By on March 6, 2013

Long-term auto loans, leasing and sub-prime financing all saw increases year-over-year from 2011 to 2012, according to a report by Experian, a consumer credit rating agency. While typically a dry and detail-oriented subject, the area of auto financing gives us some insight into the nature of the new car market and even the economy itself.

The average term for a new vehicle loan rose to 65 months in Q4 2012, up from 62 months in Q4 2011. Longer terms and lower interest rates allow for smaller monthly payments for consumers, enabling them to pick a more expensively vehicle than they may have been able to afford with a shorter loan.

The lower interest rates and monthly payments meant that the average loan amount increased slightly, up $272 to $29,691. While used car loan terms stayed flat at 60 months, interest rates did decline slightly (from 8.67 percent to 8.48 percent) as did the average monthly payment. Sub-prime financing accounted for just under a quarter of all new vehicle loans in Q4 2012, up from 22.59 percent in Q4 2011. 55.4 percent of used car loans were sub-prime, up from 53.8 in Q4 2011.

The report comes on the heels of another study claiming that most middle-class Americans have trouble affording a new car – a notion that is at odds with the 15 million + SAAR expected this year, along with strong 2012 sales. The longer loans and increase in sub-prime financing give us a clue as to the way things are going. By approving more people for loans and making their monthly payments more manageable  consumers are able to afford a car more easily, while the finance company can collect interest for a longer period of time. TTAC commenters with experiencing in this area, feel free to chime in with your take. Steve Lang has already sounded the alarm in recent columns with respect to the used car market. But I am wondering what the implications are for new car sales, and how the SAAR is being affected by overzealous auto financing.

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134 Comments on “Sub-Prime Auto Financing, Loan Terms On The Rise...”


  • avatar
    kvndoom

    If One bubble pops, just start blowing another one…

    Our new household goal is to pay off cars within 2 years of purchase. If I get a good deal on the sale price and a good APR, I don’t mind if a bank makes a few hundred profit for taking risk on my loan, but if their total profit nears 4 figures I get uncomfortable.

    • 0 avatar
      mikeg216

      So you get nervous when a bank makes a profit? You sir lack an understanding of economics… If they don’t make money they don’t loan money… It’s what keeps this world spinning.

    • 0 avatar
      DeadWeight

      To make this a little bit cleaner than reported (IMHO), subprime loans underpinned a pretty hefty 43.2% of ALL vehicle purchases (new + used combined) in the 4th Quarter (see last paragraph), which is the highest level of subprime financing since right before the economic implosion of 2008 happened, and the aggregate amount of auto loans/debt has now reached a record high:

      Car Buyers Take Out Bigger Loans, Set New Record

      http://finance.yahoo.com/news/car-buyers-bigger-loans-set-142157717.html

      The economy can’t be reported to “grow” even in nominal terms in the U.S. or many other countries without pumping out new, larger batches of debt, which inevitably means giving more credit to larger and larger percentages of consumers that can’t possibly repay the loans.

      Right now, the best free profit game in the universe is being the “lender” or “creditor” allowing someone to purchase something like a vehicle or house, while getting a guarantee that the government (taxpayers) gets stuck with having to repay the debt.

      That’s why the FHA is guaranteeing 84%+ percent of mortgages (requiring a mere 3.5% down) and that’s why government is still deeply involved in directly or indirectly backstopping auto loans.

      • 0 avatar
        doctor olds

        @Deadweight- You are right that FHA is backstopped by the government, but please provide some evidence of exactly how the government is backstopping any auto loans.

        • 0 avatar
          DeadWeight

          “Ally Financial, which is 74 percent owned by the U.S. government after a series of bailouts, is focusing on U.S. auto lending and Internet banking as it works to pay back taxpayers.”

          http://www.reuters.com/article/2013/02/18/us-allyfinancial-unit-sale-idUSBRE91H0OW20130218

          And GM either leads the way or is definitely near the top of the mountain in generating subprime loans for their Ally (that’s a pun).

          • 0 avatar
            doctor olds

            Since that business is owned by treasury, I understand your idea now.

            Financiers have little concern about default on car loans. Repossessing a car is easy and as a result there is minimal risk of loss.

            The mortgage debacle, on the other hand is far more complex. Car loan defaults were not a cause of the financial collapse.

          • 0 avatar
            FreedMike

            Ally has about a 6% share of new and used auto financing overall.

            http://www.experian.com/assets/automotive/white-papers/2012-q1-state-of-automotive-financing.pdf

            Therefore, if you want to equate Ally with the government, the government has about a 6% market share in auto financing.

          • 0 avatar
            DeadWeight

            I don’t understand what portion of what I said you’re disputing or taking issue with.

            I stated that Ally Bank is owned 74% by the taxpayers.

            Addressing your point, however, and given that so many manufacturers have their own financing arms, and that the auto financing market is somewhat fragmented, 6% is a pretty significant share of a pretty large pie for one (taxpayer owned) bank to have.

          • 0 avatar
            FreedMike

            You said the government is “deeply involved in directly or indirectly backstopping auto loans,” using Ally to support the statement.

            Ally has a 6% market share.

            Therefore, I think it’s safe to say the government isn’t all that involved in the auto loan business, considering that 94% of it is conducted by companies with nothing to do with the government, besides satisfying the various lending regulations they have to follow.

            And I don’t think the government wants to stay invested in Ally to begin with.

      • 0 avatar
        FreedMike

        @DeadWeight:
        “That’s why the FHA is guaranteeing 84%+ percent of mortgages (requiring a mere 3.5% down)…”
        The most recent figures available show FHA loans account for about 1/4 of the mortgage market.

        http://www.fhfa.gov/webfiles/24016/Conservator'sReport1Q2012061512_FINAL.pdf

        And the government does not guarantee FHA loans – it provides mortgage insurance that partially reimburses lenders in case of default. The premiums for the mortgage insurance are built into upfront fees and monthly charges. So, when a FHA loan defaults, the government doesn’t just write out a check to the lender to reimburse them – it makes an insurance payout, and the payout is offset by the premiums they’ve been collecting on that loan and other loans. It works the same with private mortgage insurance, just at lower LTVs.

        As to the risk of “government loans” (i.e., FHA/Fannie/Freddie/VA), the default rate on them, even at the worst points of the financial crisis, was around 5%. The default rate on loans that had nothing to do with the government (AltA, subprime, HELOCs, etc) was around 25%. Draw what conclusions you like from that.

        • 0 avatar
          DeadWeight

          You’re correct.

          I should have said nearly 90% of mortgages are guaranteed by the FHA, Fannie & Freddie (8th paragraph in Reuters article I cited).

          Bipartisan group lays out plan to shutter Fannie Mae, Freddie Mac

          http://www.reuters.com/article/2013/02/25/usa-housing-finance-idUSL1N0BP89120130225

          “Fannie Mae, Freddie Mac and the Federal Housing Administration currently back nearly nine of 10 new mortgages.”

          • 0 avatar
            FreedMike

            Actually, Fannie and Freddie don’t guarantee mortgages, and they don’t originate them, either. Individual lenders use Fannie/Freddie underwriting guidelines to originate their loans, then Fannie/Freddie facilitates the sale of blocks of these mortgages to end servicers and investors. By doing this, investors can be reasonably confident of the risk of the paper they’re buying.

            The reasons why Fannie/Freddie and FHA have picked up so much market share are simple: 1) they lost a huge amount of it during the bubble to subprime lenders, who promised faster and easier processing (too bad if the borrowers were all lying, but it sure was a fast process), and now that those crooks are gone, the GSEs filled the void; and, 2) after the subprime debacle, investors ran away from the non-GSE originators.

          • 0 avatar
            DeadWeight

            So that Reuters article that I cited stating that:

            “Fannie Mae, Freddie Mac and the Federal Housing Administration currently back nearly nine of 10 NEW mortgages.”

            …is incorrect, and horribly so?

            I’m asking, and not rhetorically (the press is not exactly precise or accurate regarding what they report, often).

          • 0 avatar
            doctor olds

            It is accurate to say that the Obama administration has promised to make good any losses at Fanny Mae and Freddy Mac which is not exactly the same as saying they guarentee the mortgages.

          • 0 avatar
            DeadWeight

            “Fannie Mae, Freddie Mac and the Federal Housing Administration currently back nearly nine of 10 NEW mortgages.”

            I’m not adding nor deleting anything from the Reuters article. That’s a direct quote.

            It’s pretty unambiguous.

            It’s either true or not.

    • 0 avatar
      corntrollio

      The best way to avoid a 4-figure profit for a bank is to have good credit or put money down. For example, even a $24,000 loan at 1.49% for 5 years definitely has an interest cost below $1000 over the term of the loan. That’s an actual rate offered by one of my credit unions on new cars and certain used ones.

      At 8.5%, it’s much harder to do. Even when I had no money and was just out of school, and the prime rate was 7 or 8%, I got a much better rate than that.

      • 0 avatar
        rodface

        I just bought a car on that exact loan (same rate and financed amount limit), for a 36 month period. I believe the total interest over the three years came to ~$650. I have the full amount that I borrowed available as cash and was considering paying off the loan within a few months; the rate is so low, though, that I might be better off investing a chunk of the money and making regular payments from the rest.

        • 0 avatar
          APaGttH

          The last new car I bought had an offer of 0% for up to 72 months. Well shoot, if the interest is zero and I can optimize cash flow, and have a plan to keep the car beyond six years (and a hefty down payment) why not. That’s what I did.

          • 0 avatar
            NormSV650

            FYI for an Impala: 0% APR for 72 months for qualified buyers. Monthly payment is $13.89 for every $1000 you finance. Example down payment: 18%.

            Even with some of the .9 or 1.4% your looking close to $500.00 in interest.

      • 0 avatar
        highdesertcat

        “The best way to avoid a 4-figure profit for a bank is to have good credit or put money down.”

        Sage advice! So true, but I well remember the days when I was young and poor and didn’t make enough money to qualify for a new car loan from anyone, at a time when I was in dire need of reliable transportation.

        In many cases, if you need wheels, really need wheels, for whatever reason, sometimes you have to sell your soul to the devil which are the banks and finance companies.

  • avatar
    Felix Hoenikker

    Simple rule of thumb. If you can’t comfortably afford a 36 month car loan, you can’t afford the car. The basic problem is a disconnect between needs and wants.

    • 0 avatar
      sirwired

      I’ve heard this rule before (although when I heard it, it was 48 months.) My question is: why?

      All but the most nasty, trouble-prone (or driven hard), models are almost guaranteed to last well beyond three years. Why limit your car purchase to vehicles that you can pay off that quickly?

      Yes, I can’t argue that it’s nice not having a car payment (haven’t had one on my car for five years now), but if you can swing the monthly payment, and the loan length isn’t anywhere near the useful life of the car, what’s the problem?

      • 0 avatar
        Luke42

        I bet that rule made a lot of sense in the bad old days when cars rusted out in a few years.

        For the sake of argument, let’s suppose that the reasoning behind that number was because it took real money to maintain a car after 3 years, in the bad old days.

        Modern cars are way more reliable than those 1970s GM cars. So, how do we find out when the inflection point on a modern car’s maintenance costs are?

        The best way would be massive TrueCar style statistics and some informed guesswork. So, look at TrueCar, and use your best judgement to guess whether the statistics apply to new cars.

        BUT, someone else is tracking this: manufacturers! Furthermore, they bet real on car’s reliability by offering a warranty – so they must have some confidence in their answer. And, if they’re wrong, they pay for it.

        So, the car’s warranty provides a lower-bound estimate for how long the car will have maintenance costs – AND the manufacturer will take care of it of they’re wrong.

        So, assuming my guess about the rationalle for the rule is correct, the revised rule would be: “if you can’t pay off the car before the warranty expires, you can’t afford it.”. This sounds like sensible advice.

        P.S. This would make Hyundai far more affordable than GM, because of the 10 year warranty.

        • 0 avatar
          KixStart

          swired: “Yes, I can’t argue that it’s nice not having a car payment (haven’t had one on my car for five years now), but if you can swing the monthly payment, and the loan length isn’t anywhere near the useful life of the car, what’s the problem?”

          Because things change. You might be able to afford the payments on a BMW 750 today but you might not be able to afford them next year and the bank will still want them. Upside down on a car with a big payment is not a pleasant situation.

          Luke42,

          I don’t have a Hyundai but that’s why one of my friends does. He can keep it 10 years without significant worry that it wil suddenly take a giant bite out of his wallet. However, he does not take 10 years to pay the loan.

          • 0 avatar
            Luke42

            I definitely agree that there’s a big difference between “I can pay for it” and “I can afford it”.

            I’ve laughed at many feeble attempts to sell me expensive crap on that basis.

            There are also tradeoffs and opportunity costs. Financial resilience is one. Education is another. Things to consider for sure. My dad’s rule about these things was to keep thinking about these things! :-)

            At this stage of our lives, my wife and I have chosen to put our efforts into education for my wife, my son, and myself over stuff! It’s fun to learn stuff in the short term, and should makes us employable/entrepreneurial in the long term.

        • 0 avatar
          sirwired

          The length of a car’s warranty has little to do with the vehicle’s expected lifespan. Toyota has remained wedded to 3-years, 36k, for as long as I can remember, while other, less reliable brands, have longer warranties. (In some cases, MUCH longer warranties.) The length of the warranty is just another line on the P&L, and it’s length is decided on by Marketing and the CFO’s office (with input from Engineering and some actuaries.)

          Are you saying that you should limit loans on a Camry to 3/36k but can stretch out a Hyundai for a decade? (Hyundai’s are much better than they used to be, but they aren’t THAT great.) And are you also saying you should never take out a loan on a used car that is out of warranty?

          Personally, I think a BETTER “rule of thumb” is that you should never be “upside down” on a car loan. (Unless you are just starting out and have neither a trade-in or possibility of a Down Payment.)

          • 0 avatar
            Luke42

            I’m not saying that the car won’t last longer than the warranty, but I am saying that the warranty is one of the more credible tools we have to forecast the maintenance costs of the car, and that the forecast is an important part of determining affordability.

            I thought GM was stuck on the 3 year warranty? My wife’s Prius had an extended warranty that lasted for 8 years and 100k miles, but I met her shortly after she bought it and so wasn’t involved in the purchase process.

            But, yeah, I think it does make more sense to take out a 10 year loan on an Elantra than it does on a Cruze, because you can have an assurance that the car will get you to work over that 10 years. Yeah, the Craze probably would too – but why bet your own money when Hyundai will bet theirs? The Hyundai is, therefore, more affordable.

            Also, were taking about defensive personal finance here, so we’re supposed to be using pessimistic predictions. Of you’re willing to bet that you’ll get a raise next year, then this doesn’t really apply. But if you’re in this for resiliency, then using the warranty as your guide is one of the easiest and most credible forecasts that most people have for making the decision – at least as simple pessimistic rules of thumb go. Otherwise, we need to break out the spreadsheets and start doing regression analyses…

            One wrinkle with Hyundai is that the warranty is nontranferrable, so this logic doesn’t apply to a used Hyundai. Hyundai’s car probably isn’t that much more reliable than the Cruze, because part of their bet is that you’ll buy a new car some time during the next decade. But you can control that and, if you want to or need to keep the car, your maintenance costs will remain predictable.

    • 0 avatar
      hreardon

      To me, that seems like an arbitrary number. What is it based upon?

      I’ve always taken 60 month terms on my cars (along with the requisite .9, 1.9 or 2.9% rate) and paid them off before 48 months. To me, that’s a win.

      Likewise, I’ve had people tell me that if I couldn’t afford a 15 year mortgage I couldn’t really afford the house.

    • 0 avatar
      corntrollio

      That’s not well thought out. If you get a 0% offer or even 0.9% or even 1.49% as I said above, it’s probably better to have someone else take the risk.

      I like to pay cash, but at 0%, I’ll take as long a term as they’ll give me.

      • 0 avatar
        toomanycrayons

        I agree. Take the low interest if it pays better than cash. If you don’t have the cash back stop: Grow up? Maybe you really don’t need what the bank needs you to need.

      • 0 avatar
        KixStart

        Unless it costs you something else. Sometimes it’s rebate cash or 0% but not both. If possible, get cheap financing elsewhere and take the rebate.

      • 0 avatar
        NormSV650

        Don’t think the 0% loan is without costs. The fine print must be read and the whole picture weighed.

        • 0 avatar
          sirwired

          Funny lease agreements are hard work to interpret. 0% loans are pretty straightforward. The only cost is that you commonly have to give up a cash payment to get the loan. Unlike a credit card, there isn’t a whole lot “fine print” involved. If you set up Autopay, you’ll be in good shape.

    • 0 avatar
      krhodes1

      My personal rule of thumb is that I won’t make payments on a car that is not under warranty. I have a five year note (at .9%) on my BMW, but it will be paid off before the warranty expires in four years. I just figured I would rather have the flexibility to make the occasional smaller payment if I needed to. For example, this month I have the $800 registration to pay, so I won’t pay any extra towards the note. I’ll make it up over the next few months.

      Also count me as one who has no problem using someone else’s money. I could have paid cash for the car, but at .9% that would be stupid – it would have cost me more in capital gains taxes to get the cash in hand.

      • 0 avatar
        DenverMike

        @Krhodes1 – Having access to your cash that’s in a tax sheltered annuity isn’t quite the same as it sitting in a safe deposit box.

        • 0 avatar
          krhodes1

          Yes, the annuity pays a lot better, and keeps ahead of inflation if you have half a brain. The chances of my needing to pay off my car earlier than I intend to are less than zero, because I would simply sell it if it came to that. I put more than enough down to ensure that I will never, ever be underwater on it.

          This really isn’t rocket science.

          • 0 avatar
            DenverMike

            @Krhodes1 – You essentially live on a fixed income and paycheck to paycheck. I mean as far as having lots cash around just for large purchases.

            I know a millionaire that lives by your rules and another millionaire that likes having several million in safe deposit boxes. He buys residential and commercial property at tax auctions and likes to have his money close at hand and thinks it’s absolutely stupid to finance anything what so ever. Just a totally different approach is all. Neither are wrong.

            I also love the awesome feeling of owning absolutely everything outright. I should explain I’m self employed so you have to be ready to live on a shoestring even if you never actually have do.

    • 0 avatar
      highdesertcat

      “The basic problem is a disconnect between needs and wants.”

      Yup, I agree with that and I also think that new cars or trucks, of any persuasion or manufacturer, cost way too much. Although SOME brands retain a lot more value than others.

  • avatar
    sirwired

    Really, this is far less dangerous than it used to be. 15 years ago, you’d have to be nuts taking out a 5+ year loan on almost any car, except maybe a new Camry… meaning the bank ran a pretty high risk of being stuck with a non-running chunk of collateral. These days, breaking the 100k barrier without any expensive repairs (a.k.a. Collateral Risk) is utterly, completely, routine for all but the most trouble-prone cars. Even for a used car, 5 years isn’t out of line for a late model car with a decent reputation for reliability.

    For my next car purchase (hopefully still a few years away) I might strongly consider stretching out the payments to six years instead of the four that was my hard-and-fast rule before. (Depending on if I can get good rates or not… current financing rates, even without incentives, are crazy low at the moment.)

  • avatar
    mikeg216

    My rule of thumb is I have a list of what I need out of a vehicle and the one that comes closest with the longest 0% financing wins. Investing your own money into a constantly depreciating asset is a stupid thing to do. Fully depreciated the used cars different story
    Even the most average automobile should get you to 250k and beyond these days, if you change the fluids and get the required work done in a timely fashion .

    • 0 avatar
      doctor olds

      @mikeg216- Most deals seem to offer 0% financing OR cash off. When you evaluate the 0% financing, you really should compare it to outside financing with the additional cash as a downstroke.

      As an example, I bought a new 2008 GMC Sierra with nothing down and found that the monthly cost to me for the same term was lower to use the cash down and bank financing at 5.9% than the 0% offer. The icing on the cake, my equity in the truck was higher right off the bat!

  • avatar
    gslippy

    “But I am wondering what the implications are for new car sales, and how the SAAR is being affected by overzealous auto financing.”

    SAAR is obviously being fueled by overzealous auto financing. I think housing is going the same way.

    I’d also bet the number of auto leases is increasing dramatically.

    I wonder if the collapse of the European car market can be attributed to the return of sensible financing terms. Did this happen?

    • 0 avatar
      raph

      “I wonder if the collapse of the European car market can be attributed to the return of sensible financing terms.”

      I’m a huge fan of that, If you can’t afford it you don’t deserve it.

  • avatar

    Because people around me know I work in mortgages/loans and RE – and they know I’m heavily into cars, one woman comes to me for help buying a new car:
    #1 She makes $30,000 a year.
    #2 She has 3 kids.
    #3 She pays $1200 a month for an apartment
    I helped her with one of my family who owns a dealership and as soon as I found out:
    #4 she wants to buy a $26,000 SUV.
    I’m like WTF?
    How can you afford that…or is it MY TAX DOLLARS AFFORDING YOU THAT?

    • 0 avatar
      Kyree S. Williams

      That “my tax-dollars are probably going to waste on you” argument is getting really old, mate. It’s turned into one of those venomous phrases that well-off people use as ammunition on those who are either less-fortunate or irresponsible. Here’s the thing: all it does is make you bitter. I doubt the person in question gives a single care about your tax dollars. Might as well get over it. Moreover, you’d be surprised at how many people are unaware of what they can comfortably afford in a vehicle, not out of pickiness or snobbiness, but out of a lack of proper information and counseling.

      Try to be more compassionate and less judgmental…

      • 0 avatar
        200k-min

        I know that the “real” economy isn’t the best and that there are many people down on their luck but it OFTEN does appear like “my” tax dollars are being wasted. With nearly 50 million people on food stamps (EBT) there are plenty of people on the dole. When I’m at the gas station and see someone buying groceries there (overpriced) on EBT and then jump in a 1-2 year old SUV it does make me scratch my head about just how “unfortunate” that individual might be. I drive a ’99 Accord with 200,000 miles not because I don’t like new cars, but because it’s fiscally prudent. Every month that thing keeps going is more cash in the bank. I will overgeneralize here but I do honestly believe a lot of “poor” people are that way because of poor decisions. Rewarding that with gov’t handouts isn’t the best way to teach a lesson.

      • 0 avatar
        jkross22

        Give me a break.

        Financial irresponsibility combined with unaccountable government programs has proven to be a recipe not only for terrible public policy and wasted money, but creating a dependence and ignorance that feeds on itself.

        People need to be told they can’t afford things they truly can’t afford. There are too many people running around thinking they’re owed something. They need to be corrected.

        • 0 avatar
          28-Cars-Later

          “People need to be told they can’t afford things they truly can’t afford.”

          I agree JKRoss22 but I think nobody in power has the balls to “tell it like it is” to the plebs.

          • 0 avatar

            I AM NOT a compassionate conservative. That’s another name for “big government conservatism”.

            I am a fiscally conservative Republican.

          • 0 avatar
            raph

            I suspect 28 that if the government had the “balls to tell it like it is”, the economy would come to a screeching halt.

            A friend of mine once made the observation – wealthy people only buy things once, they can afford the best, and expect the best and expect to purchase it only one time. Poor people on the otherhand can only afford cheap stuff that doesn’t last very long so they have to replace it with cheap stuff when it breaks so they are the ones the really power the economy. Ergo its in the governments best interest to allow poor people to keep buying stuff as it keeps the economy moving.

          • 0 avatar
            28-Cars-Later

            @bigtruckseriesreview

            Not sure if that was intended at me. Personally, I want to hang all of the communists from the lightposts and then return to late 19th century Libertarianism.

            @raph

            I agree, especially in the most of the West. We’re pretty screwed economically speaking. The elites are simply playing the most high stakes game of kick the can in Human history.

            I think you’re friend was right, the trouble is I think consumer goods from a durability standpoint are light years behind where they were even thirty years ago no matter the cost. For example I still see those 1980s console tube tvs on occasion. Will we see 2010 era LCD, Plasma, and LED tv’s in 2040?

            The term for forcing consumers (poor or otherwise) to replace low quality items is planned obsolescence. If you’re interested in the subject there is a documentary called The Lightbulb Conspiracy

            http://www.youtube DOT com/watch?v=4WPrTk90VZM

      • 0 avatar
        Kyree S. Williams

        Like I said, yes, there are plenty of people who abuse taxes and government benefits, but there are also people who are victims of their situations and upbringings. Americans are very poorly educated about money compared to the rest of the world. There is often tremendous pressure to have the newest, the flashiest, the fanciest, and some families cave into that trend, even when they can’t afford it. Often times, this is because of how they were brought up and what they were–or weren’t–told. Fortunately, I grew up with parents that have a clue, so we never lived on welfare or took out debt that we couldn’t afford to pay back, but not everyone is so informed. Now while you would argue that an adult becomes responsible of his/her finances despite his/her upbringing, what you have to understand is that some people really don’t get it. I often help people shop for cars, and I have several acquaintances to whom I’ve gently had to explain why they can’t comfortably afford a something like a brand-new Charger R/T on minimum-wage…often times after they had somehow already financed said vehicle, *because they were uninformed.* What I didn’t do was run around crying about taxes.

        “There are too many people running around thinking they’re owed something. They need to be corrected.”

        Seriously? Do you understand how bitter and mean you sound? We should educate and inform the less-fortunate rather than passing judgment and condemning them.

  • avatar

    One of my clients had a 520 credit score and bought a $26,000 car from Major World with just $1000 down and a STUPID loan…lol.

    21.06% interest rate.

    He was fresh out of college and just started working a job at $47,000 a year.

    Normally you’d think this is gonna end poorly, but actually, I guided him through the aftermath, his salary went up to $55,000 and he made all payments on time. His credit went from 520 to 750 and he traded in one car for another – going from a 21% down to a 7. Then he recently called me and said Thanks for the help… refied down to a 3.9%.

    telling me: “before long, he’s gonna have a Jaguar XJ-L just like mine”. I’m like: not on $55,000 a year you ain’t.

    • 0 avatar
      28-Cars-Later

      21 points on a real loan? Wow. Prob wasn’t even that nice of a car, was it?

      “telling me: “before long, he’s gonna have a Jaguar XJ-L just like mine”. I’m like: not on $55,000 a year you ain’t.”

      Love Jags, now not to be snarky but do they still have a 70%/3 year depreciation? If this is still the case, he may have one just yet albeit used probably with lots of juice on the note.

      I contemplated buying a 2001 XJ8 in 2006, they were at the time doing 10-12 at the auction 60-70K on the clock, msrp at the time was I believe $60K. (Maybe the Nikasel hangover was part the reason why they were so cheap?). Didn’t pull the trigger.

      • 0 avatar

        #1 Major World deals almost specifically in sub prime loans because they are a major NYC used car dealer. They have a lot that you can see from orbit with everything from BMW to Kia. they sell new and used cars.
        #2 They deal with a large hispanic community- many of which are undocumented and they are willing to deal in cash just to move vehicles.

        YES 21.XX% on a real loan. When he told me that my jaw dropped. He’s doing much better now.

        #3 Jaguars depreciate so fast it’s madness. Thing is, NO ONE IN THEIR RIGHT MIND FINANCES a LUXURY CAR. You LEASE them. The lease terms will put you in a Jaguar XJ-L for $899 a month with just $7000 due at signing.

        I have no idea what my XJ-L will be like later on in regards to maintenance, but I have absolutely no intention of keeping it long enough to find out. It’s just another show off car for when I go to client’s houses. A conversation piece.

        • 0 avatar
          CJinSD

          So is it okay to sell big ticket items for cash as long as you tell the IRS and the DEA that you’re selling to illegal aliens?

          • 0 avatar
            highdesertcat

            It’s all part of the underground economy, and selling big ticket items for cash money to anyone, including illegal aliens, happens every day.

            And you don’t have to tell anything to anyone. Invest in a $55 Accubanker D64 to make sure you don’t accept bogus funny money, if you make sales like that on a recurring basis.

          • 0 avatar
            DenverMike

            As long as dealers report the sale, why should the IRS care if items are bought with cash (under $10K) or even financed to illegal aliens? The DEA? It’s not a dope deal.

            Dealers sell cars to illegal aliens with a wink and a nod because while they can not legally drive, they CAN legally own and insure cars through special waivers.

          • 0 avatar
            CJinSD

            My concern here was that he said big ticket items. I assume that means amounts that are over the cutoff for IRS required reporting. The IRS requires this reporting so they can look into people that have more cash than they should based on their taxable earnings, people like drug dealers. Car dealers have gotten in trouble in the past for making cash sales to obvious criminals. Money laundering is also an IRS concern with big ticket items, since they could be bought and sold to launder money were it not for reporting requirements. A car dealer that does numerous cash sales would be fodder for such an investigation, unless a blind eye is being turned to further a demographic change agenda.

          • 0 avatar
            DenverMike

            It’s not the car dealer’s job to sort out who’s a drug dealer or illegal alien. Car dealers have gotten into trouble in the past, but so did banks taking in pallets of cash with no questions. That was a long time ago and if you haven’t seen “Cocaine Cowboys” I highly recommend it.

            Dealers just have to file the required IRS forms for cash purchases over $10K. If the dealer is laundering money, then that’s a whole other topic.

          • 0 avatar
            highdesertcat

            In New Mexico ANY illegal alien can get a drivers license, no questions asked. Es la ley!

            Illegals come from all over to get their drivers license in New Mexico and then spread out across the US.

            Once illegals have that drivers license they can open bank accounts, get credit cards, whatever requires a photo ID like a drivers license. There are even banks in the US that cater specifically to illegals.

            They can buy cars, get loans, go anywhere and do anything that any US citizen can do, except vote (although many do, just like many felons do).

            Many buy cars with cash, and it’s no big deal. Many dealers are also buy-here-pay-here self financing retailers, and the illegals love that.

            FYI, any Cash deposit of $5K or more is reported to the feds by a bank or credit union, and ANY cash transaction of $5K or more made by a licensed car dealer is also reported to the feds. That’s the law.

            But why would any private individual report a large cash transaction to the feds? The moment you report anything you become liable for paying taxes on that amount, yeah, even for garage sales.

            What is trending now is for people who have money to withdraw large cash amounts from their accounts and keep the cash at home or in safe-deposit boxes, out of sight and out of mind of the feds and the IRS.

          • 0 avatar
            corntrollio

            “But why would any private individual report a large cash transaction to the feds? The moment you report anything you become liable for paying taxes on that amount, yeah, even for garage sales.”

            I get that you’re a self-described wannabe tax dodger, but this is not true for garage sales or car sales, unless you are regularly buying and selling cars for profit.

          • 0 avatar
            highdesertcat

            “…unless you are regularly buying and selling cars for profit.”

            Exactly! And there are quite a few people in America who augment their income with regular trips to garage sales, estate sales, and other venues to buy goods (including cars) on the cheap for resale and profit. They do this for a living, and they love it! Make great money, too!

            Do you really think that all those ‘individual’ sales on eBay and other sites are just people cleaning out their attics and garages?

            How about gun shows? How about all those vendors on street corners or parking lots? How about all those door-to-door sales people? Most of them make a damn good living, and get to keep all their proceeds.

            How about those panhandlers at intersections who beg for donations to charities? Did you know they get to keep 2/3 of what they collect and turn over the remaining 1/3 to the charity they panhandle for?

            Do you think they declare those cash donations they pocket as income? Do you think they pay taxes? Many of them take home as much as $200 a day at the gas&sip where I hang out. A buck here, a buck there. It all adds up.

            Dude! You better think again? What planet are you living on? Car sales to illegals are no different! Happens every day, all over America.

            In America its not so much about how much you get paid. It’s more about how much you get to keep.

            There are plenty of ways to keep your money out of sight and out of mind of the federal and state governments. And the people with money to shield know this.

            Most of them prefer to redistribute their own wealth to members of their family in cash, cars, tuition or real estate, instead of having Obama and the ‘crats redistribute America’s wealth from them to those who don’t work and have never broke sweat in their lives, except maybe to squirt out kids to increase their welfare checks.

            There’s a difference between people who worked and paid into the system and who now collect their entitlements, and the people who are just freeloading, ‘getting their money for nuttin’ and their foodstamps for free.’

            There are plenty of jobs in America but too many Americans refuse to take those jobs preferring instead to collect the welfare and unemployment checks from Uncle Barack. But the illegals aren’t too proud to take those jobs.

            My former son-in-law is one of those. A corporate attorney who got downsized when his company moved to Mexico, he is one of the 99ers, refusing job offers for a plethora of reasons all his own.

            People with money have learned what to expect from Obama and the ‘crats and are working to circumvent their socialist policies of spend&tax, now touted as invest&raised-revenue.

          • 0 avatar
            corntrollio

            “There’s a difference between people who worked and paid into the system and who now collect their entitlements”

            It’s funny that you have to defend your significant government benefits in every non sequitur rant. You somehow “earned” your handouts because you signed a contract, right? I’m not saying I’m pro- or anti-union, but are you also one of the same people who criticize union employees who have similar benefits to yours? They signed a contract too.

            Federal government employees with their better than private sector benefits aren’t that different from the union ones that many commenters here criticize — they just have an even bigger sense of entitlement, as you’ve shown.

          • 0 avatar
            highdesertcat

            corntrollio, there’s no comparing union contracts with military contracts, which is where I derive my entitlements from.

            To argue that they are the same or even similar, reflects a woefully poor understanding of each.

            Union pay and benefits are far richer than any military equivalent, and the working hours are far better under union contracts.

            The only thing that could possibly approach similarity to military contracts are those of law enforcement professionals.

        • 0 avatar
          Kyree S. Williams

          Maintenance-costs on Jaguars are traditionally horrendous, which is part of what makes their resales sink lower than those of Audi, BMW, Mercedes-Benz or Lexus. Those cars can have mechanical and electrical issues too, but they are predictable and you can usually look at what is happening with others’ cars to know how to handle yours. Jaguars, however, are just not very reliable and are full of unpleasant surprises, making the prospect of owning one out of warranty very ugly. They are also, in their nature, far less serviceable to customers and uncertified mechanics than competitors’ vehicles, to ensure that when something goes awry, you really *must* take them to the dealerships and deal with their exorbitant rates and charges.

          I know someone who wants a 2009-2010 XF Supercharged very badly, and the prices are well within her budget, but I looked at the maintenance costs, and even the upkeep for the naturally-aspirated model is sky-high. I told her to forget about it.

        • 0 avatar
          28-Cars-Later

          Thanks for the leasing advice, I’ll remember that when I become a big shot. :)

        • 0 avatar
          jkross22

          “The lease terms will put you in a Jaguar XJ-L for $899 a month with just $7000 due at signing.”

          Is that all? I gotta go and trade my LeBaron convertible in and score me some Jag!

      • 0 avatar

        Check AutoTrader.com. There are 23 different 2011 XJ models (that’s the new body) in the 40s. Ouch.

    • 0 avatar
      Liger

      I sold cars for a bit in the early 2000′s. i had a customer with horrible credit get approved for a second chance loan on a new Hyundai elantra (full msrp of course) at a 29% interest rate (kansas)…..he was crying as he signed the loan papers. I had no sympathy as he was a rat.. He cheered up when we took his picture in front of the car. Little did he know that the bank wanted his picture so that he would be easier for them to find him when he defaulted on the loan.

      • 0 avatar

        Banks would rather sell you a BRAND NEW CAR than a used car if your credit sucks.

        #1 they can charge you a high interest rate and take what money you do have just “allowing” you to drive.

        #2 If you default – there’s more value in a new car when they repo it.

        #3 Depreciation is so bad nowadays that if they give you a loan on a used car the risk is higher, the depreciation has already made the loan worthless and if they have to repo it, it’s too hard to resell.

  • avatar
    seabrjim

    Sounds like someone is gonna have a 520 score again real soon. Cant live within your means, gotta have a Jag, huh?

  • avatar
    JuniperBug

    Average new car loan is at 65 months? To me that’s just plain irresponsible. While I agree it’s nice to have a nice new car, it’s not a necessity and certainly not something I’d be willing to be in a constant cycle of debt for (5 year loan and as soon as it’s paid off you have to start putting money towards repairs on the car, or – what seems more likely these days – trade in for the next new one). The limit I’d be comfortable with would be 36 months and even then I’d feel guilty. The more debt you have, the less freedom you have to do what you want. Boss is treating you like shit but you’ve got that monthly car note? Guess you better suck it up and keep working, eh? Me, I’d rather have a less nice ride and be able to take a risk or two in life.

    The more I live, the less ok I am with paying taxes, because all they seem to go to is financing other people’s laziness, greed, and unwillingness to make decisions beyond the level of a sugar-addled 12 year-old.

  • avatar
    Big Al from Oz

    Why have fiscal, financial responsibility?

    Look at how the US is managed:)

  • avatar
    Astigmatism

    You know, I make enough to be in the top 2% or so by salary, and I drive a five-year-old Acura that I bought used two years ago for under $20k, and it seems like half the cars on the roads are BMWs and Audis, and I just don’t get it: how do this many people feel comfortable committing to spend two or three times what I do on a car, when statistically that many people can’t be making that much more than I do? (And sure, lots of them are owned by BU and BC students and their parents from Scarsdale or Abu Dhabi bought the car for them, but still.)

    And then I talk to former colleagues who tell me that the securitization market is booming, they can’t do deals fast enough, etc., and I read articles like this, and I think, Aaahhh.

    And then I think I should start buying canned food.

    • 0 avatar
      jmo

      “and it seems like half the cars on the roads are BMWs and Audis”

      Half? BMW and Audi combined have about 4% of the new car market.

      3.8 million households in the US have AGI’s above 200k. That is more than enough people to comfortably afford all those 3-series and A4s.

      • 0 avatar
        DeadWeight

        Astig, I am in the upper income bracket.

        The only reason I mention this is that I have a 7 1/2 year old car that I see no need to replace within 2, 3 or maybe even 5 years, unless there’s a very compelling and sudden reason to do so, that I can’t foresee occurring at the present time.

        I would have no problem going and paying 3x or even 4x – in cash -what my present vehicle was purchased for new.

        Why would I do this, though? My present car has been completely reliable, literally drives as tight as it did when I purchased it, I spend only a moderate amount of money to keep it zealously maintained (oil, coolant, brake fluid, differential oil, manual transmission oil, and other fluid changes, hose and belt inspections constantly along with necessary replacements, spark plug and coil replacement as needed, rotation of tires every 10k miles or less), and it’s now at an age where the depreciation curve is letting me drive it for around $75 a month ($100, tops).

        It’s somewhat ironic that I consider myself at least moderately enthusiastic about cars, yet also consider them among the most devastating purchases on a % basis that most people typically make (boats, RVs, other recreational toys and a few other things are even more devastating, on average).

        My thinking has evolved with age as I actually find myself more appreciative of quality over quantity, and am increasingly attracted to vehicles that are reliable, durable, somewhat minimalistic measured against the bloat-mobiles of the last several years, and that have solid foundations in design and fabrication versus being glitzy, dressed up illusions of “prosperity” with few if any redeeming qualities from an engineering standpoint.

        Even if I had an 8 figure annual income, or a couple hundred million in the bank, I can honestly say that I doubt that I would purchase a Jaguar over a Chrysler 300, or a Land Rover over a Jeep Grand Cherokee.

        (What I really want is the TTAC ghost; a diesel station wagon with a 5 speed manual, with a rock solid chassis, of precise build quality, with absolute reliability, trimmed with durable yet luxurious whale penis foreskin leather, and AWD that sends as little power as necessary to the front wheels as possible given the road conditions, for less than $15,599)

        This isn’t to say I’m “right” and people who buy/lease new cars every 2, 3 or 5 years are “wrong,” nor that people who want, for whatever reason, style over substance, even if it’s to the detriment of their finances, are “wrong,” however, even if I think they’re making idiotic decisions; markets are shaped by voluntary choices, and the market will provide what the consumers of any given period of time seek out.

        • 0 avatar
          jmo

          So, being upper income you’re clearing 40k a month and your company is kicking in $500/month toward what ever you want to lease and your really going to quibble about $300/month to get the jag vs the 300?

          • 0 avatar
            DeadWeight

            I’m not going to get too detailed about my income except to repeat that I’m fortunate enough to definitely be in a high rung.

            I do think my comment above already provided an answer to your question, and I’m not trying to be a prick about it.

            It was a long comment, though, and because I’m not trying to be a prick, here’s the relevant portion:

            “Even if I had an 8 figure annual income, or a couple hundred million in the bank, I can honestly say that I doubt that I would purchase a Jaguar over a Chrysler 300, or a Land Rover over a Jeep Grand Cherokee.”

            I could as easily have suggested a Bentley instead of the Jaguar above, and I still maintain, while really trying to be genuine, that I’d opt for the Chrysler 300.

            I have had very wealthy clients in the past, nearly all of whom drove modest cars or trucks (F150s, Camrys & Buicks were common amongst them). When I state “wealthy,” I’m speaking 10 million or even 50 million of LIQUIDITY on a net basis.

            I also had clients that drove the $100,000+ vehicles, and I pledge to you that many of these clients (I’d estimate 80% or more) were either already in financial ruins or would get there soon.

          • 0 avatar
            jmo

            “I’m not going to get too detailed about my income except to repeat that I’m fortunate enough to definitely be in a high rung.”

            I’m somewhat doubtful. But, I don’t have your 1040 so what can I say?

            I know that you want to belive what you’re saying. Is it actually true? I have my doubts.

          • 0 avatar
            DeadWeight

            Don’t hate, congratulate.

            But seriously, don’t let jealousy put you in a state of denial that there really are people who post on TTAC who are in upper income brackets.

            Why would this be so hard to believe, anyways? What’s such a big deal that you’re obsessing about this?

            The central point I am making is that many people of actual means don’t put a value on a vehicle as a lifestyle or a project-an-image accessory, but rather, assign it a far lower value than many would suspect, since it’s a depreciating tool of transport, and not a wealth accreting asset.

            Maybe you have difficulty understanding or believing this given your economic circumstances, and I can relate to that as I was once in that same spot.

            There’s a powerful psychological force called “habituation.” In its most basic element, it makes things one once thought would be invigorating mundane once they acquire or do them regularly.

            What’s that saying? Never meet your heroes? Something like that…

          • 0 avatar
            28-Cars-Later

            “I also had clients that drove the $100,000+ vehicles, and I pledge to you that many of these clients (I’d estimate 80% or more) were either already in financial ruins or would get there soon.”

            I have heard this sort of thing before and I tend to believe its true. Real money buys/bought Lucernes, Lacrosses, Avalons, and Panthers… something nice/comfortable but not too ostentatious… they tend to avoid large depreciating assets. Only occasionally have I seen truly moneyed people with high end rides, and when I have its a leased Benz SL or S Class sedan, which are still conservative models by most standards.

          • 0 avatar
            DeadWeight

            Buick LeSabres, Park Avenues with a lot of miles, Town Cars & Cadillac DeVilles (oddly, typically low mileage relative to the age of the car) were very common vehicles of our true high net worth clients.

            One of the wealthiest clients we’ve ever had was too old to drive (eye issues and general health) and rode in the backseat of his Mercury Grand Marquis (I do not know the model year). He lives in a suburb that Ronnie Schreiber knows well (as does Michael Karesh) in an approximate 100 year old house (it is a very nice house, though).

          • 0 avatar
            kvndoom

            Sorry DW, I am not gonna believe you until we see the birth certificate.

            ….

            ;)

          • 0 avatar
            DeadWeight

            I understand and don’t blame you.

    • 0 avatar
      jmo

      2012 Vehicle Sales

      BMW 281,460
      Audi 139,310

      Total US Vehicles sales for 2012 14.5 Million

    • 0 avatar
      Power6

      You mention BC and BU…so you know you live in an area fairly packed with 1%-ers, not to mention those loaded foreign students too.

      I’m not quite 2% myself, more like 5%, live metro-west Boston, we drive 2 older cars over here and keep them running. 30k for a new car for us is laughable, financed or not.

    • 0 avatar
      krhodes1

      @Astigmatism

      I guess it all depends on your cost of living other than your car. I have a tiny $150K mortgage and no kids. And no other debt. I live in Portland but work for a Boston company. Call me a 3-4%-er, just breaking 6-figures. Buying a 3-series BMW was not a stretch. And I don’t plan to make a habit of it, I’ll keep it for a long, long time once it is paid for.

      If you have a typical Boston $300-400K mortgage and/or a couple sprogs to pay for, I can see why you are more frugal with your car choices. In particular, kids are WAY more expensive than even German cars. I bought almost nothing but well-used cars for 20 years until I started making real money.

      I’m seriously thinking about selling a couple of my toy cars and buying a shiny new FIAT 500 Abarth to have as a toy. Proceeds from the old crocks will cover 1/2 the price, and .9% for a few years covers the rest. And I get to just drive it and polish it, and not have to wrench on it.

  • avatar
    SaulTigh

    As a society, we’ve substituted easy credit for real income. It’s lead to nothing but bubbles, as we’ve seen but apparently not learned from.

    Nobody wants to put money into maintenance to keep a car on the road, but they’ll happily sign up for a 6, 7 or 8 year auto loan. Pure madness.

    I’ve decided that the three very common, very reliable vehicles I own (5, 17 and 19 years old) are good enough for me, and with parts for all cheap and plentiful, I’d rather put a little cash into them and spread out my mileage than buy something new.

    • 0 avatar
      AJ

      I hear you. Until a few months ago, I’ve had five new car loans in a row. Nice to be done with that craziness. And taking care of the three I have, they all have plenty of life ahead of them. I’d rather put money towards other things, like paying off the mortgage early.

    • 0 avatar
      vertigo

      The part about maintaining a used car or a big car payment is hilarious to me – the latter are most of my friends. They’re always harping me about my ’05 Mazda and I should replace it, but it’s paid for (this is the best part), hasn’t cost me anything other than normal wear items, is practical and still looks and drives terrific. They all have new(ish) cars.

      One of them hopped from an ’11 F-150 to an ’09 TSX to a ’12 WRX STI within the span of 2 years. I have no idea how he can afford it.

    • 0 avatar
      highdesertcat

      SaulTigh, these sub-prime loans we’re discussing here apply mostly to the younger buyers.

      People over age 60 often have difficulty getting a new car loan approved by any lender for a variety of reasons, other than low income.

      From the experiences of others I have learned that banks and finance companies often require a lot of collateral, down-payment and/or term life insurance for the older buyers because they may not outlast the duration of their new car loan. Many don’t.

      To me it seems that the pure madness is in extending sub-prime loans to young people with an unstable source of income, while being biased against the over-60 crowd with stable incomes, life insurance policies, social security and equity in their homes.

      The US government actually recognized that and backs equity loans/reverse mortgages on the homes of people over age 62 so that they can be spared the indignity of being refused a new car loan by a lender.

      The only exception to this new car loan-bias against seniors that I know of is USAA, an organization by, and for, military folks. They really do great service for this group, from the young to the very old.

      So, considering how little the old folks get for their money stash if kept in a bank or investment account these days, many, who can, take the money out and pay cash for their new purchases, like cars, trucks, boats, RVs, etc., although it would actually behoove them to finance something to prevent a drain on their assets.

      I’ve often seen bumper stickers on new cars that read, “I’m spending my kids’ inheritance.”

      • 0 avatar
        ...m...

        …USAA’s great; i’ve been with them twenty-five years and they’ve always treated me right…in fact, i just bought a new car through them last week: zero down, 1.5%, 72 month term, so there you are…

        • 0 avatar
          highdesertcat

          USAA has done many wonderful things for many people who could not otherwise qualify for normal bank or credit union loans.

          I’ve never financed anything with them but I have a checking account, a savings account, a credit card, life, house and car insurance, all from USAA, at damn good rates, too!

          I’ve been with them since I came back to the US from my tour in Europe in 1980. Best financial organization for all those who can qualify because of honorable military service.

          And when I use my USAA credit card at many Hotels and Motels, they often give me a discount over and above my military and AARP discounts. Not too shabby! I’ll take every discount I can get.

          Their car-buying service is another great member benefit, with everything included from beginning to end.

          You tell them what you want, they sent it out through their True Car dealer network, a dealer contacts you with a discounted price and availability, USAA will finance and insure it for you. Hey what’s not to like?

          USAA has you covered!

  • avatar
    redav

    “The report comes on the heels of another study claiming that most middle-class Americans have trouble affording a new car”

    That study–that median income families can’t afford median priced cars–has enough holes in it that its conclusions are virtually worthless.

    - If the “median vehicle” is the median of sales, then that means people are actually buying them.
    - The median car is over $30k, but there are fantastic new midsize sedans in the low 20s which easily satisfies their definition of “affordable.”

    Thus, it isn’t so much “can’t afford” as it is “spending too much,” and the real question is: Why? I suspect it involves several different things:
    - We overspend on everything, not just cars. (Which stems from not understanding what we can actually afford.)
    - People believe they deserve/need the more expensive option.
    - They are unaware of better options (financing, cars, saving techniques, etc.).
    - Haste. This is the tactic of time shares, buying clubs, etc., who push you to make decisions *NOW* because when you step back and think, you are less likely to overspend. Also, not doing due diligence & acting when it’s not in your advantage (e.g., sales, saving more to put down).

    But all that aside, it’s also entirely possible that the whole notion of “affordable” is incorrectly defined. Fact: cars are getting better & lasting longer. It is entirely possible that old assumptions about financing are wrong.

  • avatar
    jim brewer

    Good to see the car market reviving. I don’t see why all this concern for taking a loan to buy a new car. The loan should match the expected life of the vehicle. Worst reasonable case scenario, that should conservatively justify at least four years even for a built-to-a-price VW.

    There’s no reason why you shouldn’t take a sub-four percent loan from credit union and buy yourself a decent car if you need one. The interest paid is really not material. My biggest expense by far is depreciation. I paid about 21 K for car a year ago, which has depreciated at least 3K. Insurance is maybe 1.2K Gas was only 1.5K. Registration is negligible in my state. I paid cash for peculiar reasons that aren’t of interest here, but if I had financed, i would have only paid maybe $750. So what?

    At the same time, when the depreciation curve bends in your favor, you need to be there to exploit that. Wife’s ten year old car is now only worth maybe 2K. She basically has no depreciation expense. She spends maybe 2.4K in gas, maybe 600 bucks for insurance, and, let us say, $500 a year in maintenance and repair. The car could blow up tomorrow or go another three years. For as long as it lasts, she has incredibly cheap transportation.

    Before the Great Recession, you could get incredible deals on off-lease luxury cars. That’s how I got a 12 cylinder BMW for 12K. Those days are gone, for the time being.

    • 0 avatar
      2012JKU

      A $12,000 V12 BMW? Is that what you paid for the vehicle or the first year in maintenance costs? ;)

      • 0 avatar
        highdesertcat

        How about the $1100 90,000-mile tune up on a BMW 3-series? Or the $1500 80,000-mile tune up on a M-B C-Kompressor?

        You do get a checklist of everything they did and much of it is preventive maintenance like replacing the oxy-sensor even though it still works, and shimming the suspension.

        Another reason why so many people opt to lease instead of own.

        • 0 avatar
          onyxtape

          “How about the $1100 90,000-mile tune up on a BMW 3-series? Or the $1500 80,000-mile tune up on a M-B C-Kompressor?”

          I was all “wow…” until I remembered that my sister-in-law’s Forrester was quoted a $800 30k tune up by the dealer last month.

          • 0 avatar
            highdesertcat

            An elderly friend of mine was quoted $380 plus tax to replace the waterpump on his Chevy S10.

            I did it for him with a $30 brand new pump from Autozone in about an hour, for a sixpack of Sam Adams Pale Ale. And we had a great time shooting the bull while he watched me work.

            Same guy was quoted $765 plus tax to replace the alternator. I did it for him with a $130 brand new Bosch Alternator, guaranteed forever by Autozone, that was made in Mexico, in about five minutes.

            No kidding. Nothing to it. Pop the Serpentine belt, unplug the old alternator, loosen the bolts, R&R the Alternator, tighten the bolts, hook up the plug, remount the serpentine belt, and we were off and running.

            And for that they wanted $765 plus tax? It’s a racket and people should learn to maintain their cars on their own.

            You get a little bit dirty when you change the oil and filters, but you save a lot of money if you do it yourself. If my daughter can do it on her own, I’m sure others can too.

            Things are bad enough if you have to get real work done, like AC repair, or a transmission rebuilt.

            That’s when you’re up the creek, without a paddle, and you pretty much have to fork over whatever they want to get the job done, or walk.

          • 0 avatar
            corntrollio

            “You get a little bit dirty when you change the oil and filters, but you save a lot of money if you do it yourself.”

            No, you don’t. My regular mechanic does it for $5 in labor. Not talking about Jiffy Lube or some other crappy place that will ask you if you if your Ford Escape has AWD and then say your transfer case needs service.

          • 0 avatar
            CJinSD

            There are cheap oil change specials, but they’re predicated upon the notion that $20 oil change customers can be sold additional service that they don’t need. They’re also performed with all the precision of a government job. How many times have I paid for an oil change only to get home and discover my car’s oil is almost a quart low? At least half the time. Is the oil in the gun what I paid for? Heck if I know. Does the guy in the pit take much care while switching over the filter, cleaning the mating surfaces and oiling the gasket? Heck if I know. Will the next guy that changes my oil be telling me the truth when he says it was the last guy that created the situation necessitating him HeliCoiling my oil pan? Heck if I know. How many times have I had to return to BMW service facilities because they didn’t reset the service computer when that was the driving factor for me going to them in the first place? At least 3 times.

            A friend made fun of me for going to two different stores and spending twice in materials what he spent for someone else to change the oil in his car. That was before the warranty ended on his BMW and he got used to four figure oil changes though.

          • 0 avatar
            highdesertcat

            At the gas&sip where I hang out an oil&oil filter change costs $45 no matter where you take it.

            That includes 5 quarts of house oil, whatever they buy by the 55-gallon drum full, and a generic oil filter, usually made by WIX. All other filters are extra as is other oil.

            My wife’s Grand Cherokee takes 6-quarts and I use the Purolator oil filter, not WIX.

            I also invested in a K&N air filter which I just rinse out with gasoline every time I change oil, and then brush on some of the new engine oil to make the dust stick to it.

            I get my oil at Wal-Mart but have ordered all my filters from Amazon, in quantity, with free shipping and no tax. The savings really add up if you can do it yourself.

        • 0 avatar
          corntrollio

          How about $800-900 for a timing belt (and assorted things you do at the same time) of a Civic at somewhere between 60K and 110K depending on severity of service?

      • 0 avatar
        jim brewer

        Actually it was more like $11,500. For some reason the old 750s were one of the more reliable models. Never had ANY problems with the engine. It didn’t burn a drop of oil.

        I definitely had repairs but it wasn’t horrible, and the car was reliable–I remember the radiator blew up one day. Brakes were really expensive for some reason. Other repairs, weirdly. were not so bad. I admit I wasn’t driving a whole lot of miles. I remember at that time I bought it you could get a 5 year old Jaguar XJ for around $17-$18 K. Cars like that at that time were a real drag on the market. Would=be plutocrats wouldn’t be caught dead in a 6 yr old luxury car. Most of them were leased, which practically guaranteed the market dropped out after five years.

        Those days are gone. When it got totaled in a minor fender-bender last year (after five years) I took the $7,700 check and got a new pickup truck.

        My point being, you have to play it by ear and try and make depreciation work for you instead of the other way around.

  • avatar
    Kyree S. Williams

    I don’t see anything wrong with new car loans that are financed at 4 or 5 years, so long as you stay within your means and put enough money down at the beginning. Yes, times are tumultuous and your situation may not stay the same from one year to the next, but if you make a large-enough down-payment, you’ll be on top of the depreciation curve and if your situation changes and you need to sell the car for financial reasons, you can still come out on top with some cash to invest in a less expensive ride. Plus, of course you’ll get better interest rates if the bank sees that you’re willing to put equity into the car.

  • avatar
    zeus01

    It’s not uncommon here in Canada to see new cars on dealer lots with window stickers advertising that you can “own” it for under $85 per…WEEK. (Come on, guys, why don’t ya just say $350 per month? Oh, never mind, I know: The sheeple will think $85 doesn’t sound like such a high mountain to climb. Sorry I asked). But when you do the math against the MSRP (never mind taxes, freight/PDI, fees, etc) it just doesn’t add up.

    There’s a good reason for this: The term is now for SEVEN years, not five. Furthermore, in order to get those low payments even the longer term isn’t enough. That’s right: Even after seven years of taking it up the hoop in interest you Still. Don’t. Own. The. Car(!) There’s a final payment in the three-figures at the end to cover the short-fall created by the artificial affordability scheme that you were sucked into when they first saw you coming and drooled all over their patent leather shoes.

    Think about this the next time you mortgage a vehicle. Yes, I said “mortgage”. The only difference between this and buying a house is that the house will still be worth (at the very least) an amount that kept pace with inflation. Once paid off over seven years, most cars will be worth about 25% of their original purchase price—minus the rate of inflation over that same period, for a final value of approx. 15 to 20% of the original out-the door cost to you.

    So… if you can’t pay off that new car in five years or less, you can’t afford the car. Maybe consider a 2-yr-old used one with low mileage for a 20% lower price?

    • 0 avatar
      krhodes1

      But what always seems to get overlooked is that while the now 7yo car is worth 20% of what you paid for it, you also got 7 years of use out of it. And it has a LOT of life left in it yet, assuming you bought something decent and maintained it properly. Cars are cheaper to fix than they are to buy new. To me, you don’t save enough on a nearly new car to be worth the bother. You might as well either buy WELL used, or brand new. The average age of the cars I have owned as daily drivers over the years was probably more than 12, and I got good service out of them.

      I also think depreciation is wildly overstated in many cases, since because car sales are so un-transparent, the only thing to compare to is MSRP. But for the cars with deep depreciation, hardly anyone pays MSRP. So that 2yo car that seems like such a great deal probably isn’t, as you have lost the two best years of the cars life.

      But back to my previous posting – I think it is stupid to owe money on a car that you will also have to pay to fix, i.e. it is not under warranty. And I DO NOT believe in gambling, otherwise known as extended warranties – the house ALWAYS wins. Either buy new (and KEEP it a good long while), or buy fully depreciated for cash.

  • avatar
    7402

    It’s useful to have a car plan. I update mine on January 1 every year. It includes the mileage of every vehicle in our fleet, a summary of likely expenses (major expenses anticipated), current value, and a description of how it will be used during the coming year and likely total mileage. When I’m sitting down writing this up, I almost always realize we can do with our current fleet for another year.

    This year we have the possibility of needing to replace a vehicle. We test drove candidates and will pick between two identified choices when the time comes. We’ll pay cash unless the financing makes more sense. We live in an area where we can find a vehicle to our spec within a few days.

    Keeping our daily fleet (7, 8, and 11 years old) down to cars we need means I can afford the car I want as a toy. I chose a 39-year-old BMW that I can work on myself, is a joy to drive, and doesn’t break the bank on parts.

  • avatar
    rpol35

    Interesting choice of a picture, it looks like an early ’90′s Toyota ad, “Oh what a feeling!”(whatever that really means) except she’s all hopped up in front of a Nissan.

    Oh, on second review, retract my prior statement, it is a Toyota, nevermind! (they all look alike to me).

  • avatar
    200k-min

    I’m not surprised that the middle class is squeezed trying to buy a new ride. Wages for the middle class have been stagnant for decades. Lots of people have had wage freezes or actual reductions since the collapse of ’08. Meanwhile new cars are not inexpensive. I was floored that a new Kia Optima can option up over $30k. If you option up a new Fusion with everything it’s within reaching distance of $40k. Any vehicle that costs more than 50% of a middle income gross wage isn’t easily attainable IMO. Even smaller vehicles like the Cruze and Focus go well into the mid $20k range when optioned up.

    Sure, you can get a stripped down model for around $20k but those are rarely on the lots and used more for fleets and advertising. Besides, if I have a 5+ year term I’d want a little nicer car knowing I’ll be in it for a long time. Can’t fault anyone on that.

    Really the problem IMO is that the used car market is sooo expensive now. I used to buy 2-3 year old off-lease cars with roughly 30k miles at a nice 40% or better depreciation off original sticker. Those were prices that were easy to save cash for and purchase outright. The car also had a ton of life still in it. That just doesn’t exist anymore. Saving $25k + tax, title, license takes longer to save for. A family on a middle income wage that’s near impossible.

    • 0 avatar
      28-Cars-Later

      “Really the problem IMO is that the used car market is sooo expensive now.”

      Agreed and there are three major factors why:

      1. Automobile production fell from a high of 17 million units in 2007 to 9 million in 2009, and has leveled off around 12 million in 2011/12. Ouch.
      2. Credit markets froze in 2008 and were tight until 2011, so people who otherwise would buy/lease brand new couldn’t get as much or any credit, so they started looking at the used market, thus demand on the used market significantly increased.
      3. Cash for Clunkers stupidly destroyed thousands of used cars, pushing the people who would otherwise drive sub $5000 cars and like it, into the newer-used (or new car) market.

      I only see this getting much worse in the future rather than better. Economics isn’t an exact science, but if dot gov really cared it would be best to relax some of the rules and possible taxes (CAFE style, not corporate income) on the automakers but I won’t hold my breath.

    • 0 avatar
      redav

      Today’s “stripped down” models are every bit as nice as “optioned up” ones from a decade ago. We need to ask how our ‘needs’ have changed requiring us to have more.

      There are great cars that fit the median family’s needs for under $25k that will still be nice in 10 yrs. No, I don’t fault them for wanting something better (I want better stuff, too), but you have to buy what you can responsibly afford. If people are exceeding that (and I’m not convinced that’s the case), then they should put wants aside and scale back.

  • avatar
    sportyaccordy

    One graph I would love to see is the median new car purchase price vs the median household income over time. That graph alone could tell a HELL of a story.

  • avatar
    sportyaccordy

    Something else to note, which goes contrary to internet consensus, is cars are simply better built today than they were even 10-20 years ago, warranting higher used car prices.

    In 2003 I bought a 1993 Honda Accord EX with 91,000 miles for $2200. That’s $2700 today. When I bought it, it was solid, but it looked and felt like something out of the 80s. Fast forward to now, a 2003 Accord costs about $5000-9000, but it looks and feels modern. I would feel confident buying one today and driving it through 2023. I think we will be seeing the cars of the last decade on the road for at least another 10 years. The used car market recognizes this and values used cars appropriately.

    • 0 avatar
      28-Cars-Later

      I’d be willing to bet your ’93 will be on the road longer than the ’03 with proper care, well beyond 2023. Let’s have lunch long after, you bring your ’93 and I’ll bring my ’93 Volvo 240. :)

  • avatar
    el scotto

    A fine column filled with common sense and a few dashes of pessimism. Am I the only one who saw a car on a lot and said ” Must have that”?


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