Is Vehicle Debt Killing You?
By Bob Hauck, 4 Pillars Kamloops (January 2016)
Sometimes people come to us and the biggest issue they’re having is their vehicle debt—it’s ‘killing’ them. How does this happen? Easy enough!
Occasionally I meet with people who have decided to buy a pretty expensive vehicle, often loaded up. At the time of the purchase, they were making good money, and the payment on the vehicle loan seemed well within their monthly budget. Big trucks are usually the object of affection, but sometimes it’s a luxury car. While the sticker price at the dealership doesn’t necessarily seem all that bad, and the interest rate on the financing is great, by the time the warranty and other finishing touches are added on, there’s more owing on the vehicle than what it’s worth. Once the buyer drives it off the lot, depreciation starts, and now the vehicle is worth a lot less.
Roll the clock forward a year or two. The individual is still making good money, and now they want to upgrade that truck or luxury car. Trouble is, they are now in a significant ‘negative equity’ position — very little of the original debt will have been paid down, while the vehicle has depreciated in a major way. Maybe there’s $20,000 of negative equity. The dealership has a solution: they get into a new vehicle, the dealer may have some factory discounts to apply to make it seem like an attractive deal, and maybe the financing is even better than it was the first time around. Often the term of the financing is extended to make the monthly payment as low as it was for the original purchase. The person feels like they are getting more car or truck, for the same monthly payment.
But now the individual has an $80,000 loan on a vehicle that in another year or two is only worth $35,000. We’ve seen several of these types of situations, with various levels of discrepancy between the vehicle value and the amount owed. Everything in this scenario may seem OK until the person has job loss, even a temporary one. The payments on these loans are huge, usually $1000 per month or more, and once you factor in the insurance and fuel, owning the vehicle becomes like having a second mortgage. From an investment point of view, it’s hideous. Big dollars are being paid on ‘assets’ that are going to do nothing but relentlessly decline in value.
The solution in these cases is often to stop making the vehicle payments. The law in BC under most agreements forces the creditors to either ‘seize or sue’. If the creditor seizes the vehicle, the debt disappears. If they sue the person, then the individual keeps the vehicle and is free to keep it or sell it but still has the debt owing and pending legal action to collect it. In the vast majority of cases, the lender seizes the vehicle. From their perspective, it’s common sense: they can recoup most of the value of the vehicle, less the costs to seize it. If the lender chooses to sue the person, and the individual decides to go bankrupt, the creditor may receive almost no value at all from the vehicle.
For people who approach us with such unmanageable vehicle debt, the prospect of being sued, even if it’s a small one, is quite scary. There’s an answer: it can be an ideal time to file a proposal to their creditors. The proposal helps them avoid bankruptcy, and will deal with most other debt besides the secured loan on the vehicle. Also, by the individual taking this action, the lender is informed of the proposal and will understand that their best option is to seize the vehicle so they receive some benefit from the asset. It gives our clients an additional level of comfort that the asset will be seized, and the debt will disappear. The proposal becomes a great opportunity for people to hit the financial ‘reset’ button, and deal with other debts, secured or unsecured, that aren’t affordable based on their income.
The other complication to this scenario is finding alternate transportation. Fortunately, there are a number of lenders who will provide loans or leases to people in this situation. At 4 Pillars Consulting Group, we put our clients in touch with lenders who will help arrange alternate transportation. It’s not unusual for people to end up with a vehicle payment that is in the $400 to $500 per month range, which provides a big help to the monthly budget compared with the $1000 per month they were paying previously.
So large, unmanageable vehicle loans don’t have to be a ‘death sentence’. If you are struggling with a vehicle loan that has become too much to handle, maybe it’s time we talk. Give me a call. I’d be happy to hear from you and we can figure out what your options are.
About the Author
Bob Hauck operates the 4 Pillars Kamloops, BC Debt Restructuring office. To contact him directly visit his website or call him directly at 250-434-4505.
