Personal Finance Advice

If you fall behind in your car loan payments there may come a point in time when you decide that it just isn’t worth it to keep trying to scramble to catch up, especially when late fees and other administrative fees seem to pile up daily. You may decide that you would rather just go ahead and give up the car so you can rid yourself of the financial obligation and start all over later when you are ready to buy another car. Whether this means turning the car back into the dealership or allowing the car to get repossessed, for some people this translates into a heavy burden getting lifted from their shoulders.

Not so fast. Unless you obtained your car through a dealership offering a special program where you are allowed to return the car when experiencing financial burdens and not get charged fees, then giving the car back will just be the beginning of a new set of financial problems. Giving the car back does not mean that you and the lender are fair and square; instead, it means that you’ve given the collateral back but you may still owe money.

What happens to a car that has been repossessed or returned to the dealership? You may no longer have ownership of the car, but that does not automatically mean that your car loan disappears. In other words, giving the car back does not erase the amount of money you owe even though you no longer have possession of the car.

After the car has been resold to a new owner, whether through auction or through other means, any deficit that exists between the amount the car sold for and the amount that remained on the loan is still your responsibility. This means that if you still owed $8000 on a car that sold at auction for $5000, you are still responsible for the difference between the amount paid and the amount you owed: $3000.

It may not seem fair that you still owe money on something that you already turned back in and no longer have possession of, but the lender is allowed to charge you this because you did initially agree to pay the loan in full. The fact that you no longer own the car does not mean that the loan is cancelled altogether. You are still expected to pay the debt, even if a portion of the amount you owe is augmented by a purchase of the vehicle through an auction or another buyer.

How aggressively will a lender pursue you for the deficit? It all depends on the lender. The amount will usually go on your credit report as a delinquent debt if you don’t pay it, and this can drag your credit score down substantially. If you never pay the deficit then you can be sued for the amount you owe, but whether you are actually taken to court for the amount depends on the lender.

It’s a similar situation when facing foreclosure on a home. If you walk away from your home and allow it to go into foreclosure, you can expect to still owe money after you walk away. Again, whether the lender pursues you for the deficit depends on the lender and the circumstances surrounding your loan. Regardless, walking away from any loan will result in financial repercussions, even if you give back the collateral.

Home equity loans were once commonly used as a method to make large purchases or to consolidate debt into a lower interest rate loan that is usually tax deductible. Back when home values skyrocketed many people tapped into their home equity to get their hands on some cash without applying for a traditional loan. Many lenders were granting equity loans at a quick rate, and many of them also loosened their lending standards to keep up with the applicants who found themselves knee deep in home equity.

Borrowers obtained home equity loans based on their newly inflated home values. They used the loans to consolidate debt, do home improvements, or even to take a luxury vacation that they may not have been able to afford otherwise. Some borrowers obtained home equity lines of credit and just used the funds sporadically as needed, sometimes making impulse purchases that they should not have made.

What happened to these borrowers when home values started plummeting? Although some of the homeowners borrowed within their financial means, many of them borrowed the maximum amounts offered by lenders. When their homes lost value and suddenly they owed more than the homes were worth, they found themselves upside down in their loans.

The lesson learned in all this mess is that home equity is not a piggy bank to be used for luxury purchases. It is one thing to tap into your home equity to make necessary home repairs, but it’s another thing entirely to borrow against your home’s equity in order to buy a set of jet skis or to take your dream vacation. When you use home equity to make frivolous purchases, you’re putting your home at risk.

Consider obtaining a home equity loan when you have no other options that will work. It’s far better to put cosmetic home improvements on hold until you have the money to pay for them than it is to use your home equity to finance them. As far as using home equity funds for a frivolous expense, such as a boat purchase or for an expensive piece of jewelry, it’s just not a good idea. The equity in your home is not free money. Instead, it’s an asset that should only be used when necessary.

Interest rates that are advertised on television commercials and print ads can seem too good to be true, and in some cases, they actually are. In fact, if you have a blemished credit history and a less-than stellar credit score, then you can safely assume that the low interest rates you see advertised for loans and credit cards probably don’t apply to you. Either you won’t qualify for the financial product at the low advertised interest rate and will be offered a higher rate, or you will instead be turned down for credit altogether.

That’s what it means when you see “WAC” next to the interest rate, which means “With Approved Credit.” You might also see “OAC” or something else similar, but they all mean the same thing; if you don’t meet the credit standards of the lender, you won’t get the advertised interest rate.

Sometimes it isn’t your credit history or score that dictates what interest rate you qualify for. Instead, lenders oftentimes state that only certain items qualify for the lowest interest rates. For example, when a bank offers a really low interest rate for auto loans, it isn’t unusual for the bank to only offer this interest rate for new vehicles purchased through a car dealership. Used cars -even when purchased at a dealership- may not qualify for the very lowest interest rates. The length of the loan might also disqualify you from getting the lowest interest rate. In most instances, low advertised interest rates are for loan terms of 48 or 60 months. If you go beyond these terms, your interest rate may increase.

Problems arise when you don’t realize that your loan approval is at a higher interest rate. Some financial representatives won’t specify that your approval isn’t at the advertised interest rate, but will instead congratulate you on your loan approval and hand you documents to sign. If you don’t read the documents carefully you may not realize that you didn’t actually receive the interest rate you thought you did. If you complain to the representative you’ll be told that you simply didn’t qualify for the low interest rate based on whatever factor (credit score, type of loan, etc) and that since you already signed the documentation for the loan, it was assumed that you read the paperwork and accepted the interest rate you were offered.

For this reason, never assume that a loan or credit card approval includes the low advertised interest rate. Before you sign anything, study the paperwork to find out what interest rate you were actually given. Don’t sign the paperwork if you don’t agree with the interest rate.