01 March 2023

"Car debt" in the United States

Chris Martin knew he needed a bigger car as the birth of his fourth child approached, but he and his wife were already $14,000 underwater on their two vehicles.

So the couple proposed an unusual two-for-one deal with an Atlanta-area auto dealer in 2020: trading in both of their vehicles so they could afford a three-row Ford Explorer. Their total loan after factoring in negative equity, a service contract, fees and other costs ballooned to $66,000 on the $49,000 Explorer.

Despite a lot of progress on the debt, he feels uneasy. “I don’t want to be paying interest on cars that I don’t even have anymore,” said Martin, a 36-year-old data engineer.

The build-up in negative equity  — or the amount that debt exceeds a vehicle’s value — is rattling consumers and raising alarms within the industry. Though it’s not unusual for drivers to carry negative equity, some dealers say more people are arriving at their lots up to $10,000 underwater, or “upside down,” on their trade-ins. They’re buying at still-sky-high prices and rolling debt from one car to another and even onto a third. Loans are commonly stretching to seven years. 

As trade-in values begin to cool, each month more and more consumers will find themselves falling from positive to negative equity,” said Ivan Drury, director of insights at auto-market researcher Edmunds. “Unless American car shoppers break their habit of buying again too soon, we’ll see the negative equity tide continue to rise.”
The article continues at Bloomberg.  Any comments Jesse?

27 comments:

  1. We talked a while ago about how much the financial industry in the US constantly tries to rip off its customers. Here's another example. Sane banks don't provide loans to customers that can't afford to pay it back, but current banking rules make even that a profitable business, so it happens. This is evil.

    Also, use a condom if you can't afford more kids. Or go live in a place where you don't need to depend on a car to get around. Or just not a freaking Explorer. There's other spacious cars.

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    1. Why blame the bank instead of the buyer? Stupid is a better adjective than evil for this situation.

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    2. I explicitly blamed both.

      But let me turn that around: Why only blame the buyer? Why absolve the bank? Why can't we expect from banks that they not to actively push their customers into bankruptcy for a small amount of easy profit, while unloading the burden of the bankrupt customer on society?

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    3. Why blame the bank or the buyer when you can blame the dealership?

      1. It's right there in the text: "after factoring in ... a service contract, fees and other costs." Service contracts are a ripoff, and dealers are notorious for charging junk fees. They're very efficient at selling or sneaking by these add-ons, and will try to sneak the cost into the purchase price if you say no.
      2. The article doesn't mention the lender, but many manufacturers offer financing at subsidized rates. Again, they'll get their pound of flesh somewhere, but the effect of the subsidy is to push down rates and push up loan limits in a race to the bottom for lenders. Banks have to keep making loans in order to continue to exist, so they're forced to compete.

      Dealers are vampires on the economy, and politicians are complicit by giving them the exclusive license to sell to the public for the sake of "jobs". Say what you will about Tesla, but their push for direct sale to consumers and elimination of the middleman is a crusade we should all be behind.

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    4. Why blame the bank or the buyer when you can blame the dealership?

      Dealerships, or better car manufacturers are de facto banks with a side-hussle of producing cars.

      Similarly, air carriers are de facto banks (of their air miles) with a side-hustle of flying planes.

      These models exist because regulation allows it, and the fact that so few people know it shows how deceptive it is.

      Again, the financial industry is rotten to its very core and its sole function is to rip off regular folks. And they're doing it under a veil of very false christianity.

      https://kentandersonlaw.com/2007/12/is-bankruptcy-unchristian-certainly-not/

      Furthermore, they're very good at shifting blame on their customers under the notion of individual responsibility when they never take any. Ever.

      The deck is stacked against you and me to their profit.

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    5. Agreed. Credit unions are the best, they fold all their profits back into better rates or benefits for the members.
      That said, the financial industry is heavily regulated already, at least relative to retailers (dealerships included), who can basically do whatever the hell they want. Where are the safety and soundness audits of air miles programs, or Starbucks gift cards? Starbucks has over $1.6 billion in stored value liabilities (gift cards), equivalent to the 555th largest bank in the US, of roughly 5000.

      Pg 43: https://s22.q4cdn.com/869488222/files/doc_financials/2023/ar/Starbucks-FY22-Annual-Report.pdf
      https://www.federalreserve.gov/releases/lbr/current/

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  2. A "data engineer" is doing this. Really. I have this feeling he is not very good with numbers, which makes me wonder about the results of his "data engineering". SMH

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  3. There are so many things about this that don't make sense.
    Why is he getting a new car? If he has 4 kids, it will be caked in mud/food/sunscreen anyway.
    7-year car loans? How is that even legal?

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    1. And how does it make any sense for the lender to loan $17,000 more than the initial value of the vehicle. If the borrower forfeits on the loan, the lender could repossess the car and still be in the hole.

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  4. Horrific example of what we'd expect in late capitalism. A predatory frenzy in transportation, education, housing, medical care...

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  5. Chris Martin is the villain of this story for having four kids.

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  6. For Atlanta, minivans and SUVs only, there are 1200+ cars available under $15,000 on Craigslist.

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    1. Buying a used van would make more sense, but they had the problem of trading in two used cars they still owed money for. A new van was probably their only option.

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  7. Also, crucial to understanding this sht-show is the fact that dealers buy your car at a wholesale price and sell you a car at a retail price. What's underwater to a dealer might be at par on the open market. The buyer goes into a dealer thinking he can negotiate. This is delusional. Dealing with a dealer only works when the buyer knows as much as they do and insists on the terms they began with when they arrived. That is, fully ready to "walk." This mean no dealing from a position of desperation. Never be poor. Never "need" a car. Thoughts and prayers.

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    1. You are correct. Do not negotiate. Enter the dealer having done research and be ready to walk away. Know when to buy and what to buy. Let the salesperson know what you want and what you will pay before you look at any cars. Have a frank discussion with yourself about all of the "bells and whistles" that you do not really need. Don't buy more car than you need. Dealers have vehicles that are fairly basic that sit on the lot because buyers are lured to the touchscreens, surround sound stereos, moonroof, fancy alloy wheels, etc. Spend your money on safety features rather than glitz. Safety equipment will also save money on auto insurance, a touch screen dashboard not so much.

      It also helps to pay cash for a vehicle. I am approaching 70 years of age and have never had a car loan or lease. When we buy a vehicle, we immediately start saving for the next one. And keep the vehicle maintained. Find a trusted auto service shop and get the car there 3 or 4 times a year. Drive your car gently.

      And please keep the phone in your pocket while operating a vehicle.

      Thanks for reading

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  8. Look at all the ads for companies that claim they can raise your credit score. There is only one reason to raise it... go deeper in debt.
    My personal pet peave is people buying groceries with credit cards. Sure some a debit cards but the cashiers tell me credit cards are predominant. There are costs and the store is adding that cost to prices, the prices of my groceries. Too many downsides to a cashless society. If a bad guy can't get your cash, he might take your kidney.
    xoxoxoBruce

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    1. Your credit score can affect your auto and homeowners insurance rate, your ability to rent an apartment or a space for a business, the deposit you may have to pay for a rental or a utility hookup. If you apply for a job at a financial institution, your credit score will be looked at. A job that requires a security clearance usually requires a good credit score. And if you do have to borrow money, a high credit score can lead to a substantially lower interest rate, as much as 50% lower.

      I use a credit card to purchase groceries and most other retail products. Yes, there are costs associated with that. Perhaps the store should offer a discount for using cash, as many gas stations do.

      For some reason, I always use cache at the local brewery...

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    2. Ah, thank you Rider, I didn't realize the world had gotten to the point where the measure of a man is his credit score. Makes sense as a quick and dirty way to separate the wheat from chaff. Certainly mistakes will be made but quick is more profitable than accurate.

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  9. https://www.marketwatch.com/story/ford-seeks-patent-to-repossess-a-car-remotely-by-locking-owners-out-of-their-cars-and-cutting-off-ac-8825d3c4?mod=home-page

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  10. What about NOT having a fourth child when you seemingly can barely afford the 3 you already have?

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    1. There is no indication that he could "barely afford" the three kids he had. He and his wife made some poor decisions regarding taking on debt and he incurred more debt. The story says he is worried about the debt, but it appears the family is getting along ok.

      No doubt though that future family planning might be a topic of discussion, as well as some learning about financial planning. I wish them luck.

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  11. This is why I drive a half dead 04 hhr that leaks everything... I'm literally afraid to buy a car right now. Buy anything and you've been ripped off right now. The world is so cat and mouse I'd rather be a turtle.

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    1. "The world is so cat and mouse I'd rather be a turtle." That's a good one.

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  12. If you do buy a new car the odds are pretty good you won't be able to fix anything that goes wrong even if you can diagnose what it is. The electronics are so complicated no system is stand alone and expensive to repair. Well not repair, that's old fashioned, now the diagnostic computer tells the tech what to replace. A breakdown on the road with 4 kids means a tow truck, no more sanding the points with a matchbook. LoL
    My daily driver is 18 years old and still as complicated as early space shots.
    xoxoxoBruce

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    1. One bonus of cars from the past 25 years is they are a HECK of a lot more reliable than older cars. No more sanding the points period.

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  13. Akshullly....with the advent of Youtube, it became vastly easier to repair and maintain your own vehicle. The trick is to purchase a common car. That way you can be assured that there will be in-depth pro-level videos covering almost every problem you can imagine. I just bartered for a nice Prius, then sold a 1998 Honda Civic I nursed for 200k miles. It had survived 4 minor wrecks by my daughter and er...myself. Pull out the metal with a come-along, bash off the rust, rivet on some sheetmetal, a little bondo and paint and off she goes again! For my construction work truck, I use Suburbans. I'm on my third one, and the highest price I've paid is $2,000. As soon as I got the Prius, I promply thrashed the front end of it. The large plastic cover on the front got ripped off by a branch and shredded. I looked it up on Youtube and found out YOU CAN EASILY FIX most plastic items. You can weld plastics back together with a piece of the same type of plastic, metal mesh and a iron that heats up to just the right temperature (kits on Amazon). The best thing we can do as Americans to save the environment is to repurpose things that otherwise would be junked.

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  14. That's all cosmetic, the difficulty is determined by your level of good enough. But when you turn the key(or push the button) and nothing happens you're in a world of hurt. Now you have to find out why, and even the diagnostic computers the dealer has gives a half dozen possibilities to any trouble code. That's when the techs start throwing parts at it. Many of them are expensive parts.
    So go on the internet and read 50 owners of the same blisterbuster model Q like you have had to replace the framis when it wouldn't start. They even have detailed instructions how. Where do you get a replacement framis, how much/long to have one delivered since you can't drive? What if that doesn't fix it? What are the other 5 parts that may cause this. On the bright side you now have a spare framis as they are non-returnable. But maybe not because there are so many parts daisy chained.
    You can't get the shifter out of park, linkage? transmission? Did you check the little switch on the brake pedal that the system requires foot on the brake before the shifter will move? Hard to think rationally when you're late for work.
    Nothing is simple and most take a lot of time
    xoxoxoBruce

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