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Seven year auto loans
Old 10-02-2019, 10:32 AM   #1
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Seven year auto loans

Interesting article on auto loans. America’s middle class can’t afford their cars.

Apparently, auto loans have grown to seven years in length. Interest comment in the article that auto dealers now can make more on their loans than their cars. Other interesting note was that they take these loans and bundle them into a bond like product. Didn’t we learn not to do that from the 2008 credit crisis?



https://apple.news/AoTmBEHNUR86gBUFPL0gNqw

Here’s the WSJ link but you have to sign in.

https://www.wsj.com/articles/the-sev...rs-11569941215
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Old 10-02-2019, 10:37 AM   #2
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This part was really scary....

Quote:
He paid $27,000 for the car, less than the sticker price, but took out a $36,000 loan with an interest rate of 1.9% to cover the purchase price and unpaid debt on two vehicles he bought as a teenager. It was particularly burdensome when combined with his other debt, including credit cards, he said.
So they have a $36k loan collateralized by a car that was $27k new.
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Old 10-02-2019, 10:39 AM   #3
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So with these loans I guess people are upside down til year 3
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Old 10-02-2019, 10:46 AM   #4
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So with these loans I guess people are upside down til year 3
I bet they’re upside down the life of the loan. I couldn’t believe it when they went to six years. Now seven? I haven’t done the calculation, but I bet you’d be better off leasing. It least then you can walk away from the car at the end of the term. Assuming no over mileage charges or such.
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Old 10-02-2019, 10:51 AM   #5
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They should just buy a car that they can afford. People want expensive SUV’s, trucks, etc. My first new car was when I was in my 30’s. It was small with no extras at all. Now we buy 3-4 year old cars pre-certified by the dealer with low miles and a warranty. We drive them until repairs become too costly.
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Old 10-02-2019, 11:03 AM   #6
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I've bought one new car and paid cash for it, but (not having read the article) borrowing at 1.9% and wrapping two their loans sounds like a great deal for the borrower.
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Old 10-02-2019, 11:27 AM   #7
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I've bought one new car and paid cash for it, but (not having read the article) borrowing at 1.9% and wrapping two their loans sounds like a great deal for the borrower.
I agree that the interested rate is great, especially compared to other consumer loan rates. However, the act of rolling auto loan debt over into another loan just screams of bankruptcy waiting to happen. The person is definitely not practicing LBYM's or any form of good financial decision making (other than getting a lower rate).
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Old 10-02-2019, 11:29 AM   #8
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I am not really surprised to see this... they are moving the focus of car buying off of the actual cost of the car and more to the monthly payment. The assumption being made is that if you can afford the monthly payment, you can afford the car.

If dealers start making more on the loans than there cars, I will not be surprised to see them move to pitches such as "come borrow money from us, we'll throw in a car for free." I have already heard CarMax referred to as a finance company that happens to sell cars.
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Old 10-02-2019, 11:57 AM   #9
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Originally Posted by Teacher Terry View Post
They should just buy a car that they can afford. People want expensive SUV’s, trucks, etc. My first new car was when I was in my 30’s. It was small with no extras at all. Now we buy 3-4 year old cars pre-certified by the dealer with low miles and a warranty. We drive them until repairs become too costly.
+1 I have to say that I was proud of DS when we went car shopping... he had a maximum monthly payment in mind and bought a modest entry-level one-year old Kia Forte sedan.... no status symbol but dependable A to B transportation that has served him well.... and quite affordable.
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Old 10-02-2019, 12:05 PM   #10
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I wonder if no-haggle dealerships are pressuring the other dealerships to make their money off the loan instead of the sales price. But then, those who would take a seven-year loan for more than the price of the car may not be shopping around as thoroughly as this crowd here.
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Old 10-02-2019, 12:22 PM   #11
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I think it is just the change of the culture and the cost of vehicles. The concept of being able to afford something used to mean that you could pay cash for it, or you could not afford it. Over time, as it has become more and more the norm to think that you will have a car payment your entire life, being able to afford something is simply a matter of being able to juggle all of the payments. Basically, you get to enjoy the product before you complete the paying of the cost of the product. I think our youth are being led to believe that you will always have rent/mortgage, car payment, cell phone plan and school loans. The thought of being able to live mostly without payments (we all use cell phones) is unheard of and thought to no longer be possible unless you are very wealthy. Its a big shift in our thought process. Kids buy digital copies of books, buy songs by the each instead of the album etc. Companies get rich off of the unknowing masses by using small, reoccurring payments. Netflix is massive, getting $7 a month. I often wonder what might happen if the acceptance of debt reversed and the masses did not spend their entire paychecks before they even received it.
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In the Middle Ages, 7 years was the standard period of indenture
Old 10-02-2019, 12:34 PM   #12
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In the Middle Ages, 7 years was the standard period of indenture

Couldn't read the whole article due to WSJ shield so I don't know if they addressed this question: Since warranties figure strongly in car manufacturers' pitches, is the longer loan period accompanied by longer standard warranties?

My limited experience is that only a subset of the driving population ever buys new cars anyway, and that subset also tends to trade in their rides for new ones at much shorter intervals than the period of a loan or the expiration of a warranty. Therefore, whether the loan duration is 7 years or 30 or 100 may not matter to those who buy new. If I'm mistaken, perhaps someone here could educate me?

In any case, seven years is a long time to be paying on a car. And if it compounds by rolling prior car debts into each new loan, wowee!
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Old 10-02-2019, 12:39 PM   #13
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Originally Posted by pb4uski View Post
This part was really scary....



So they have a $36k loan collateralized by a car that was $27k new.

This is nothing new. I guy I went to HS with has been doing this for at least 20 years. I think his car payment is more than his mortgage.
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Old 10-02-2019, 01:53 PM   #14
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We financed about 30k at 1.9% APR. Paid it off early. I can't recall what we actually paid in interest but with this bull market...we were able to max 401k and save on taxes without needing to lighten up on contributions. It worked for us at the time.

Will never have another auto loan again though. And am trying as hard as I can to minimize interest on our home over our lives to about 18 years. Wish we could pay sooner, might happen, but you have to live somewhere and at 2.75% APR our home loan is hardly an interest killer of the 80s.

7 of those years we had 4% APR, I am REALLY enjoying 2.75%!!
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Old 10-02-2019, 02:19 PM   #15
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I think the length of the loan is necessarily as long as it needs to be to get someone to buy.

I remember back in the 80s talking to some Germans who had 50 year mortgages on their homes. They said it was very common.
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Old 10-02-2019, 02:24 PM   #16
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I would never recommend a 7-year car loan. But one relevant factor is that modern cars last much longer than they used too. I saw an article the other day about how the interiors were now not lasting as long as the exteriors and mechanicals.
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Old 10-02-2019, 02:32 PM   #17
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I have a 5-year loan on my tractor - I wish it was 7-years or even more!

(Interest rate is 0.0%).
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Old 10-02-2019, 02:47 PM   #18
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The idea that if someone is always going to have a car payment, it may as well be a less payment--from leasing. Customers know how to buy a car. Very few know how to lease a car.

Most cars leased are at MSRP--big profit makers. Potential lessors should realize that purchase price is not important, but monthly payments are what you negotiate. And dealers have a big spread in payments they can charge and still turn a profit.

If you get down to it, leasing is just balloon payment financing. But the lessor is not responsible for the vehicle at the end--other than excess mileage, wear and tear. They don't have to do anything but turn in the vehicle and pickup another. And lease monthly payments are always less than purchase payments on normal terms.
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Old 10-02-2019, 03:10 PM   #19
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+1 I have to say that I was proud of DS when we went car shopping... he had a maximum monthly payment in mind and bought a modest entry-level one-year old Kia Forte sedan.... no status symbol but dependable A to B transportation that has served him well.... and quite affordable.
Sounds like your DS did well, but buying based on monthly payment is what gets people into these longer-term loans. I HATE the car-buying BS; DH and I bought cars off-rental the last 3 times and were very happy. Here's the price, take it or leave it, get your own financing, show up with the check and get the car. If a dealer were to start the conversation with, "So... what monthly payment did you have in mind?" I'd leave. They can get you to the monthly payment you want by giving you a not-so-great deal on a cheaper car and/or extending the loan term.
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Old 10-02-2019, 03:55 PM   #20
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IMHO, if you cannot afford a 2 year loan for a car, you cannot afford that car.
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