Oran Room | Profound Problems With The Auto Loan Business


QUESTION: I got a 100% financed loan to buy a new car in 2014. Several months later, I lost my job and the vehicle was taken back. A few weeks ago, I received a letter from a collection agency that I owed more than the money I borrowed and had to pay off quickly or else. Please advise me accordingly.

– Rock

FINANCIAL ADVISOR: My advice is that you should immediately contact the collection agency and come up with a plan to pay off your debt, or you may face more serious action, such as legal action brought against you by the lender.

The reason you now owe more than what you borrowed is due to interest accrued over the many years since you took the loan.

Also, take into account that in the early years most of the money you pay is spent on interest, so there is usually little downward movement in unpaid principal. As such, an interruption in debt service can lead to the principal remaining due exceeding the amount borrowed because the unpaid interest is generally added to the principal, and it is also possible that there are penalties.

I’m trying to understand why the collection agency just contacted you. Were you somehow out of reach? The lender hasn’t contacted you all these years, and you? Did you make contact, or did you think it would just go away?

Have you been unemployed for several months after borrowing the money? There are quite a few gaps in the information you provided. And I wonder if the lender has sold the car since the repossession. Either way, if the proceeds of the sale were less than the outstanding principal, I think you would still be indebted to the lender for the difference.

Credit institutions usually lend money to other people, so they have to collect from borrowers to honor their commitments to the money owners.

Hope your experience helps other readers understand that they need to be careful in borrowing deals. “Anything that can go wrong will go wrong” is a typical phrase called Murphy’s Law. It happened to you. You lost your job, and therefore your income, when you really needed it.

There is so much uncertainty that we have to be careful in our plans. Far too many people plan on the basis of the best case scenario. While this may reflect a positive outlook, a worst-case scenario should not be ruled out.

What I find troubling is that when you started driving your beautiful new car, you didn’t have a single penny of equity: every penny used to buy that car was borrowed. Did you have no savings or decided to use borrowed funds to do so?

You should strive to repair the damage done to your credit rating. If you have a job, set aside a substantial portion of your paycheck to pay off debt – the sooner the better. This means that you may need to tighten your belt, but it is necessary. Things will get better eventually.

Are there any assets you can sell? As difficult as it is, you might want to consider this course of action. It may hurt, but consider it a necessary action. I’m sure you’ll sleep better after putting this debt behind you.

If you decide to buy another car, go for one within easy reach. It might not be brand new, but you should be able to identify one that is good quality and in good condition that you are satisfied with.

As you go along, assess your real financial situation and make a written plan for how you’re going to spend. Paying down the debt should be the top priority at this point, and you should focus on reducing or eliminating expenses related to variable spending as well as discretionary spending. The first includes food and utilities, and the second includes entertainment and gifts. COVID should help you with the entertainment.

Resist the urge to acquire any asset without using any of your funds: it can be very costly, especially if unforeseen challenges arise. Figure out what is most valuable to you in life and direct your funds in that direction. You can get out of this inflamed debt situation, although it may take time. Good luck.

– Oran A. Hall, author of Understanding investments and main author of The personal financial planning manual, offers personal advice and guidance on financial planning. [email protected]

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