In a viral TikTok video, Miami-based car expert Jayden Bloom voiced his shock over what he called the “worst car deal” he’d ever encountered. The video reveals Bloom’s reaction to a woman who, thrilled with her new car purchase, disclosed that she had bought a Toyota Camry with zero downpayment. Yet, the real shock lay in her loan agreement: $499 monthly payments stretched over an astounding 427 months—more than 35 years. According to Bloom, this arrangement would see the woman ultimately paying over $250,000, a stark example of the costly trap of long-term, high-interest auto loans.
Bloom’s warning is clear: buyers with poor credit often face higher interest rates, but agreeing to extreme loan terms is not the solution. He advised consumers to educate themselves on market conditions and financing options to avoid what he referred to as “a life sentence” in debt.
Rise of Negative Equity: More Americans Trapped in ‘Upside-Down’ Car Loans
Bloom’s warning reflects a broader trend as more Americans find themselves “upside down” on their auto loans, meaning they owe more than their vehicle’s current value. Rising borrowing costs, post-pandemic supply chain disruptions, and increased vehicle prices have all contributed to the crisis. Many buyers paid above the manufacturer’s suggested retail price (MSRP) in 2021 and 2022, only to see trade-in values plummet as the market began to normalise, leaving them stuck with debts exceeding their cars’ worth.
According to data from Edmunds, nearly one in four car owners trading in their vehicles during the third quarter of 2024 carried negative equity on their loans, with an average shortfall of $6,458. This figure has reached record levels, and some borrowers report owing over $10,000 more than their car’s current trade-in value. These trends underscore the risks associated with long-term loans, as vehicles depreciate faster than borrowers can repay their debt, leaving many in financial jeopardy, according to a report from Benzinga.
The Appeal and Risks of Extended Loan Terms
Many buyers, faced with the high sticker prices of recent years, have opted for extended loan terms, some lasting as long as seven years, to keep monthly payments manageable. While this approach reduces the immediate impact on monthly budgets, it often creates a long-term financial burden. Extended loans can lead to situations where borrowers remain in negative equity for years, limiting their options for future purchases and trade-ins.
Ivan Drury, director of insights at Edmunds, emphasised the importance of understanding the trade-offs. “With prices and interest rates being as high as they are, consumers must think beyond the monthly payment and be honest with themselves about their ownership habits,” Drury said. “A seven-year auto loan is a one-way ticket to negative equity if you know you’re not the type of person to keep a vehicle for that long.” The problem is no longer limited to luxury cars; even compact and mid-size SUVs are increasingly affected by prolonged negative equity.
Lenders Targeting Buyers with Poor Credit
Amid high demand for auto loans, lenders are increasingly targeting buyers with poor credit histories, despite the higher risk of delinquency. According to Bloomberg, auto loans for subprime borrowers backed over $37 billion in asset-backed bonds in 2022. This financial setup benefits investors by ensuring principal and interest payments are protected, regardless of the borrower’s repayment status. Yet for consumers, failure to repay can lead to harsh consequences, including repossessions, late fees, and escalating interest on outstanding balances.
Delinquencies in auto loans have also climbed due to elevated insurance premiums and inflationary pressures that strain household budgets. As of the fourth quarter of 2023, auto loan delinquency rates had risen to 2.24%. However, the U.S. government is taking steps to protect consumers. The Federal Trade Commission (FTC) recently finalised the Combating Auto Retail Scams (CARS) rule, designed to curb deceptive practices by car dealerships. The rule mandates transparency in advertising and requires customer consent for any additional charges, aiming to mitigate some of the risks associated with complex car loan agreements.
Avoiding the Trap: Financial Literacy and Caution in Car Buying
Car loans, which once spanned a reasonable five-year term, have ballooned as lenders introduce longer durations to attract buyers with lower monthly payments. Yet, financial experts urge caution. While the lower monthly costs may seem appealing, extended loans often translate to significant interest costs over time. In the case of the woman featured in Bloom’s TikTok video, her car loan would accumulate over decades, nearly quadrupling the car’s value through accumulated interest payments.
Consumer advocates encourage car buyers to focus on the total loan cost rather than the monthly payment alone. “If you only look at the monthly payment, you’re missing the bigger picture,” one financial adviser explained. “By the end of a long-term loan, you may pay two or three times the car’s initial price.”
Learning From Cautionary Tales
As Americans grapple with the real consequences of long-term, high-interest loans, cautionary stories like those highlighted by Jayden Bloom serve as important reminders. In one recent instance, a mother sold her $84,000 dream car after paying over $40,000 in interest on her loan in just three years, realising too late the burden of high-cost financing, according to a report from IBTimes UK.
Bloom’s advice, shared widely on social media, emphasises the need for financial literacy and awareness of potential pitfalls in the car-buying process. He advises that consumers educate themselves about interest rates, loan terms, and the depreciation rates of vehicles before committing to any financing deal.
While car ownership remains a critical need for many, informed decision-making can prevent costly mistakes and offer more manageable paths to ownership. With the right financial knowledge, consumers can avoid the trap of excessively long loans and ensure that their vehicle purchase remains an asset rather than a liability.
