I just read something on Credit Karma about auto loans. Ish. Things are not looking good.
The article talks about how subprime auto loans are terrible, and how many people quickly get into personally overwhelming levels of debt after taking on those loans. Bad news, to be sure.
But the subject on my mind was something that applies even to those with great credit and more manageable loans. What if something dramatic happens, and the car is destroyed?
I grew up near the mighty Mississippi, so everyone knows that cars can be flooded easily. We should have warning systems with gates that block off major roads when there’s a flash flood warning, but we don’t. Once you get down on those roads by the river, it’s easy to decide to drive through shallow-looking water on the road, only to find yourself stuck. This hasn’t happened to me, mainly because I biked that road much more than I drove it, but it happens all the time.
The river is a formidable foe.
Anyway, say your car gets flooded, but you get out of it ok—thank goodness. Luckily, the lender made you get “full coverage” on your car, so you should be fine. Because they did that to protect you, right? It’s gonna cover everything, right?
What will likely happen is the insurance payout will go first toward any outstanding debt on the car, and then (possibly) to you, minus the deductible. Ouch.
So here’s the situation: $20K Hyundai Elantra, 24 month loan at 3.11%. That means the monthly payment is about $861, and let’s say five payments have been made for a total of about $4300. And now the car is destroyed.
The insurance probably will pay the ACV, or Actual Cash Value. Meaning they’ll pay for a lovely Hyundai Elantra that is no longer new, and worth maybe $15500. After all, the car you had would have technically been a used car.
Then, knock out the deductible. Let’s say it’s $1000 to make the math easy.
Oh, and also the fee for having the junked skeleton of the car towed away. Let’s say it was about $200.
So there’s gonna be a settlement of about $14500, and it will go to pay off the car. Meaning that instead of money in your pocket, you now have nothing left that you can spend on a car. In fact, you probably owe $1500 for a car that is now scrap.
Personal-finance wise, this just means that avoiding car loans if at all possible is probably a good idea. It’s not an option for everyone, but my co-worker’s advisor always gives her a sidelong glance and tallies up how many paychecks she needs to save before buying a car with cash. His attitude is that a loan is a last resort, which makes sense. As the example shows, even “full coverage” insurance is not necessarily going to rescue an unlucky borrower.
But there’s a sexism issue here, too. Auto lenders have shown a pattern of discrimination when it comes to setting rates for loans. They’re more likely to charge a higher rate to someone who is non-white and/or non-male. And a lot of Dems are ok with this (boo). There was a high-profile settlement against some fiends doing this, including Honda (really?) and Ally Bank (darnit, I bank with them). But Congress is cool with letting these things slide.
So it’s a lose-lose. Oh well. The most any of us can do about it is to try and avoid these loans, then chew out our elected officials whenever we get the chance.
Oh, and if there’s a flash flood warning? Stay home.