Underwater Car Loans Are Increasingly Common, But They Might Not Be As Scary As You Think

If you are looking for good news about consumer debt, you will probably have to keep looking.  Car ownership is unlikely to become more affordable anytime soon, even as most people in the Philadelphia area who rely on employment income as their main means of financial support rely on a car to get to work.  Vehicle prices are not as inflated as they were at the height of the pandemic era vehicle shortages, but hardly anyone who bought a car three years ago can afford to trade it in.  First-time car buyers and those who are in the market for a new car after their old one made it to an advanced age find themselves having to finance their car loans over at least five years, sometimes as much as seven, which adds to the total amount they will pay for the car.  Recent data shows that the number of car loans that are underwater is increasing; in the third quarter of 2024, it reached the highest level it has been in years, but this is not as alarming as it may seem.  If you are stressed out about your car loan and other consumer debts, contact a Philadelphia debt relief lawyer.

What Does It Mean When a Car Loan Is Underwater?

A car loan is a secured loan.  When you buy the car, the bank paid the seller the purchase amount minus the down payment, and now you must repay that amount to the bank in installments, with interest.  Your car is collateral for the loan, which means that the bank can repossess your car if you stop making payments.  The more you make payments, the more equity you have in the car.

Of course, cars depreciate quickly; as high school economics teachers will happily remind you, a car that has been on the road in its owner’s possession for only a few minutes is worth considerably less than one that is truly new and still for sale in the dealership parking lot.  Given that your building of equity in the car is slower than the car’s depreciation, this means that many car owners have negative equity in their cars within a year or two of buying them.  Negative equity, also known as being underwater on your loan, means that the resale value of the car is less than what you owe on the loan.

If Your Auto Loan Is Underwater, Just Keep Swimming, and You Will Eventually Reach the Shore

Underwater car loans are a normal and almost unavoidable part of vehicle ownership.  They are only a problem if you are trying to trade in your car.  People run into trouble when they think they need a new car every two or three years.  It is better to wait to trade in your car until you have paid down more of the loan.

Contact CONSUMERLAWPA.com About Car Loan Debt

A Philadelphia consumer law attorney can help you if your car loan is underwater.  Contact CONSUMERLAWPA.com to set up a free, confidential consultation.

Source:

cnbc.com/2024/10/15/american-consumers-are-increasingly-underwater-on-their-car-loans.html