Your car-loan payment may be way too high. Here's what's happening
Erica Alini - Global News | October 26, 2019.

George Iny recalled a woman who wrote in saying she was paying around $550 a month for her new 2018 Toyota Corolla on a seven-year loan.

“She doesn’t appear as anybody’s statistic anywhere, but obviously her household suffers because she’s paying $250 a month too much for that car,” reckoned Iny, who heads the Automobile Protection Agency (APA), a consumer advocacy group...

Behind the gargantuan loans are ever longer auto loans, early trade-ins, and negative equity, an issue that’s been long known to insiders but remains poorly understood by many consumers, according to Iny.

Negative equity

What is “negative equity?” you may wonder.

It means the market value of whatever you bought has fallen below the outstanding balance on the loan you took out to purchase it.

In real estate, this is known as “being underwater” and is a relatively rare occurrence. Home prices generally rise year over year so it usually takes a housing downturn for homeowners to find themselves underwater (think of what happened in the U.S. after the 2007 housing bust). Negative equity on a house can be a headache because, in a recession, it may force you to stay put in an area where there are no jobs instead of moving to where there are more opportunities. You’re stuck because you’d lose money — potentially lots of it — if you sold the house.

For cars, though, it’s different. Unlike houses, vehicles typically lose value over time, meaning that, unless you’ve made a large down payment, you’ll probably owe more on your new car than the vehicle is worth, at least initially...

The problem with negative equity arises when you trade in your vehicle before it’s fully paid off, something that’s become increasingly common among car buyers in Canada.

Let’s say you bought a $35,000 compact SUV with an eight-year loan and zero down. It might take you a whopping six years to reach the point at which your vehicle is worth more than the balance you owe on it. If you decided to trade it in after three years, for example, you’d still be $5,800 in the red, according to an example provided by Canadian Black Book.

Now let’s pretend you’ve set your eyes on a new $40,000 vehicle. In order to finance that, the lender would fold your old $5,800 balance into the new loan, for a total debt of $45,800.

If you started out with a shorter loan but still traded in with negative equity, your lender may be able to keep your debt payments roughly steady by offering a longer loan, Iny said. While the impact on your cash-flow may be minimal, your debt load is mounting.That’s how cars are getting Canadians into a spiraling cycle of debt, according to Iny. Read the full story on the Global News website


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