auto

Car repo rates are soaring

Even though it is a depreciating asset, those with a fair amount of equity in the vehicle may be able to sell and downsize, thus eliminating their car payment and even creating some surplus cash. For example, consider a vehicle valued at $18,000 with a $10,000 balance remaining with monthly installments for 36 months at 6 percent.

Selling the vehicle and paying off the loan would free up $322 per month and bring in $8,000, which could be used to buy a cheaper used car or possibly used for other purposes, if the household can get by on one vehicle.

"If you have some equity in the vehicle, then you do have some freedom to make positive changes to your economic picture. (Lenders) would rather not repossess your vehicle and they have options for you," says Reed.

No matter what kind of situation the vehicle owner is in, Reed recommends talking with the lender and explaining the situation. Besides selling the car or downsizing, owners may be able to turn to their lender to reconfigure the loan, perhaps by extending the term. If your lender isn't willing to renegotiate the existing loan, look to other lenders to for a new loan -- at terms better suited to your needs -- and pay off the existing loan. Use Bankrate's auto loan rate search to find national averages and rates in your area.

Typically, if a consumer misses three payments and will not communicate with the lender, a repossession order is put in place. Even while missing payments, Reed says, drivers can at least temporarily delay a repo by simply communicating with the lender.

"They just want to know that you're not going to disappear on them and close down completely. Repossession is a negative financial situation for them as well because they have to pay to have it repossessed and then they have to pay auction fees," says Reed.

Adam says that when people are trapped between a high car payment and resetting mortgage, the worst thing they can do is to simply skip vehicle payments and risk repossession. The effects go beyond simply losing the vehicle -- a repossession can have a very negative impact on a person's credit rating. And in a time of tight credit and increasing lending standards, that can affect a person's ability to get another vehicle.

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"Defaulting on a car nowadays, with credit scores having the importance that they have, has huge consequences. It can even affect your insurance and your ability to get a job in some cases," says Adam.

Similar to the housing market, one person's misfortune is another's opportunity. An increased number of repossessions are creating some great deals in the used vehicle market and, Webb says, wholesale used vehicle prices have been down substantially.

Used vehicle sales across North America in the first three months of 2008 fell by 7 percent from a year earlier, the Bank of Novia Scotia says in it Global Auto Report, with one-year-old models dropping 11 percent. The bank says it expects used-car prices to "soften" through early 2009.

The Black Book, a guide to used vehicle prices, has reported that prices of premium used cars fell by 20 percent to 22 percent since March 2007 and CNW Marketing Research says used sport utility vehicle sales in March were down 14 percent compared to last year.

At ADESA, says Kontos, not only are used vehicles coming at a cheaper price, but repossessed cars tend to be newer and in better condition. In the past, repossessed cars tended to be five to seven years old when taken back and they usually were purchased used by someone who was already a credit risk. But under current economic conditions, many of those cars being repossessed today and the owners they are being taken from don't fit the typical mold.

"I think there are a lot more gems out there now," says Kontos.

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