You paid half the money for a new car, but what you have now is a used car which is likely to be worth considerably less.
After repossessing the car, the dealer will have to sell it on and the revenue derived from doing so may not cover your outstanding debt... If it does, then sure you *should* get the difference, or at least thats how it works when property is repossessed.
Not only that, but in most areas the tax laws stipulate that you can't recover the taxes from a car loan. Vis;
- Original purchase price: $20000.
- Freight, fees, tarrifs: $2000.
- Sub-Total: $22000.
- PST + GST (Ontario, Canada) @ 13% combined: $2860
- Total to be financed: $24860.
To make things simple I'll use 0% APR financing on the loan. Supposing on this loan, let's make it a 60 month term, you're making payments of $414.34/month and you make the first 12 payments before your loan enters default status. So you've now paid $4972.08 towards your loan, leaving an outstanding balance of $19887.92 remaining. So now the financial institution repossesses the vehicle and needs to recover that amount of money. Using the 30% depreciation "rule of thumb" let's say the car is now worth $14000. That leaves the loan upside-down by $5887.92 that has to be collected somehow.
The beauty of the tax laws is that taxes will be paid once again by the new buyer so all in all the government wins, but we the consumers lose out because the financial institution has to jack up interest rates and service charges to make up for the shortfall of $6k that the original buyer is almost certainly not going to repay.
With the trend of ever increasing personal debt load on typical North American consumers, the trend towards longer terms, lower payments and less (or no) down payment, people are finding themselves in a negative equity situation on their car loans for longer and longer as they're paying the principal balances significantly slower than the depreciation curve of their vehicles. When financing first became commonplace it was normal to put upwards of 20-50% down and take a financing term that did not exceed 36 months. Granted, interest rates were often in the double digits, but with that much down and terms so short it wasn't really an issue. It was also quite common to pay off one's car loan before the end of the term and then {gasp!} drive it for several more years before trading it or making another purchase.
This allowed people to walk into their next loan with, again, 20-50% cash down plus equity in their trade resulting in upwards of 30-80% down on their next vehicle.
Alas, 84 month finance terms are becoming the norm, 96 month terms aren't as outrageous as they once were and consumers and banks keep talking seriously about 108 and 120 month terms. Welcome to the society where once you're in debt, you're always in debt. Buy now, pay later.
I, for one, am not on the debt treadmill, but I do take advantage of 0% finance offers wherever possible so the money I have in my savings account can earn between 3-8% while the store foots the cost of borrowing. Go on you debt whores; continue paying my way with your high interest payments.
But I digress...