Car loans exceeding value of the car?

[scottish]

Sounds like my fellow Canadians are rolling over their car loans when they trade in...   the new loans frequently exceed the value of the new car by several thousand dollars.

http://business.financialpost.com/2014/11/22/how-canadas-auto-loan-bubble-has-become-a-ticking-time-bomb/

Has everyone gone crazy?

[crispy]

I was about to reply that people have been doing this for years, but I'm in the US. Sorry your fellow Canadians are falling into this trap. People are so focused on their monthly payment that they have no concept of what a car is actually worth or how upside down they are.  I find it mind-boggling.

[commodore perry]

I can't believe basic financial literacy isn't taught in school. I think a lot of people would avoid doing things like this if they were better educated. I also think a lot of people would do it anyway but at least you'd catch some people.

[Self-employed-swami]

My Dad works at a car dealership (mechanic) and some of the stories he hears from the finance guys are CRAZY! Like one about a woman with a $60,000 loan on an escalade 'trading it in' and rolling the outstanding loan into one for another $50,000 soccer mom-mobile, and having a loan for over $90,000 at the end. I can't believe that any finance company would do that!? Or that anyone could fail to see the problem with having a $90,000 loan on a $50,000 vehicle!!!

Even with a 7 year amortization, I can't imagine that monthly payment was anything but NUTS!
If she managed to get an interest rate of 6% on that fiasco, monthly payments would still be $1314!

Note: I realize this story makes it sound like the escalade wasn't worth anything on trade, but I think it was a combination of already having a loan worth more than the escalade, and the second vehicle (I believe it was a fully loaded Sequoia) being worth something like $65,000.

[RetiredAt63]

Wow.  And I was unhappy when I took a 5 year loan (0%)(unusual circumstances for me) - the car will be paid off this spring, and I expect to keep it for at least another 5 years.  Five year old body, 2 year old engine, and my mileage is way down in retirement.

But they do want you to keep buying - when the engine self-destructed last November, they would have gladly given me a good trade-in value for the car and kept my loan at the same payment.  No mention up front of what the new total would be.  I had to gently explain that I was fine driving my 3 1/2 year old car with a "new" engine and was looking forward to seeing the end of my car loan.

I can't believe I am writing this, but I miss Jim Flaherty.

Totally off topic, I'm listening to Vinyl Tap.  The Conservatives used Taking Care of Business as a theme when they opened Parliament, without permission or payment.  Wow was Randy Bachman pissed off, you could hear the steam coming off him.  He said the same thing has happened to his songs with both the Republicans and Democrats south of us.  He said they would (both of them) use things and then the election financing group would declare bankruptcy and not pay for use.

[Self-employed-swami]

I miss Jim Flaherty too. And Bachman has such a hate on for people stealing his work, I could only imagine his reaction.

[ScienceSexSavings]

Flaherty was among my favorite MPs, along with the one who was always yelling.

I'm 25 and definitely seeing the beginning of this cycle among my peers. I used to clean at a car dealership, and there was this kind of odd monthly chart in the staff room. It was a big piece of chart paper like the giant pads that teachers use on easels, but with a grid on it instead of lines. Each salesperson had their name on it with two rows per person. The first row for each salesperson would be a solid line of stickers with makes and models on them, color-coded by vehicle type. The second row would have some stickers identical to the one above, and some blank squares. One night, I was cleaning in the staff room and a salesman came up and excitedly took a sticker out of the drawer they were kept in and added it to the first row by his name. I asked why there were two rows and why the second one was always full of holes, and he replied that the top row got a sticker when they made a sale, and the second row got a sticker when it went through because "If the bank doesn't like em or something, it's not my fault." There were always quite a few holes, so I guess there are an awful lot of unprepared customers making deals that fall through.

[Paul der Krake]

I'm more surprised at the fact that you an get loans for 8 years. Wouldn't the winters bring rust problems that destroy the value of the car way faster than they can pay down the loan?

[innkeeper77]

That's why they sell "gap insurance" that pays the remainder of the loan if the car gets totaled and the insurance company pays the value of the car and the "unfortunate" consumer doesn't want to pay off the rest of the loan...

However my 7 year old car is still worth almost half of what it was new- so it's value would still be keeping ahead of the loan. (Not a great decision, but not an awful one either) (We paid it off within a year- took the loan because it was very low interest at the time (2007))

When I replace it- purely cash will be used. (Unless I can nab 0% on a nice used economy car... unlikely)

[Forcus]

Rolling negative equity in to car loans has been pretty common in the US. But the article for Canada looks like something new and I don't know if it's happening in the U.S. - bundling other debt in to a car loan. I'm not sure you can do that in the US or maybe it just hasn't got here yet.