Seven year auto loans

[Jerry1]

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-se...ddle-class-cant-afford-their-cars-11569941215

 

[pb4uski]

This part was really scary....

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.

 

[JDARNELL]

So with these loans I guess people are upside down til year 3

 

[Jerry1]

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.

 

[Teacher Terry]

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.

 

[calmloki]

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.

 

[Jerry1]

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).

 

[jollystomper]

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.

 

[pb4uski]

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.

 

[The Cosmic Avenger]

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.

 

[Oakster]

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.

 

[Mdlerth]

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!

 

[ExFlyBoy5]

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.

 

[kgtest]

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%!!

 

[braumeister]

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.

 

[USGrant1962]

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.

 

[LRDave]

I have a 5-year loan on my tractor - I wish it was 7-years or even more!

(Interest rate is 0.0%).

 

[Bamaman]

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.

 

[athena53]

+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.

 

[joeea]

IMHO, if you cannot afford a 2 year loan for a car, you cannot afford that car.

 

[Chuckanut]

The nice thing about a three auto loan is that after you pay it off, there are usually at least two or three more years of no payments and no repairs. With a seven year loan one could have repair costs and the loan payments.

 

[Markola]

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.

Yeah, so people should buy used cars and pay cash. Heresy in this consumer culture, I know.

 

[pb4uski]

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.

I probably should have mentioned that his maximum payment was only $215/month.

 

[always_learning]

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-se...ddle-class-cant-afford-their-cars-11569941215

I can't read the article, but I'm not surprised at the story. It seems that things are shaping up for a repeat of history, if the podcasts and call-in shows I listen to are any indication of what's happening "out there".

Not only are car loans being made for *8* years now, but it seems that it's not all that uncommon for households to have two of these loans, sort of a 'his and hers' if you will.

These callers/posters on other forums are also talking about financing for houses and finding that lenders are relaxing minimum down amounts, credit scores, and even proof of income. That doesn't sound too good.

 

[GalaxyBoy]

As a kid, I remember Dear Old Dad seeing a 48-month loan in the paper and erupting in disbelief. I got my first car, used, when I graduated from college with ten bucks in my pocket and DOD was good enough to co-sign the loan so I could get the unbelievably low interest rate of 17%. He insisted I not go longer than 36 months, and although I grumbled through those three years of payments I was eternally grateful to him for his advice in the long run.

Fast forward 15 years and DW and I paid cash for our first car together and discovered the joy of never having a car payment again. Save your money, then buy the car. Not easy starting out, of course, but once you pay off the first loan you simply LBYM, as we all know.

When I bought my new truck two years ago just before ER a coworker asked if I got a good interest rate. I've learned generally not to mention paying cash for such a large purchase, but my puzzled look gave me away instantly. He glared at me and walked off, not needing a verbal response. LOL

But seven years? [shakes head]