upside down is now an industry:)
This car-buying trend could leave you upside down
By Royal Ford, Globe Staff | April 18, 2004
It may glisten as a glorious idea when that new SUV, truck, or luxury sedan you thought you could not afford is suddenly in reach.
Because interest rates are low, because there are rebates in the thousands of dollars available, because minimal and even zero down payments often are accepted, and because you can stretch your auto loan out over six years or longer, you drive away in a higher-end model than you had planned.
But before you know it, you are upside down -- and no, you have not rolled over in your new car.
The formal term may be negative equity -- you owe more than your car is worth -- but upside down, in the auto-financing business, means that immediately after purchase, and often for several years thereafter, the vehicle you are driving is worth thousands less than what you could get for it in a trade-in, because your loan agreement has allowed you to shirk payments on principal.
And so when trade-in time comes, you not only take advantage of those terms yet again, but you also roll the extra dollars you owe on the old car into the next loan.
In the past, unless you paid lots of cash upfront, it was not uncommon for a car to be worth less than its trade-in value for a shorter period of time. That is because, with a hefty down payment and a short loan period, you were making significant payments on principal from the early stages of the loan.
But as Jeannine Fallon, spokeswoman for Edmunds.com, explains, buyers are upside down for far longer periods now, often remaining that way right up until they are ready to buy their next car.
Fallon, whose website offers reviews and analysis of the auto industry, says buyers frequently end up adding that negative equity to their next loan. The negative equity is caused by people making lower down payments and stretching those payments out over a longer period of time.
In addition, she said, trade-ins prompted by enticing rates on new cars have swamped the used-car market, lowering the value of cars being traded in.
Two recent studies have shown that nearly a third or more of new car buyers come into showrooms owing more on their cars than they are offered in trade. But that does not stop them.
It is a trend that has escalated, and it could pose a threat to both new- and used-car sales, analysts say.
In the middle of February, Edmunds.com reported that nearly 30 percent of all potential new-car customers strolled the showroom floor owing more on their cars than they would get in trade.
Consider an Edmunds.com example.
If, in the spring of 2001, you purchased a 2001 Chevrolet Trail Blazer SUV, with four-wheel drive, for $30,717 -- rolling in the $3,000 difference between what you still owed on your old car and its trade-in value, and even with a $3,500 rebate -- two years later you would still be $3,746 behind the value of your new car.
Further underscoring the breadth of the problem, a second study by the Power Information Network, run by J.D. Power and Associates analysts, showed that 25 percent of new-car buyers were upside down in 2001. Today, 38 percent are in that situation.
Edmunds.com, in its report, said the average length of a car loan has grown to 61.3 months, but an Edmunds.com spokesman said that 72-month and even 96-month loans are being offered.
"We'll have to help or they'll have to help themselves work it through," Paul Ballew, GM's chief industry sales analyst said of upside-down buyers -- even as he acknowledged GM is backing away from 72-month loans.
"Help" from the industry comes in the form of rebates, low interest rates on loans, or handing out more on trade-ins than they might otherwise do.
Can manufacturers continue to pour money into the widening maw that is negative equity?
Can consumers continue to hide their losses in the shadows of low-interest rates, rebates, and what seem to be extremely long loans in an industry where a three- or- four-year turnover from purchase to purchase of new cars is sought after and common?
As to the threat to consumers, Mark Brueggemann, senior editor at Kelley Blue Book -- which is considered the bible of used-car values and new-car pricing -- said: "It's almost time for tough love. People need to start swallowing some pride . . . keeping the old car for another year or two."
And he added: "Don't roll the deficit. You end up paying for two cars at that point."
Finally, he said, the threat to the industry is that the system will bog down under the weight of its long-term loans and mounting negative equity.
Dealers, he said, "just won't be able to get people out of their cars" to buy new ones.
Visit boston.com/cars. Royal Ford can be reached at ford@globe.com.
© Copyright 2004 The New York Times Company |
