If Your Car Is Underwater – What Are Your Options?
Would you be surprised to discover that your car is underwater? Not underwater in the sense of being wet, but in a financial sense. You are “financially” underwater if you owe more on your car than what it’s worth.
According to Edmunds.com, a lot of people are “very” underwater with their car loans lately. In 2016, about 33% of cars offered for trade-ins were worth less than the loans on them. Compare that to 2009, when that figure was under 10%.
Why Do Car Loans Get Upside Down And What Does It Mean?
There are several reasons why you may get upside down with your loan.
First, the average term of car loans is getting longer. Experian reports that the average loan now lasts about 72 months (6 years!). To sell more cars, lenders stretch out the loans that long to make the payments lower, even at a high interest rate.
Second, vehicles are what as known as “depreciating assets.” They lose value every year and with every mile driven.
You won’t break even on a $30,000 loan financed over 72 months at a 6% interest rate until 5 or 6 years into the loan. As the interest rate goes up, it gets worse.
What Can You Do If You Are Upside Down In Your Car Loan?
You could trade in your car for a replacement, BUT, the new loan will “roll in” the remaining balance on your existing car into a new loan. That means you owe even more on the newer car. You may end up with Mercedes sized payments but a modest Chevy in your driveway.
First, look at this problem in financial terms. For example, if you owe $30,000 on a vehicle worth only $15,000 today, you have $15,000 unsecured debt. That’s the same as if you had a $15,000 unsecured credit card debt.
If you add up all of your unsecured liabilities and you owe $20,000, you should look at bankruptcy options. These might help to get yourself back on track. Chapter 7 would allow you to just walk away from your upside down car loan and start over.
Underwater Car Loans May Be The New “Financial Bubble”
Financial analysts are reporting an increase in the number of car loan delinquencies. They expect this trend to increase as interest rates begin to rise. Higher interest rates on new loans will leave struggling families with less disposable income.
If your car or truck loan is eating up a large amount chunk of your take home pay, then seek legal advice from a bankruptcy lawyer before you end up in default status or with your vehicle repossessed.
I always look at a potential bankruptcy case not based on how much debt there is. Instead, how much of your budget is it using up. If you are spending a 5% “slice of your income pie” on unsecured debts, it may not be a problem. But if you are spending 25% or more of that pie, it’s too big a slice! Other areas of your life are probably suffering.
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For over 30 years, listening to clients and putting them at ease, while meeting their needs and helping achieve future goals, in Marion County (Ocala, Belleview, Dunnellon…); Lake County (Leesburg, Tavares, Mt. Dora, Lady Lake, Clermont, Fruitland Park…); Citrus County (Crystal River, Inverness, Homosassa, Hernando…); Sumter County (Bushnell, Wildwood, Webster, Lake Panasoffkee…); the Orlando area, and The Villages.