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Question about being underwater

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Anonymous
Not applicable

Question about being underwater

So I’m a little confused regarding this topic - I know that if you’re underwater on your loan, the dealer is most likely to suggest that you roll what you owe into the new loan. But how much until they stop willing to do that? For example, I am underwater on my current car loan for $6K, and I recently went to a couple of dealers and tried financing a new car, but both got turned down because they aren’t willing to add the debt onto the new loan. Unless I get a much more pricier car, then they might be able to work something out. Because the pricier car is worth much more, the bank might be willing to give me a shot.
But what if I don’t need cars that expensive? Am I stuck with the underwater loan until years later, even if say I have a decent paycheck and excellent credit?
I have no intention of paying that amount out of my own pocket, I’m just wondering, is there any way at all or when you’re in a situation like this, you’re just stuck?
I also have to mention I’m a fairly new car owner and I don’t have good credit. But even if you have great credit, will that help the situation at all? Thanks everyone.
3 REPLIES 3
Brian_Earl_Spilner
Credit Mentor

Re: Question about being underwater

It all depends on your Debt To Income(DTI) and Loan To Value(LTV) ratios. If either of those don't work in any of their tables after rolling over the negative equity, you'll be denied. For example, if the lender's acceptable DTI max is 40% and the additional $6k would up the payment enough to push it to 41%, that's probably a denial. Same thing with LTV. If a lender will approve up to 120%, a $20k car would allow for a $4k buffer, a $30k car will allow for $6k. Buying a $30k car would allow you to roll over the $6k while a $20k car would require an additional $2k down to be approved, BUT, if it forces your DTI over their acceptable limit, it'll be denied.

 

You can always recon. If your DTI is just over their acceptable limit, but you're paying off a loan in a month or two which would bring your DTI down, they may approve it. As for LTV, most lenders will only approve around the 80% mark. Credit unions and predatory lenders will usually max out at 110%

    
Message 2 of 4
Anonymous
Not applicable

Re: Question about being underwater

I'm a Finance Director at a local dealership here in Kansas City, I'll try and elaborate the best I can here.
Let's first acknowledge the dealership is not the bank. At the end of the day, there are limitations to what can be done. That being said, a dealer will also do just about anything to make a car deal work because they have numbers to hit and nice bonuses come with those numbers from the manufacturer.
First concern: "But how much until they stop willing to do that?" Answer: until it's just unrealistic and not possible. As long as there's room to carry over negative equity in a new deal they'll try to do it.
Second concern: "both got turned down because they aren’t willing to add the debt onto the new loan. Unless I get a much more pricier car, then they might be able to work something out." Answer: it's not a matter of them not willing to, it's a matter of them simply not being able to. Banks/Credit Unions loan out based on something called LTV (loan-to-value). For someone with a FICO of 650 or less, they may loan out 100% of the value of the car. For someone between 651-730, they may loan out 110% of the value of the car and for someone 730+ they may loan out 120% of the value of the car. Most lenders will go by the NADA Clean Trade/Clean Retail value of a car. For example, let's say you have $6,000 of negative equity, the new car you want is $10,000 and the dealer has it priced at $10,000. If you're pulling a 750 FICO, the bank will loan out 120% of the value ($10,000) which is $12,000. Not enough to care for the $10,000 selling price and then an additional $6,000 negative equity. You would have to put $4,000 down. Now let's say you're looking to purchase a vehicle that values at $50,000, is priced at $50,000 and you have $6,000 of negative equity. Well, 120% of $50,000 is $60,000 which is more than enough to tack on that additional $6000 of negative equity. $50,000 + $6000 = $56000 (112% LTV)
Message 3 of 4
Anonymous
Not applicable

Re: Question about being underwater

Sounds like you went to a dealership that didn’t know what they were doing. $6k is not a lot. Unless you are on a cheap used car. It’s all about loan-to-value. There are many factors though. It will depend on which score they pull. Some banks might hard pull a TU or TU auto-enhanced score, then soft pull a mortgage score from a different bureau, or just a general FICO score. Or hard pull and EQ 5 and soft pull an auto enhanced score from a different bureau, or a sage stream or a NexGen. There are literally hundreds, maybe even thousands of ways they will look at your credit. Banks/credit unions pull what they feel. Some banks might just choose 1.... $6k is not a lot. If you’re only $6k flipped, and your credit is indeed excellent, a bank will do up to 150% loan to value on a car if you don’t have a thin profile. If it’s bad, you’ll need to buy something new or come with a decent down payment, at least cover tax and tags....How much was the car? Was the NADA on point, or were you being overcharged? And if it was a new car, you just outright went to a place that didn’t know how to structure a deal. Volkswagen credit buys really deep, Chrysler Cap does too, GM financial also does, TD Bank, PNC, BB&T, Wells Fargo, I can go on and on, Nissan (NiMac), Toyota or World Omni, under the same umbrella. I think you just worked with Shmucks that don’t know what they are doing. How much was the car? What kind of car? Mileage?
Message 4 of 4
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