Oran Hall | Deep trouble over motor car loan
QUESTION: I got a 100% financed loan to purchase a new car in 2014. Several months afterwards, I lost my job and the vehicle was repossessed. A few weeks ago I got a letter from a collection agency that I owed more than the money that I borrowed and that I needed to pay in short order, or else. Please advise me accordingly.
FINANCIAL ADVISER: My advice is that you should immediately contact the collection agency and arrive at a plan for paying your debt, or else you could face more serious action, such as legal action being taken against you by the lender.
The reason you now owe more than you borrowed is due to the interest that has accrued over the many years since you took out the loan.
Consider also that, in the early years, most of the money you pay goes to interest so there is usually little downward movement in the principal sum outstanding. As such, an interruption in the servicing of the debt may lead to the principal sum outstanding exceeding the sum borrowed as the interest not paid is generally added to the principal, and it is also possible there could be penalty charges.
I am trying to understand why the collection agency has just made contact with you. Is it that you were somehow out of reach? Did the lender not make contact with you all these years, and what about you? Did you make contact, or did you believe it would just go away?
Have you remained unemployed since the several months after you borrowed the money? There are quite a few gaps in the information you have provided. And I am wondering if the lender has sold the car since the repossession. In any event, if the sale proceeds were less than the principal sum outstanding, I believe you would still be indebted to the lender for the difference.
Lending institutions generally lend other people’s money so they must collect from borrowers to honour their commitments to the owners of the money.
I hope your experience will help other readers to understand that they should enter into borrowing arrangements cautiously. ‘Whatever can go wrong will go wrong’ is a typical expression referred to as Murphy’s Law. That has happened to you. You lost your employment, and thus income, when you really needed it.
There is so much uncertainty, we need to be cautious in our plans. Far too many people plan on a best-case scenario basis. While that may reflect a positive outlook, a worst-case scenario should not be discounted.
What I find troubling is that when you started driving your nice new car you did not have a single cent of equity in it: every cent used to buy that car was borrowed. Is it that you had no savings or that you had but decided you would rather use borrowed funds to do so?
You should set out to repair the damage to your credit rating. If you have a job, put aside a substantial portion of your pay to service the debt – the sooner, the better. This means you may have to tighten your belt, but it is necessary. Things will eventually get better.
Are there assets you can sell? Hard as it is, you could consider that course of action. It may hurt, but consider this to be necessary action. I am sure you will sleep better after you have put this debt behind you.
Should you decide to buy another car, opt for one within your reach. Perhaps it will not be brand new, but you should be able to identify one that is of good quality and in good condition that will make you satisfied.
As you go forward, evaluate the true position of your finances and make a written plan about how you will spend. Debt repayment should be the top priority at this stage, and you should focus on reducing or eliminating spending on variable expenses as well as discretionary expenses. The former includes food and utilities, and the latter entertainment and gifts. COVID should help you with the entertainment.
Resist the urge to acquire any asset without using any of your funds: this can be very costly, especially if unforeseen challenges surface. Determine what is of the greatest value to you in life and direct your funds in that direction. You can come out of this fiery debt situation though it may take time. Good luck.
- Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. email@example.com