A $45,000 Loan for a $27,000 Ride: More Borrowers Are Going Underwater on Car Loans
The headline for the news article I’ve referenced for this week’s blog took me by surprise…
I knew vehicle financing changes in recent years means getting a loan for a car or truck for 5, 6, and even 7 years was possible… but getting approved for a loan that is higher than the current value of the vehicle makes no sense to me, for rideshare vehicles or personal-use vehicles.
I can more or less understand a home loan for more than current market value… houses usually appreciate in value and if the homeowners stay put long enough the loan won’t be “underwater” forever.
But 99.999% of all car and trucks will never be worth more than they are worth today even if they are stored in a garage and rarely driven!
According to the referenced article:
“Some 33% of people who traded in cars to buy new ones in the first nine months of 2019 had negative equity [worth less than the loan payoff amount], compared with 28% five years ago and 19% a decade ago, according to car-shopping site Edmunds.”
In 2019 one-third of car buyers are trading in vehicles worth less than what they currently owe?
I’m wondering why? Why not keep driving the vehicle you already “own” and making the monthly payments?
Again, from the referenced article:
“Consumer lawyers say borrowers are typically trading in their vehicles because they have to—often because their needs change, or because the vehicles have problems. ‘These aren’t Rolls-Royces,’ said David Goldsmith, a lawyer who defends consumers in auto cases. ‘They’re Ford Escapes.’”
The bottom line here… when it comes to using a vehicle to drive for Uber or Lyft, earning income using your vehicle is probably not going to make up for making a “bad” car or truck buying decision.
Rideshare Driving Is Not the Fix for a Bad Car Purchase Decision
Buying more personal or rideshare vehicle than you can afford never makes sense. It makes even less sense when you plan to use the vehicle for earning income because along with that income comes more frequent maintenance expense and of course a vehicle with higher mileage will not be worth as much when you sell it or trade it in.
This online calculator from Edmunds provides insight into the overall cost of owning a vehicle.
When I was deciding what kind of car I would purchase to drive for Uber and Lyft I wondered if I should get an all-wheel-drive vehicle? In Denver, Colorado there will be days when a snowstorm causes dangerous road conditions.
I did not get an all-wheel drive vehicle instead went with a Toyota Prius because what I save on fuel all year long would more than make up for the days I would not drive because of snowstorms and dangerous driving conditions.
My 2006 Toyota Prius qualifies for Uber and Lyft driving and with 98,000 miles on the odometer when I made the purchase the price was right at only $8,000.
A rideshare vehicle that costs more to own and operate doesn’t necessarily mean being an Uber driver or Lyft driver doesn’t make sense… it does mean the driver’s “take home pay” will be lower compared to a more logical vehicle choice for you… for your situation in life.
As I said at the beginning of this blog, I was surprised by this trend in vehicle financing.
My best advice… just because you can get a loan to buy that shiny new (or new-to-you) car or truck doesn’t mean it’s a good idea… for rideshare driving or for your personal use.
Rideshare Vehicle Choice is Critical
Being a Lyft driver or Uber driver means going into business for yourself… in order to be successful making “good” business decisions is important… and the most important business decision is the rideshare vehicle a driver chooses for their driving business.
My book Driving for Uber and Lyft - How Much Can Drivers Earn? will help you make the best possible business decisions for you… for your personal situation.
Rideshare driving can help improve your financial situation in life… but purchasing more rideshare vehicle than you need and/or more than you can afford can also make your long-term financial situation worse.
Just because you are approved for a vehicle loan does not necessarily mean it makes sense for you… for your individual situation.