As the economy slows an increasing number of consumers are upside down on their car loans . What that means is that they owe more than the car was worth. We haven’t heard about this issue as much as upside down mortgages; but upside down car loans are becoming a real issue as consumers struggle to pay their bills.
The biggest problem is in the sub-prime car loan industry, where consumers with less than a 650 credit score take out car loans that average 61 months. The problem is that over the 61 months it takes to repay the car loan the vehicle has lost a significant percentage of its original value. After five years, the average vehicle retains only about 35% of its original value.
This loss is important because it is at the five year mark that most people want to trade-in their vehicle and purchase a new one. According to Kelley Blue Book, in the first quarter of 2007, 29% of consumers were upside down on their car loans. So what do these consumers do with their upside down loan when they want another car?
They roll the loan balance into a new car loan and once again end up owing more than the vehicle is worth. But the now reality is that the amount of credit available is continuing to contract and many consumers are finding it impossible to trade-in or sell their vehicle and cover the entire amount of the loan adding one more debt to America’s mounting pile of unpaid bills.