06 Jan Is Your Car Loan 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 with your loan if the fair market value of your vehicle is substantially less than the debt you owe.
According to Edmunds.com, quite a lot of folks are significantly underwater with their loans. In 2016 nearly one-third of all vehicles offered for trade ins at dealerships are worth less than the debt encumbering those vehicles. By comparison, the underwater percentage was less than 14% in 2009.
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 between 68 and 72 months. Further, the average loan now amounts to around $30,000.
Second, vehicles are what as known as depreciating assets – they lose value every year and with every mile driven.
When you do the math, you won’t break even on a $30,000 loan financed over 72 months at a 4% until year 3 or 4 of the loan. As the interest rate goes up, it may be year 5 or even year 6 before your loan balance falls below the vehicle value.
If you trade in your underwater vehicle for a replacement (or if you have to replace a damaged or destroyed car) when the loan balance exceeds the fair market value, the replacement lender will reduce the unpaid balance by the wholesale value of the original car and “roll in” the remaining balance into a new loan.
You may end up with Mercedes sized payments but a modest Chevrolet in your driveway.
What Can You Do if You are Upside Down in Your Car Loan?
If you find yourself owing substantially more to your car lender than your vehicle is worth, you do have options. First, you need to look at this problem in financial terms. For example, if you owe $30,000 on a vehicle worth only $15,000 today, you effectively have $15,000 unsecured debt, just 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 or $30,000, it would not be unwise to look at bankruptcy options to get yourself back on track. Chapter 7, if you qualify, would allow you to just walk away from your upside down car loan and start over.
Chapter 13 can allow you to restructure your out of control car loan, along with all of your other debts. If your car loan is more than 910 days old (2 ½ years), you have even more options in that you can “cram down” your outstanding debt to equal the fair market value of your vehicle.
Underwater Car Loans May Represent a New Financial Bubble
Financial analysts are reporting an increase in the number of vehicle loan delinquencies. I expect this trend to increase in 2017 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 an large 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. Bankruptcy lawyers are always able to offer more options before a crisis starts than if you are staring down an emergency deadline.
Jonathan Ginsberg, Esq.
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