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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Square_Dealings who wrote (174)	7/12/2003 6:00:07 PM
From: russwinter	Read Replies (2) \| Respond to of 110194

Here's a novel concept, trade in your old car and add the remaining "upside down" balance of the old car to the new car loan. Then stretch the payments on both out beyond the useful life of the new car. And people say this isn't a massive credit bubble? Know of any publicly traded companies in this "gap insurance" Ponzi Scheme to short? Car buyers burned by negative equity David Kiley USA Today Jul. 7, 2003 11:50 AM DETROIT- A large number of auto buyers owe more on their trade-ins than the vehicles are worth, making it tough for dealers, and expensive for buyers, to finance new purchases. Edmunds.com, an auto shopping service, reports that 40 percent of new-car buyers are "upside down" with an average negative equity of $2,200. J.D. Power and Associates says negative equity for an average buyer has about doubled since 2000 to $1,200. It's a growing phenomenon because big discounts on new cars have the effect of depressing the value of used cars, and five- and six-year loans means it takes longer for car owners to achieve positive equity in a new vehicle. "Every extra dollar (of discounts) we put on a Dodge Durango comes off the trade-in value of a used Durango," says Chrysler Financial spokesman James Ryan. Mark Eddins of Friendly Chevrolet in Dallas estimates that 90 percent of his customers are upside-down, often owing $10,000 to $15,000 more than the trade-in is worth. "It's an awful thing for our business," says Eddins. It's a bigger problem for customers of automakers who do the most discounting and attract the longest term loans - General Motors, Ford, Chrysler, Mitsubishi, Hyundai, Suzuki. Many Toyota and Honda dealers report only about 15 percent of their customers are upside down. In-the-hole buyers usually add the amount they owe on their trade-in onto the loan for the new car. And they often stretch out the loan to keep monthly payments low. The longer the loan, the longer it takes to owe less than the vehicle's depreciating value. The Consumer Banker's Association reports 82 percent of new vehicle loans last year were longer than four years; 31 percent were longer than five. In California, some dealers are writing seven-year loans. The problem has spawned a new profit center for some dealers, who are promoting gap insurance. Gap pays the difference between what's owed and what regular insurance will cover if a vehicle is totaled in a wreck or stolen - usually up to 130 percent of the vehicle's value. Dealers typically charge $500-$700 for gap coverage that can be bought online for $300 or so. "We are selling a ton of gap insurance to individual vehicle buyers, where it used to be most of our business was with leased cars" to protect the leasing company, says Dave Hurt, president of Drivers Select Gap Insurance.