Whereas homes.... homes going for $300k one day in Vegas were not able to find buyers at $100k.... you cannot exactly move a constructed home.

Chicken Little
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Re: WSJ: Underwater Car Loans

Post by Chicken Little » Sun Nov 10, 2019 3:54 pm

regularguy455 wrote:
Sun Nov 10, 2019 3:06 pm
...leverage...
Ok, let’s go looking for leverage...

https://www.google.com/amp/s/www.market ... 9213C87F49

If they make rules saying you can’t sell CDO’s, then change the middle letter?

Honestly, who even cares what the details are at this point? I won’t watch the documentary or read the book.

Grt2bOutdoors
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Location: New York

Re: WSJ: Underwater Car Loans

Post by Grt2bOutdoors » Sun Nov 10, 2019 4:16 pm

Chicken Little wrote:
Sun Nov 10, 2019 11:50 am
Independent George wrote:
Sun Nov 10, 2019 11:31 am
...so can somebody explain how you get in...this kind of financial mess?
I'll take this one...

You get into this kind of mess because people are giving you money that they shouldn't be.

In that article, it states that the dealers make more on financing than they do on the actual sale. As we all well know, the dealer doesn't keep the loans on their books, they push them through banks and credit unions and whatever (all in article). So why are those lending institutions so irresponsible? Because they don't keep the loans on their books. These loans are packaged and sold to "investors". Sound familiar?

So it's not the consumer who is stupid, it's the investor. TBM held some MBS back in 2008, so I'm pretty dumb and more-or-less caused that financial crisis with my stupidity.
delete
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Grt2bOutdoors
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Location: New York

Re: WSJ: Underwater Car Loans

Post by Grt2bOutdoors » Sun Nov 10, 2019 4:20 pm

Ivygirl wrote:
Sun Nov 10, 2019 3:44 pm
The people look at their leaders to see what behavior is allowed. It has been tacitly accepted that the national debt will never be paid off - there is not even anybody in politics any more who even mentions the deficit, much less the debt. Those of us who cared about it fought the good fight and were overwhelmed by the snowballing power of compound interest on trillion-dollar bad decisions.

Some of the major policy proposals out there are so detached from the reality of what can be paid for, they seem to have come from a fever dream. Might as well propose colonizing Alpha Centauri while you're at it. Why not? We can roll it into another loan on something even bigger in a few years.

Looking for the next financial crisis is looking in the wrong direction, the next one will be a crisis of character. There is no "free money." That is the most degrading and harmful phrase of our day.
Take a number, there will be many to fall before we go. You don't have to pay it off so much as one should prudently manage their obligations. That is universal, be it in business or on personal obligations.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
Posts: 21456
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Location: New York

Re: WSJ: Underwater Car Loans

Post by Grt2bOutdoors » Sun Nov 10, 2019 4:24 pm

regularguy455 wrote:
Sun Nov 10, 2019 3:06 pm
Is this really that big of a deal? Yes, the owners are underwater but it’s essentially a secured loan. The loss due to default is just the difference between the value and the loan. The leverage here seems to be relatively low and there can’t be a margin call. I mean, if people had a $100k loan on a $10k asset it would be bad but that’s not what we’re talking about here.
LOL, a secured loan! Nothing like a secured loan that depreciates faster than the paint deteriorating on the hood of the car. The moment the car is driven off the lot, the value declines by 20%, the next year the car is worth 70%, the following year 60% and maybe more depending on how well the car is cared for. Secured? that's what the pension funds who hold the receivable securitizations think.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

bovineplane
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Re: WSJ: Underwater Car Loans

Post by bovineplane » Sun Nov 10, 2019 4:42 pm

Not afraid to admit we did this years ago. Had an 04 Durango bought used for decent price. 2008 financial crisis and GM was selling cars and trucks at cost. Durango had 150k plus miles and we had two years left on the note. Traded it on a new avalanche. Forget how much was rolled into the new 5 year note. Note was at 0%. $42k total if I recall.

Realized a year or two in we were far underwater. We were not looking to trade it or upgrade but just getting more serious about our finances. Slowly paid off the loan. Kept driving the Avy until 2017 and 160k miles. Engine started a well known issue with oil consumption. Sold the avy for $11k. 9 years ownership with the last 4 paid off.

By this point I was looking for a replacement truck. Had the $11k from the avy and another $30k ish saved to pay cash. Was offered 1.25% to finance on the red tag clearance. Bought the new truck at $40.6k. put down $15k and took the banks money at 1.25%. pay a bit extra each month and will be paid off next year. Not underwater.

Long story short, drive the underwater vehicle until paid off. Keep driving said vehicle until "the wheels fall off" (or it drinks oil). Buy when you can afford it. Repeat.

Chicken Little
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Re: WSJ: Underwater Car Loans

Post by Chicken Little » Sun Nov 10, 2019 4:42 pm

Grt2bOutdoors wrote:
Sun Nov 10, 2019 4:16 pm
delete
Whoops, I forgot to apologize...Sorry for the financial crisis, everybody.

I’m trying to buy better paper. You won’t catch me fronting these freeloaders for the vehicles and houses they can’t afford (is there any of that in TBM these days?).

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Re: WSJ: Underwater Car Loans

Post by LadyGeek » Sun Nov 10, 2019 4:45 pm

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