So do they write a check for $7,200 to get out from under the loan?
Negative equity
- Thread starter andrew_j
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Worse, they roll it into their next car purchase sinking themselves even further underwater.
You can do that? Isn't the loan secured by the new car's value? Sounds like some kinda predatory (aka stupid) lending.
Lending up to 140% LTV is pretty common.
Now you're scaring me... OMG. Why would anyone do such a thing? And why would a lender do such a thing? Everybody loses.
That's exactly what they do. I suspect there is way more money made on the financing than ever made on the car.
Anyone rolling negative equity into a new car is likely buying on payments which means they are stuffing that sale with every add-on scam they can. The financing is just icing on that cake.
Chicken or egg?
While financing a house is a necessity for almost all of us when we are young and starting a family, a house is a stable or appreciating asset while the availability of easy credit has probably been fundamental in making borrowing for college a necessity. If easy credit were not available, college would have to be less expensive. College loans are a relatively recent development after all. The same is true of motor vehicles. In the absence of easy access to credit, with higher downstrokes required as a percentage of the agreed selling price, prices would have to be lower.
In short, I'd argue that prices are often driven by the availability of financing. It's just too easy to sign and drive.
It is easier for any given person to live without debt than it is for a nation, although being free of debt is easier once one reaches the stage of peak earning years and then an empty nest.
Just some thoughts on how the availability of credit probably increases the cost of goods and services.
That just makes it worse for the owner as the used car market is propped up as a less expensive, yet still expensive, alternative to the new car market.
As an example I got my Prius Prime for $17602, brand new, after all the rebates and credits. It's 5 years and 130k later and still pretty much worth that, mostly because its successor has no rebates and an MSRP in the low $30ks.
Cars used to depreciate even faster than they do now. You've got to really suck to be underwater with something that "happily" loses its value more slowly than expected.
Yup, and in a few years the WSJ will publish an article titled “average negative equity for trade-ins in 2030 is $14,400”
I have been going with the financing specials offered from the manufacturer for the last few cars but in the past I've gotten preapprovals from USAA, PenFed and NFCU. I believe they were willing to finance up to 125% of the LTV. I never did that, but I think they offered it. That said, it's been at least a decade since I've done that so I don't know their current policies.
There are pros and cons to paying cash for a vehicle. My simple philosophy is, is you can't pay cash, you can't afford it.
I hate debt in general, but for depreciating assets? Please.
I hate debt in general, but for depreciating assets? Please.
Well...cashflow/savings has to play into it a little bit but I agree with your sentiment. I CAN pay cash for any vehicle I buy, but I CHOSE not to because interest rates were ridiculously low for the past decade and I like a healthy emergency fund. Scenarios like I just paid $60k for vehicle and when I get home, I open a letter from my homeowner's insurance stating I have 6 weeks to replace my $40k roof or they're dropping me and boom just like that, $100k is gone, run through my mind. Admittedly, some of them are remote but I sleep
soundly at night this way.
When CV-19 hit, my business partner and I just happened to be sitting on quite a bit of cash and you can bet that helped us get through months and months of greatly reduced cash flow. That was a situation he and I never considered possible and after that I just feel better with a large buffer.
Now, if I hadn't had access to 0-2.9% financing, I may have considered cash.
Lexus has a current offer:
- $7500 Lex cash OR
- $5000 Lex cash + 0% financing for up to 60 months.
I’ve read all of this for the last 50 years. Yet have yet to see the Great Depression II. Oh yeah the Chinese/Japanese going to take our jobs and rule the world is another one.
Here's what the chat has to say on a $65k Lexus. It's always fun to see if my intuition is correct and here I predicted $5k/0% would be significantly better. Interestingly, below $26.5K, the $7500 cash wins.
On a $65,000 vehicle, assuming you finance for 60 months and ignore tax/title/fees for simplicity:
| Offer | Amount financed | APR | Monthly payment | Total paid over 60 months |
|---|---|---|---|---|
| $7,500 Lexus cash | $57,500 | 4.99% | about $1,085 | about $65,080 |
| $5,000 Lexus cash + 0% | $60,000 | 0% | $1,000 | $60,000 |
Difference: the 0% financing offer saves about $5,080 total, and the monthly payment is about $85 lower.
So on a $65K vehicle, the $5,000 Lexus cash + 0% for 60 months is clearly better.
And that assumes you financed the $57,500. All I am saying is, there are lot's of ways to slice up the deal.
I hate payments, but a zero percent loan would allow you to put $$ into another appreciating asset. A loan is simply acquiring an asset with other people's money. Again, lotsa considerations. Oh yeah, I've made my mistakes, some doozeys!
The Lex RX my neighbors just bought was $50,145 MSRB, $5500 dealer discount plus the Lex incentive option. They took the $7500 so the RZ was $37,145 + the governor's tax and licence.
I probably would write a check for $25K or whatever and let the payments ride.
Not too shabby...
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Yeah, no, I wasn't making a statement either way. I just wanted to know which one saved more and while it is not difficult math, it's cool that the ChatGPT can do it so easily.
I always pay cash for my vehicles and have done so for the last 25 years. When you pay cash you realize how hard it is to accumulate the money and are much more prone to make wise financial decisions. Most people will buy on impulse if they are qualified for the loan. I remember many years ago I walked into a local bank to buy a Ford Explorer that was mint with over 100,000 miles on it. The young banker who was kind of a loser said well I can give you the money for a brand new Ford Expedition but I cannot approve the loan for a previously owned one. I told him I would take my business elsewhere and found another banker to write it up.
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