Seven year auto loans

[brewer12345]

Folks, these loans have been popular for several years. Get out of the rich man's ghetto once in a while.

Is this a good idea? Obviously not. But Cars last a lot longer than 7 years and most people buy based on the payment.

 

[pb4uski]

Folks, these loans have been popular for several years. Get out of the rich man's ghetto once in a while.

Is this a good idea? Obviously not. But Cars last a lot longer than 7 years and most people buy based on the payment.

I get it. But the article said:

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.

Are they really writing loans in excess of the value of the collateral?

 

[joeea]

Folks, these loans have been popular for several years. Get out of the rich man's ghetto once in a while.

LOL! Rich man's ghetto?

 

[Gumby]

Some oldtimers may remember this thread from 2006. Same hymn, second verse.

http://www.early-retirement.org/for...ing-hosed-in-cash-uut-refinancings-22533.html

 

[Walt34]

Are they really writing loans in excess of the value of the collateral?

Yes.

If the buyer has good credit they've been doing that for years. I first learned of it when a SIL (the one I sometimes refer to here as "Spendarina") bought a new car because the "old one" all of three years old, need a $250 brake job. She was happy with the deal because her payments were only $15 a month more.

 

[Senator]

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

(Interest rate is 0.0%).

I am getting ready to by a Kubota MX5200. Hopefully they have a 5-year loan at 0.00%. From what I see, the initial price of the tractors are $500+ higher with the 0.00%.

 

[CoolRich59]

This part was really scary....

My thoughts exactly.

This was pretty scary too: "... a growing share of car buyers won’t pay off the debt before they trade in their cars for new ones, either because the car is in need of repairs or because they want a newer model."

What a recipe for disaster.

 

[Badger]

I hate borrowing money especially since any item would depreciate while still having to make payments. So I started paying for everything with cash/check except for a credit card that is paid off every month. I really don't like the monthly inconvenience of having to remember to write out a check on a loan. The last time I did that was around 1992. I like to simplify as much as possible as I get older and forgetful.



Cheers!

 

[Andre1969]

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.

I almost let myself get seduced into this back in 2002. I had a 2000 Intrepid that I had bought new, in November 1999. 0.9% for 60 months. In early 2002, I looked at a Nissan Altima. It was all-new that year, and I was really smitten. At the time, I still owed about $11,300 on the Intrepid, and they offered me $6500 in trade. Those cars depreciated fast, as I discovered, and I already had about 56,000 miles on it at that point.

They offered to let me roll the negative equity into the new car, but I would have been financing something like $28,000, on a fairly basic Altima. My payment would have gone from $347/mo to about $525, and pushing it back out to 5 years. Thankfully, common sense got ahold of me.

I came somewhat close to getting back into the payment trap again. In September 2003, I went car shopping with my Dad. We saw a used '03 Regal that he really liked, and ended up buying. But, while we were there, I saw this '02 Intrepid R/T that I really liked. I think they wanted something like $16K for it. By this time, my 2000 had about 87,000 miles on it. I owed around $4800 on it, and they gave it a trade in value of $3500. They said they'd give me what I owed for it, though. I was tempted, but that '02 gave me a bit of a bad vibe, the more I thought about it. One nitpick was the dealership wouldn't give me an answer as to how much factory warranty it had left. Back then, Chrysler switched up a bit, so not all 2002 models had the same warranty. Some had a 3/36K bumper to bumper, but some had that, plus a longer powertrain warranty. One of its headlights was also misaligned, and made me think it had been in a minor accident. And the sales manager said that a mechanic had owned the car, so it had been well maintained. BUT, they couldn't produce any service records. So, it just seemed...iffy.

Anyway, I passed on that car, ended up paying off the Intrepid in late '04, and ended up driving it until it was about 10 years old and 150,000 miles, when it got totaled.

 

[LRDave]

I am getting ready to by a Kubota MX5200. Hopefully they have a 5-year loan at 0.00%. From what I see, the initial price of the tractors are $500+ higher with the 0.00%.

On mine, the deal from the dealer was independent of the financing. In my case, I got the tractor from family in the business, so slightly discounted. Mine is a sub-compact - the margins on the small tractors are quite low. They make their profit in implements and parts/service. (Sounds familiar)

 

[Perryinva]

Whenever one purchases a depreciating asset, it cannot be looked at as any kind of investment but as an asset net value judgment. The money is going away as you use up the asset. The way I have always looked at it is “what is the cost per month and is there value in that cost?” The value part is where we all have different judgments. In BLow the Dough threads, excess money is spent on expensive food, drink, and travel. Judgment calls are being made. For financially saavy people leveraging debt makes you money or simply reduces net costs. Whether you pay for a service, or expensive food, it is a choice you make for the use of your money, ie: the reason You worked.

Being able to afford that cost is a different discussion. You can pay cash for a well negotiated $70k car. You want the car, and you have made the judgement that it is worth its cost to you, which is peanuts to your bottom line. Then the dealer offers you a 7 year loan for $50k at 0.9%. You would be a fool not to take it. Even if you parked the money at 2% you are getting a discount over paying cash. Preaching to the choir, I’m sure.

The terrible part is of course as everyone has said, is that the same loans are being made to people that can’t really afford the item, just like the housing bust if 2008. I applaud 7 year loans for those that can make money on them, though like others here, I cannot see myself doing that. Just too much ingrained aversion, plus I have never seen the favorable rates for that long a period on my purchases.

But once I won the game, and decided to spend my winnings at my awarded rate (isn’t that what we all are doing?), then it is simply a game to get the most of what you want for the least. I do my homework and negotiated my last 2 new car purchases (out of only 4 lifetime new cars) till the dealers cried impossible and walked away. When they came back to ask if my offer was still good, I was satisfied that I was getting what I wanted at the best price. I make no bones about the loss of that money for the depreciating use of the vehicle. It is easy to predict (usually) what the residual value will be over time, and whether that net cost is worth it to you. I have two car loans, (after maybe 20+ years of not having one) one with 8 months left, and the other 44 months left. I saved about $400/yr having those loans vs paying cash. In fact, BMW actually offered a further incentive if you financed over a certain amount as part of the negotiation, if your credit score qualified you. All payments are automatically made so that is effortless and I don’t even notice them.

I aim for a net cost (not including operating expenses except insurance ) of less than $2k/yr over the life of a used vehicle, and a bit more for a new one, as the warranty period carries a definite value that used does not. Of course, the longer you own the car, the lower the cost per year unless the repairs go on the rise. And no new car has any reasonable cost per year for the first 5 years at least. My 99 Dakota beater truck I have owned for 13 years is down to $300/yr, and my Porsche (11 years) is down to $1300/yr. (Both bought used of course)

 

[pb4uski]

I hate borrowing money especially since any item would depreciate while still having to make payments. So I started paying for everything with cash/check except for a credit card that is paid off every month. I really don't like the monthly inconvenience of having to remember to write out a check on a loan. ....

No inconvenience at all... I just set up a recurring check with my bank for the payments and for the number of payments of the loan and from there it happens automatically... also automatically imports into Quicken. Easy peasy.

 

[Chuckanut]

FWIW, twice I did sign up for a 5 year loan when buying a car. The first time the interest rate was 0% (which beat the cash discount taking inflation and the time value of money into account) and the second time it was 0.9% (same factors taken into account).

One thing I had to watch for was buying gap insurance since the value of the car would sink faster than the amount I owed for the first few years. The dealership wanted to sell me a gap policy for about $140 a year. The company that insured my home and car charged me about $12 a year. After three years I figured I no longer needed the gap insurance and cancelled it.

Like PB4 I setup my bank's bill payer system to automatically make my loan payment each month.

 

[jazz4cash]

Folks, these loans have been popular for several years. Get out of the rich man's ghetto once in a while.

Is this a good idea? Obviously not. But Cars last a lot longer than 7 years and most people buy based on the payment.

+1

 

[Andre1969]

This thread got me thinking...my Mom didn't have a car payment until 1986. That year, she bought a new '86 Monte Carlo at the end of the model year. I don't know how much she put down on it, but I seem to recall it was $282 per month for four years. MSRP on the car was just under $15K, but I don't know what she paid out the door, with discounts and such. I think cars like that were actually becoming a bit of a hot item. There was starting to be a bit of an FWD backlash at that point, but good, old-fashioned RWD V-8 cars were getting harder to find as the auto makers discontinued some, and reduced output on others to avoid getting CAFE fines. So, even though it was the end of the year, it might not have been discounted *that* much.


Still, it's interesting to see how much car payments HAVEN'T gone up over the years, as long as you stick to something somewhat modest. For instance, my 2000 Intrepid was $347.66/mo. I financed $20,389 for 60 months at 0.9%. I think they would have given me another $1500 off if I went with "regular" financing, but in those days, that was something like 6.5-7.5%.


In 2012, I bought a new Ram at the end of the model year. I financed about $19,400. The payment was around $358/mo for 60 months, and I think the interest rate was 3.99%

Neither of these were fancy vehicles. The Intrepid was a base model, but still pretty well-equipped. Power windows, locks, cruise control, nice stereo, etc. All pretty much standard equipment these days, but once upon a time it would have been a luxury car. The Monte Carlo just had crank windows and manual locks, but it did have a V-8, and a nice sound system. The Ram is a basic RWD truck, regular cab, 8-foot bed, but it has power windows/locks, a nice sound system, and the Hemi V8.

Adjusting for inflation, my Mom's $282/mo payment back in 1986 would be like $660 today! My Intrepid would be like $535 in today's dollars. And even the Ram would be around $400. Now, Mom's car skews the results a bit, because it was a 4 year term versus a 5-year. But, I think it still shows how, as long as you don't go hog wild on a new car, you should still be able to get a reasonable payment, and for a term that won't outlive you.

 

[Andre1969]

One other historical tidbit I forgot. Lee Iaccocca came up with the marketing slogan "$56/mo for a '56 Ford", whereby the buyer put 20% down, and the monthly payments were $56/mo for 36 months.

I've always wondered about the details behind that, though. For instance, what was the original MSRP of the car? $56 over 36 months comes out to $2,016. Even at 0% interest, when you factor in the 20% down, that would put the total purchase price at around $2500. Which, admittedly, wouldn't get you much of a car, even back then. My grandparents bought a '57 Ford, and it was around $3500.

FWIW, adjusting for inflation, that $56/mo would be around $528 in today's dollars. Not *too* bad, I guess, considering it was for 3 years.

 

[scrabbler1]

I hate borrowing money especially since any item would depreciate while still having to make payments. So I started paying for everything with cash/check except for a credit card that is paid off every month. I really don't like the monthly inconvenience of having to remember to write out a check on a loan. The last time I did that was around 1992. I like to simplify as much as possible as I get older and forgetful.

Cheers!

I tend to agree. Other than my apartment, I have never bought anything which required recurring monthly payments over several years. That includes 3 cars, all of which I paid with cash, in 1986, 1992, and 2007.

One time, I agreed to a special offer at an home electronics store for 0% if I took out a store charge card. Because I knew I would be buying 3 expensive items over the next few months there, I thought this would be a good idea. The 0% rate applied only if I paid off the entire balance on each item in full within a few more billing cycles, the equivalent of an expanded grace period. Because this extended grace period overlapped for the 3 items I bought, it was somewhat confusing how much of the running total I had to pay in order to maintain the 0% interest rate the whole time. I did see in the statement that any partial payment would be applied to the purchased items bought first (which is what I expected).

It all worked out just fine.

With my mortgage, I was able to set up with two lenders (the loan changed hands 3 or 4 times) an automatic payment feature, something not very common in the early 1990s, so I didn't have to worry about mailing a check to them every month.

 

[gwraigty]

FWIW, twice I did sign up for a 5 year loan when buying a car. The first time the interest rate was 0% (which beat the cash discount taking inflation and the time value of money into account) and the second time it was 0.9% (same factors taken into account).

I won't share all the boring details behind our car and financing sagas, but I/we did some of what is frowned upon and have managed to be in a great place despite it. I rolled one car loan into another, twice, because my first 2 used cars broke down frequently and didn't last the duration of the car loans. I bought my 3rd car new and it lasted over 11 years. We took out a 401k loan to buy a used minivan to accommodate our growing family, so we could rebuild our taxable savings after we paid cash for our newly built home.

We paid cash for a few new cars, until I read that you should compare what your investments are yielding vs. the loan interest rate. So we financed our last 2 new cars because most of our investments yield more than we're paying in interest. When that isn't the case anymore, the loans will be paid off immediately. Or if anyone can point out a flaw with that logic.

 

[ExFlyBoy5]

Are they really writing loans in excess of the value of the collateral?

Yes, and have been doing it for YEARS.

As far as haggling, I found that buying my last car through Carmax was about as painless as it can be. The price is the price, no haggling. I found what I wanted and it was shipped to the store. They happened to damage it (and didn't tell me until I showed up) but gave me $1500 off another model that was in the lot. It took me about 45 minutes to drive, sign the paperwork and then leave in the new car. I didn't finance it, but had I been able to get 0% for XXX years, I would have probably taken it.

 

[HadEnuff]

I've been buying cars for 45 years, and for at least that long car dealers and their salespeople have been trying to sell cars based upon "what is your budget for a monthly payment?"
I currently drive a 4 year old Highlander, I bought new, and paid cash for. (I guess I live in the rich man's ghetto.) For about a year I have been getting regular emails from the dealer, urging me to take advantage of a really great opportunity to trade it in, and get into a new one, and they'll arrange t make sure my monthly payments are less than what I pay now.
From the sales pitch it's obvious that they assume I took out a longterm loan.
So far I have resisted the urge to buy a new car.

 

[The Cosmic Avenger]

I won't share all the boring details behind our car and financing sagas, but I/we did some of what is frowned upon and have managed to be in a great place despite it. I rolled one car loan into another, twice, because my first 2 used cars broke down frequently and didn't last the duration of the car loans. I bought my 3rd car new and it lasted over 11 years. We took out a 401k loan to buy a used minivan to accommodate our growing family, so we could rebuild our taxable savings after we paid cash for our newly built home.

We paid cash for a few new cars, until I read that you should compare what your investments are yielding vs. the loan interest rate. So we financed our last 2 new cars because most of our investments yield more than we're paying in interest. When that isn't the case anymore, the loans will be paid off immediately. Or if anyone can point out a flaw with that logic.

Well, by the time your investments are doing worse than the loan interest rate, we may be deep in the trough of a recession, and that plus the recovery could take five years to rebound over what it was when you took out the loan. So you'd either wind up paying more in interest than you made on your investments, or selling off investments during the recession to pay off the loan, which kind of defeats the purpose of trying to outperform the loan.



I'm glad it's worked for you so far, though! If I was feeling lucky, I might do the same, but I'd rather take that risk on a retirement/snowbird home, as the loan will be for somewhere in the 15-30 year range, and market performance might be less volatile over the longer term.

 

[Gumby]

I currently drive a 4 year old Highlander, I bought new, and paid cash for. (I guess I live in the rich man's ghetto.)

Oh. my, what a conundrum. Now I don't know if my location should be "In the rich man's ghetto" or "The lumpen slums of cyberspace."

 

[ckelly78z]

I see all my friends, and family driving nice new cars/trucks, and bitching about the payments. I have been driving a nice $2500 2004 (triple black) Mustang GT convertible for 5 years now, and have had very few maintenance costs even with 178,000 miles,

My wife drives a 2006 Jeep Liberty with similar miles, and we have several other cheap, high miles cars at the ready.

These folks are living the American dream, they "deserve" that new car, and will do nearly anything to keep up with the Joneses, and stay current.

 

[pb4uski]

....Are they really writing loans in excess of the value of the collateral?

Yes.

If the buyer has good credit they've been doing that for years. I first learned of it when a SIL (the one I sometimes refer to here as "Spendarina") bought a new car because the "old one" all of three years old, need a $250 brake job. She was happy with the deal because her payments were only $15 a month more.

Yes, and have been doing it for YEARS. ...

Then if it blows up on the lenders they deserve it and should absorb the losses.

 

[timemoveson]

Car stories are painful to read if you've been there...

Despite my, relatively speaking, strong financial success, cars were definitely a low-point for us.

I was the key driver of those decisions and it's embarrassing on reflection to tote up over perhaps 15 key years how many $10's of thousands of additional capital was wasted on purchases, leases, depreciation, and trading losses. Capital that would have been deployed to pretty much ANYTHING better.

Frequent trading of expensive vehicles before they were paid off and subsuming the portion underwater into the next loan? Been there in spades too many times.

It didn't kill our trajectory but we were not normal. I out-earned and out-saved our way past this. But, for "normal" people struggling against all the normal life pressures and the hedonic treadmill, this is a disaster waiting to happen.