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I'm underwater on my car loan. But my credit rating was low and I got to get a new car without anything down, extended payments. The interest rate is a bit hi

I'm underwater on my car loan. But my credit rating was low and I got to get a new car without anything down, extended payments. The interest rate is a bit high, but now my credit score is good. It works out. At least I got a car that will last as long as the loan.

nickthegreek 7y ago
Unless that car is involved in an accident and it becomes a total loss. Carrying gap insurance can protect you from this possibility.
- pc86 7y ago
  Many banks will require it in lease agreements if they feel your income/payment makes you less likely to be able to cover a total loss early in the lease. It's been a while since I purchased a Toyota but I believe they require it for all leases regardless (from your insurer, not TFS).
pc86 7y ago
While obviously not the best long-term financial decision, this situation works out for a lot of people. It's pretty risky to get a 6 or 7 year loan on a 3-5 year old car, but almost any car of almost any manufacturer should last 7-8 years minimum if purchased new and regularly serviced. Just like in the last housing bubble, being underwater is only a problem if you want or need to sell. If you are $15k underwater on your 3-year old car, that's not a problem if you plan on keeping it beyond the loan term. And even if you do need to get out of it, the best way is often not to purchase another car - it's to lease the cheapest car that will cover your negative equity and get approved by the bank. This lets you grin and bear it for 3 years and wipe out all your negative equity, while having a brand new car with service that is likely complimentary for the first 2 years if not the entire lease term (varies by manufacturer and incentives).
latchkey 7y ago
Thanks for sharing and good that it is working out for you. What would happen if you lose your job? I think that is the big question for whether this would really affect people in a downturn. As long as you can keep making those payments, all good... but as soon as the jobs start to go, it cascades for a larger number of people.
notlukesky 7y ago
Albert Einstein famously said that compound interest is the most powerful force in the universe. He said, “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't, pays it.”
Finnucane 7y ago
Cars last a long time now. My car is 20 years old and it’s still far cheaper to maintain that car than to buy a new car.
- seminatl 7y ago
  The replacement cycle of cars has been getting longer since about 25 years ago. The average age of cars on the road is now about 12 years. This fact is often overlooked by folks who predict a rapid shift to electric cars.
- MarkMMullin 7y ago
  Depends where you live - 20 years of salt nets you a frame that will break if you sneeze
  - Finnucane 7y ago
    I live near Boston.
archi42 7y ago
No offense, but an honest question: What's to come after the loan? Even with a car that's cheap with repairs, the seven (or more?) years discussed in the article mean one has to pump a lot of money into maintenance, especially as the car gets older; even more so for people who do a lot of miles/km.

nickthegreek 7y ago

Unless that car is involved in an accident and it becomes a total loss. Carrying gap insurance can protect you from this possibility.

pc86 7y ago
Many banks will require it in lease agreements if they feel your income/payment makes you less likely to be able to cover a total loss early in the lease. It's been a while since I purchased a Toyota but I believe they require it for all leases regardless (from your insurer, not TFS).

pc86 7y ago

While obviously not the best long-term financial decision, this situation works out for a lot of people. It's pretty risky to get a 6 or 7 year loan on a 3-5 year old car, but almost any car of almost any manufacturer should last 7-8 years minimum if purchased new and regularly serviced. Just like in the last housing bubble, being underwater is only a problem if you want or need to sell. If you are $15k underwater on your 3-year old car, that's not a problem if you plan on keeping it beyond the loan term. And even if you do need to get out of it, the best way is often not to purchase another car - it's to lease the cheapest car that will cover your negative equity and get approved by the bank. This lets you grin and bear it for 3 years and wipe out all your negative equity, while having a brand new car with service that is likely complimentary for the first 2 years if not the entire lease term (varies by manufacturer and incentives).

latchkey 7y ago

Thanks for sharing and good that it is working out for you. What would happen if you lose your job? I think that is the big question for whether this would really affect people in a downturn. As long as you can keep making those payments, all good... but as soon as the jobs start to go, it cascades for a larger number of people.

notlukesky 7y ago

Albert Einstein famously said that compound interest is the most powerful force in the universe. He said, “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't, pays it.”

Finnucane 7y ago

Cars last a long time now. My car is 20 years old and it’s still far cheaper to maintain that car than to buy a new car.

seminatl 7y ago
The replacement cycle of cars has been getting longer since about 25 years ago. The average age of cars on the road is now about 12 years. This fact is often overlooked by folks who predict a rapid shift to electric cars.
MarkMMullin 7y ago
Depends where you live - 20 years of salt nets you a frame that will break if you sneeze
- Finnucane 7y ago
  I live near Boston.

archi42 7y ago

No offense, but an honest question: What's to come after the loan? Even with a car that's cheap with repairs, the seven (or more?) years discussed in the article mean one has to pump a lot of money into maintenance, especially as the car gets older; even more so for people who do a lot of miles/km.