A record 32% of all vehicles offered for trade-ins at U.S. dealerships are from folks upside down in their loan. U?

Put 15k down on my car and will be paid off after 3 years, so nope. Buying my last car though, the guy next to me was arguing with the sales guy about his trade-in being a good car. The sales guy kept trying to explain to him that he owed more than the car was worth, so there was a negative trade-in value. He also tried to talk them down to a cheaper model. I was actually impressed with the salesman for this. The customer was having none of it.

Can't wait for the auto loan bubble to pop along with the student loan bubble and silicon valley vc bubble.

pop_pop!_v2.2.1 wrote:

newer car guy wrote:

I'll probably pay for half the car just in interest on my $50k over the 5 years.

Who's the loser and sucker?

Unless you are gambling, you had better check your math.

This is typically what happens I think. People say they are being fiscally smart taking a low interest loan, but they never actually do the math and in reality end up just buying more toys with the extra cash. Or they never had the extra cash up front to begin with.

What is the auto loan bubble?

Do you think defaults are on the horizon?

I don't know how many people want to risk their credit not paying their car loan.

For the trade-in, the dealer is low balling for higher profit.

The buyer has to come up with cash to cover the negative equity and that will enable the sales guy to hold better on the sales price of the new car to get more profit on that end, too.

To roll negative equity into a new loan they have to give a good discount on the new car which hurts their commission.

For a trade-in, they don't want to buy your car unless they can make money off it.

That's what puts you upside down.

You may have a little equity if you sold it on your own.

In general a trade-in to the dealer is about $2,000 less than selling it directly to someone. And they will sell it for $3,000 more than they paid you for it. That's business.

Never underestimate the willingness of people to shirk responsibility/declare bankruptcy. Hell, how many times has our president-elect done it now? Delinquency rates are on the rise.

I have one car that was recently paid off.

Bought our other car about a year ago and that car is probably upside down if I were to trade it in right now.

I brought in a car to trade in that was paid off and I was offered $7,000 for the car. (There were issues and I didn't want to take the time to sell it on my own so I took the easy route)

The new car had a 5 year 0% financing deal.

I had them put $2,000 of the trade down to cover taxes, fees and and such and financed basically the entire car.

I had them write me a check for the $5,000 difference from the trade.

Obviously I could have put down more on the car and had more equity.

But I chose to be upside down and take the cash while borrowing at 0%.

So I had cash in the bank to cover a number of payments.

Or I had cash to pay down some debt that did carry interest.

Or I had cash to cover the insurance gap in case it got totaled.

Or I had cash to invest.

In any case, it was better to have the cash with me than as equity in the car.

So I'm upside down right now. So what?

I don't plan on trading it in any time soon. I'll pay it off at some point and still have for a bit after that.

I don't need "peace of mind" of lower debt. My mind is quite peaceful knowing the numbers work well this way.

Dealers will always take a trade. If they do not think they can make money off of it, they will send it to auction and will usually break even. They do not want to ever turn down a trade because that will cause the customer to leave the dealership.

Trade values are actually pretty mechanical at dealerships. Dealers do not like to spend any time haggling on trade values. They will have their used vehicle manager look at NADA, Manheim and other pricing guides to get an idea of what is a competitive offer. They also do not want to lose a deal because the negative equity is too high. If anything, they may over allow a little to help get the customer out of a vehicle and into a new one.

Dealers will try to get $2-3k above cost on a trade, but there are lots of risks. A dealer may have to put a lot of money into making repairs to get a vehicle "front line ready". If a used vehicle does not sell quickly, the dealership starts incurring interest and other charges on its floor plan that eat up profits quickly. And sometimes the dealer has to send a vehicle to auction if it sits too long. That can result in a loss of a few thousand.

There is definitely an auto finance bubble out there. The main culprit is 72 mo loans and "special finance"/subprime lending. Too many people are getting into loans with high interest rates on used vehicles that are old and have high mileage. When the vehicle starts falling apart with 3-4 years left on the note, they try to trade it in and find that they have a lot of negative equity. They roll the negative equity into a new loan and just fall further into the negative equity trap.

This bubble is not nearly as dangerous as the subprime housing bubble mainly because it is very quick and easy for lenders to foreclose on the collateral and get some money back by auctioning the vehicle off after repo. The housing crisis was devastating because the foreclosure process was very long and the market became saturated with foreclosures, driving other property values down. When someone defaults on a Ford Explorer, that does not mean that the price of other Ford explorers goes down.

I already explained this. No one is attacking you for being upside down on a loan, but there are a lot of people that are upside down and trade it in and roll the debt into the next loan. Your method is perfectly acceptable and fiscally responsible method to pay for the car. Especially with the statements "I had cash to cover the insurance gap in case it got totaled" and "I don't plan on trading it in any time soon." Stop being so defensive. The car prior to the one I have now was upside down and I wasn't worried about it. Just explaining that it's not always ideal in every situation just because interest rates are low.

Right out of college, I bought a new car with a car loan (I put about 30% down). I told myself I would pay off the car before buying a house, so I paid off the loan in two years (I don't remember how long the loan was originally for).

I decided after buying a new car that I would never get a car loan ever again. I would only get a car I could afford with the trade-in value of the current car I have, and whatever cash I have available. I have only gotten one car since then (in the past ten years, and only because my first car got wrecked), and I paid it in cash.

I'm not some millionaire. I make less than $50,000 a year. Buying a new car right out of college wasn't my smartest financial move ever, but overall I am good with money.

People, if you are getting cars you can't afford and paying off high interest rates over a long period of time, YOU ARE A COMPLETE IDIOT!

Let me clarify that the dealer will try to maximize a profit on a trade.

Or break eve as long as it gets them a sale, but they are still taking the trade to get money on the net deal.

They will not take a trade if you demand too much for the trade, so they will not always take a trade.

What is the the auto finance bubble risk?

Higher interest rates if there are too many defaults?

They have had zero percent deals since the year 2000.

The bubble may be that fewer people get offered the great rates but they won't pass up a sale for borrowers with perfect credit who will certainly make their payments.

Maybe the bubble is that it pushing car prices too high.

You don't get a cash deal so offering cash doesn't help lower the price.

The economy in general has more impact on what people will pay for cars.

The longer terms could mean people hold their cars longer before buying which hurts the car business and could lead to lower prices (bubble bursting).

I think we can both agree that you should make financial decisions based on what you are comfortable with and all of our advice is merely something to consider.

I buy beaters for 1,000-2,000 and drive them until they die. I graduated with no student loans (thanks, running) (NAIA), but my wife had $32k. She came from a family who had 2 brand new cars at all times, so I compromised a bit and paid cash for a $5k car for her, which had 60k miles on it, and it will last until we can pay off the rest of the loans (should take less than 24 months from start to finish!). As for me, beaters all the way. Even after we have all debt paid off and 6 months of income security.

Young Ramsey Dude.. wrote:

I buy beaters for 1,000-2,000 and drive them until they die. I graduated with no student loans (thanks, running) (NAIA), but my wife had $32k. She came from a family who had 2 brand new cars at all times, so I compromised a bit and paid cash for a $5k car for her, which had 60k miles on it, and it will last until we can pay off the rest of the loans (should take less than 24 months from start to finish!). As for me, beaters all the way. Even after we have all debt paid off and 6 months of income security.

Good for you Ramsey Dude. Let someone else take that initial depreciation and keep your money for better things (investing, fun etc).

Young Ramsey Dude.. wrote:

I buy beaters for 1,000-2,000 and drive them until they die. I graduated with no student loans (thanks, running) (NAIA), but my wife had $32k. She came from a family who had 2 brand new cars at all times, so I compromised a bit and paid cash for a $5k car for her, which had 60k miles on it, and it will last until we can pay off the rest of the loans (should take less than 24 months from start to finish!). As for me, beaters all the way. Even after we have all debt paid off and 6 months of income security.

I follow Ramsey pretty closely. His advice isn't complicated and it would keep a lot of young people from making A LOT of bad mistakes, financial mistakes that end up bleeding over into other areas of life. Financial stress destroys marriages, creates additional job stress, and can be professionally limiting.

As far as beater cars. remember, Dave isn't against having nice stuff IF you can pay for it.