Here is the situation.
My stepson came over yesterday and told us he bought a used auto.
Price tag $14900. 2015 Mitsubishi Outlander with 35k
He is paying $504 a month for 60 months.
I certainly wished he had talked to us first but it is past that now. He took possession of the vehicle yesterday.
So he is into negative equity for better than $15000 immediately.
He keeps insisting the salesman told him in 6 months he can refinance and to my knowledge that just won't be possible until he gets it down to about 120% of the cars true value of $14900.( or there about).
Any insight would help.
Not really an expert on this predatory loan situations.
Why is he into negative equity?
Did he trade something in with negative Equity?
Yes he will need to be at 120% LTV before he can refinance but right now he would still only owe the $14,900 unless he rolled negative equity into it?
Something isn't adding up. You say he's $15K in the hole immediately but if the car cost $14,900 how is he $15K in the hole?
I would assume the interest he owes of approx 15000 would be the negative equity.
I have never financed an auto with that much in interest payments......not even remotely close.
Nor had a need to refinance
Sorry for my ignorance.
OK I get it now.
It's not as bad as it seems.
Yes it's a horrible loan my guess 30% interest or so but there generally is no pre-payment penalty.
I could be wrong in this case but not sure that would be legal in the US.
This means if you take out a loan for $14,900 at 30% interest and pay it off in 30 days from inception you would owe 30 days worth of interest not 5 years worth of interest. If this were not the case it would never ever make sense to refinance a loan.
So yes if he can improve his score, get a co-signer, get something negative to age off then he can likely refinance in 6 months.
If it were a brand new car with little to nothing down at a high interest rate the car would depreciate faster than he could pay it down and would be stuck at higher than 120% LTV for a long time.
I do see where the confusion came from - somewhere it says total of payments but that's assuming the full term of the loan.
My suggestions are:
1) it may be too late but if not return the car - walk away from deal maybe paying for the miles used
2) Take a good look at his credit see what's wrong with it what can be fixed what if anything is truly a mistake and can be disputed. Maybe his problem is high utilization because he has just 1 credit card with 300 limit that's maxed. Pay it off and his score will improve
3) Look to refinance as soon as possible. Looking at an amortization table I am guessing it's 30% interest or higher and that his first payment is $396 in interest and $103 in principal so after 6 months he will have paid down less than $700 and probably depreciated more than that. Even a 10% loan would cut the payment by close to $200 a month.
Also while 500 is a high payment, if he can go higher, it will save a lot of money over the course of the loan, and help keep the LTV low while fixing scores for a refinance.
Looks like right around 32% interest.
Take a look at KBB or CarGurus and plug in the information to get a value for the car. I plugged in the model for my Zip Code, mid-level trim and mileage and the value came out to around $13,500.
Now you can see the negative equity.
I would also have your stepson run his own credit via one of the free sites and see where he really is sitting.
We can also assume no warranty and he did not have the car inspected by a mechanic?
Experience is a great teacher but so dang expensive.
It's done now, support him the best you can and teach him some basic car maintenance. If he is open you can also cover some financial tools and help him set up a goal to get out from under that loan. Good luck!
As Appleman said, based on the numbers you provided he is paying 32% interest.
That. Is. Insane.
I suppose it comes down to what type of relationship you have with him and/or what lessons he needs to learn but I can't imagine a 32% auto loan ending well. It is credit TNT waiting to explode. Moreover, I am unaware of any time restrictions on waiting to refinance although perhaps this varies by state. In six months it will be MORE difficult to refinance because the car will be worth less (age, miles) yet the principal will have barely budged.