Finance Roll

We've all heard about the Phantom of the Opera and the movie Phantom Tollbooth, but how about the Phantom Car? Not the Rolls Royce Phantom either, but one of thousands of driver-less cars that exist only as memories in the mind's of their owners yet are still listed as assets on the balance sheets of finance companies.

The circumstances that contribute to the metamorphosis from physical to phantom car ownership are the total loss of a vehicle combined with the failure of the insurance settlement to cover the entire outstanding loan balance. In other words, you're stuck making car payments on a vehicle that no longer exists.

Although no statistics are available for the exact number of phantom cars floating around, it's safe to say that just about everybody knows, or has heard of, someone is this predicament.

The principal causes of phantom car ownership are a combination of rapid vehicle depreciation and increasingly liberal loan terms.

Between 2000 and 2008 the average weighted maturity of a new car loan increased from 52 months to almost 63 months with many of these same loans of the zero down variety. What this leads to is an increase in the total amount of interest paid which in turn delays the build up of equity in the vehicle. So on a typical 5 year loan the principal remains virtually unchanged for the first year of the loan.

When the absence of equity build up is coupled with the instant devaluation, or depreciation, that occurs when a new car is driven off the dealer's lot, a deficit develops between the actual cash value of the car and remaining loan balance.

This condition is especially prevalent during the first two years of car ownership and it would not be unusual if the owner of a vehicle owed five or six thousand dollars more than the vehicle is actually worth.

If a total loss should occur during this time period when insurance coverage lags behind the actual cash value of the vehicle, an unprepared consumer could well be driving, or not, a Phantom Car.