Rebates bail out ‘underwater’ car loans  

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One of the major factors bedeviling the auto industry today is that more would-be buyers than ever are “upside down” in the loans on their current cars and trucks.

Being upside down — also called “underwater” or negative equity — means you haven’t finished paying off your existing vehicle and you still owe more on it than it’s worth as a trade-in or resale.

Right now, as many as 6 million underwater car owners are postponing buying a new vehicle, according to J.D. Power and Associates, the research and consulting firm.

U.S. auto sales in 2008 were about 13.2 million, down from 16.1 million in 2007. That’s about an 18 percent drop and some of it is due to people putting off new-vehicle purchases. What’s more, the number of upside-down owners is growing in today’s market for two reasons, says Gary Dilts, senior vice president of J.D. Power.

Used-car values are down for most types of cars and trucks. For instance, the average wholesale auction price for minivans was about $9,400 in January, according to used-car auction firm ADESA Inc. That was about $1,000 below the year-ago month. Luxury SUVs fell about $1,800 in the same time period, to about $18,600, ADESA says.

Auto lenders are also in financial distress themselves. GMAC Financial Services and Chrysler Financial each have received U.S. government help, echoing emergency loans for GM and Chrysler.

Until recently, auto lenders were willing — often even happy — to allow you to add the remaining balance on your existing car to the loan you took out for the new car, but because of the economic conditions, they’re no longer anxious to do that. That rollover of the existing balance was so common that, judging by questions Bankrate receives from readers, people are likely to be surprised and disappointed to learn that they really do have to pay off the old loan.

“It’s not like he (the consumer) can will his way out of this,” says Dilts. “There has always been negative equity,” he says. It just hasn’t always been such a big problem.

That’s where cash rebates come in. Even as automakers accept bailout cash from the government, they offer rebates as a common escape hatch for upside-down buyers. That is, instead of putting the cash rebate directly towards the new vehicle, buyers can use it towards paying off the loan on their trade-in. That’s one reason why cash rebates are the discount of choice for many car companies.

The alternative is to put off buying a new vehicle, which is exactly what many people are doing, Dilts says. He says that in the fourth quarter of 2007, the age of the average trade-in was 68 months but by the fourth quarter of 2008 the average age jumped to 76 months from the year-ago quarter, or about 12 percent older. “That’s a big increase. If you look back over many years, that is a big move in only a few months,” he says.