One example:
> 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.
How do you go looking for a vehicle that's less expensive and end up with a vehicle that's nearly 2x the cost?
The article includes two anecdotal examples. I suspect that my income exceeds both. I would never pay as much as they did for a car. Cars are terrible investments. Most should be purchased as the bare minimum cost to get back and forth to work.
I particularly dislike the common refrain, "the cost to repair it is more than the car is worth." It's the wrong mindset. The repair cost is always far less than the replacement cost. My old 150k beater that needs $1k of repairs every year is still much less expensive than the $25k+ it would cost to replace. I have no car payment (thus no interest), and property taxes are cheaper.
And people keep buying brand new cars. Why? Our culture doesn't properly identify brand new cars as luxury items. We should publish a new rule of thumb. Nobody should be buying new cars who can't already afford to fund an IRA.
The really sad part: It's easily curable, with financial education. Why it's not part of middle school education, I'll never know.
I’m concerned, of course, that Americans have built a society with so few buses that everyone has to buy a car on credit. But being “underwater” is not the main problem here.
More specifically, we've built cities that are pretty awful for bus (or rail) transportation, if you thrown any sane amount of money at the public transit system. Most of our cities have been relying on inefficient (i.e. very spread-out, low-density) growth patterns to cover costs, while the long-term expenses demanded by that growth (maintenance, for example) outpace the revenue it brings in. It's musical chairs, and when the music (growth) stops most of the cities in the US are going to be Detroit, with way too much city for their tax base to support.
Huge, low-density cities lead to shitty, expensive services (bus service being but one example) and crippling, indefinitely-ongoing maintenance expenses.
Perhaps we can mitigate many of our urban problems--pollution & greenhouse gases, road congestion & traffic accidents, and consumer debt--by investing in electric or NG buses.
That said I tend to agree that "underwater" isn't really the right concept for a car loan. Unless of course you total a car right after you get it. Sucks to be putting $ towards a car note with nothing behind it.
In my early years I once took out a loan for a car. I've never once been underwater on my loan. You're only underwater at some point if you put down a small/no down payment and pay the minimum amount due every month.
The topic of this article is people rolling the balance of their previous car loan into their new car loan. So they are underwater before they drive it off the lot, sometimes by a LOT. That's scary! Its basically running on a treadmill that always accelerates.
By far, the largest amount of money tied up in debt is in mortgages. The highest number of borrowers are credit card users.
Underwater car loans are a problem for some borrowers, maybe, and could portend a slowdown in car buying, but people have many options when it comes to cars. They'll buy used, if they hit a debt wall and simply can't afford new, then later trade up for a new vehicle.
It's unlikely that this is a sign of recession, in my opinion.
1. https://www.lendingtree.com/debt-consolidation/consumer-debt...
Looks like WSJ is skirting around the issue of subprime loans made to rideshare (Uber/Lyft) drivers. lost track of the number of unhappy uber/lyft drivers I have chatted, because of the predatory nature of the incentives and car loans.
The drivers think they bought a new Camry, and while making a nice profit in the first few months. Then the incentives dry up, while principle due has barely moved. Now the predatory lender has a captive slave to make the monthly payment by giving ride, because there's a loss aversion mindset that prevents the driver from walking away.
At some point though, the drivers will realize it's not worth slaving it out for a car they don't own. With Uber losses continuing to pile up, at some point incentives will go to zero, their retention costs will go up, drivers will get fewer $$$ per mile.
If this happens on a large scale, there has to be some kind of a crisis with these subprime loans. There'll be glut of used cars, killing new car sales, thus affecting those car manufacturers/sales.
FCA will take much riskier clients (and much more negative equity) than other makers, even though their product depreciates way faster than almost every other brand on the market.
Lenders are willing to make the underwater loans, often charge with high interest rates. Many of the loans are bundled into bonds and snapped up by Wall Street investors therefore having supposedly a broader effect.
Sequioa shared the “Rest in Peace Good Times” presentation in 2008 with their portfolio companies:
I think that is the big question for whether this would really affect people in a downturn. As long as you can keep making those payments, all good... but as soon as the jobs start to go, it cascades for a larger number of people.