“They really got you, didn’t they?” The Atlanta-based used car dealer is on the phone with a client. The driver purchased a 2016 Jeep Patriot back in 2019, before the pandemic. After five years of $440 car payments, though, the driver somehow still owes $18,000…on a $15,000 loan. “They sure did,” the Jeep owner responds. “I didn’t know at the time.”

Car dealer tries to help a Jeep driver deep underwater on their auto loan

How does one end up owing more than they started with after five years of car payments? Well, in this case, the driver hasn’t been consistent. They tell Yusuf Benallal, the dealer who often tries to help drivers get out of bad car loans, that the pandemic messed with their ability to make their note.

“So I haven’t paid anything but interest,” the Jeep owner explains. To make matters worse, after four years, the Jeep Patriot isn’t worth much anymore. Its trade-in value is somewhere between $3,000 and $4,000.

As such, the driver’s pretty much trapped in their car loan. They only have $500 cash right now, and a 511 credit score. This narrows the options: stick with the loan until it’s fully paid off, or let the bank take the Jeep and face bankruptcy.

Auto loans are written to collect all the interest before paying down the principal

Financial institutions tend to design car loans such that any initial payments drivers make go straight to the loan’s interest. It can take years to whittle the balance down to the original sale price of the vehicle, then.

For example, say you buy a car for $50,000 and you have a $750 car payment. At first, maybe $550 pays down the loan interest and only $200 goes toward the $50,000 principal. Eventually, as the loan’s lifetime interest due is paid down, the portion going to that $50K increases.

If you miss any payments, loan terms can tack on additional fees, inflating the balance.

First-time car buyer wants to file bankruptcy, but dealer suggests thugging it out

While the Jeep driver’s situation certainly isn’t ideal, there’s really nothing Benallal can do for the client. $440 a month is still lower than the average American car payment. The Jeep doesn’t have any mechanical problems at the moment, either.

Since the Jeep isn’t worth much, someone would have to pay off the $15,000 gap. Since the driver only has 500 bucks and a poor credit score, they won’t likely get any new financing. Some drivers can roll their negative equity into a new car loan, but that also creates a debt cycle many motorists have trouble escaping.

“You might as well just keep the Jeep and thug it out,” the car dealer suggests. The damage is already done.

The lesson here is to make sure you understand car loan terms against your personal financial situation. While we’d like to think banks and dealerships wouldn’t allow first-time car buyers to enter into agreements that will likely damage their credit and make paying their bills difficult, it’s ultimately up to car shoppers to understand what they’re signing up for.