By on May 14, 2012

Suckers come in all shapes and sizes.

They can be a young guy with college loans in his mid-20’s who is charged $800+ for a $100 repair. Or an elderly couple on a fixed income who is encouraged to sign on the dotted line with a malevolent seller.

Every single American has probably been a sucker at some point in their lives when it comes to cars. Young, old, smart, not so smart, confident, fearful… and in all cases, struggling with the unfamiliar. Our society is not one that de-fangs the predators or educates the victims. It is a debtful and litigious one that encourages money to be thrown into every which direction but personal accountability.

Or does it? Frugality is supposedly the in thing these days… and cars are now kept longer than ever. As a life long debt hater, I would like to think that there are far fewer suckers than before. Especially when it comes to cars.

But the numbers tell me otherwise.

This recession has yielded some unusual results in two industries that reflect the lack of change within the American automotive lifestyle. Take a look at this graph for instance.

 

Autozone is the largest auto parts retailer in the United States. Not to be outdone by a long list of other competitors. It has been a bellweather of success along with many of the other publicly traded auto parts retailers during this recession. Since 2008 this market segment has yielded a 125% return vs. the S&P 500 index.

So should we all just toss in our proverbial ponchos of stock portfolios and start chasing after companies that embrace Americas newfound penchant for frugality? Not quite yet. Any investment we do in life has to require far more than a few blips worth of data.

The idea of buying a parts retailer may be lucrative to the ‘keepers’ amongst us who believe in investing in our cars for the long haul. But the three most dominant and successful auto parts retailers have only seen annual revenue growth of 4% to 7% over the last five years (Click symbols: AAP, AZO, GPC.)

Without going too deep into the rabbit hole of data, success in the auto parts business has more to do with managing inventory and costs than the sudden enlightment of the general public.

As far as it pains me to say it, most Americans are not pursuing the path to wisdom at all. At least as it relates to cars. In fact everything on the wholesale side of the world points to a public that is increasingly dependent on barnacle levels of debt for their roadside freedom.

Go to page 18 of the 2012 Data Source Book for Used Car News and you will see the nasty reality of a ‘sucker’ infested marketplace. According to Experian Automotive, loans for used cars that are for 60 months or less are becoming far fewer in number.  In their place are 5+ year loans. The 61 to 72 month term is now the most common one in the United States with loans beyond 72 months up a startling 41.1% just in the last year (see page 18).

There are now more auto loans for used cars that are six years and longer, than those that are three years or less.

The average term has gone up (page 17). The average payment has only declined for the most creditworthy (see page 16). While those who are the most credit challenged are putting nearly 15% less of a down payment since 2008 ($959 down in 2011 vs $1130 down in 2008, see page 23).

From these numbers, it appears like a lot of folks are going to be bordering on the broke for a very long time. But it gets worse. Far, far worse for the unfortunate among us who happen to live from paycheck to pawn debt.

For more Americans than ever before, the cycle of ‘debt to equity’ has become a ‘debt to debt’ trap. That will be shown in detail come Wednesday. But for now let me ask you a question. How can we reduce the number of suckers in our society? Jokes are welcome as always. But serious answers would be even better.

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126 Comments on “Hammer Time: Is America Becoming The Land Of The Suckers?...”


  • avatar
    65corvair

    2011 Ford Fiesta. Doesn’t have a blue and white emblem on the hood, and doesn’t have a loan on it either. (Or lease)

  • avatar
    Robstar

    I’ve seen advertisements locally for 72 months on new/used cars @ 0%.

    With that interest rate I’d sure take a 72 month loan and put 0 down if the price is right and it was what I wanted…

    • 0 avatar
      KixStart

      On a purchase one is otherwise qualified and ready to make, one would be crazy to pass up 0%. Better make the payments on time, though. Penalties may apply.

    • 0 avatar
      Toad

      The purchaser is always paying the interest cost in the form of a higher purchase price. If you look at the fine print of every advertisement offing 0% financing (or at least every one that I have seen)a cash discount in lieu of the 0% is offered, and it is essentially the same amount as the interest cost of the 0% financing.

      Nothing is free. Most people who think they can get something for nothing usually end up with nothing for something and can’t figure out how it happened.

      • 0 avatar
        KixStart

        I understand what you’re saying but I am presuming one would bring one’s own financing, negotiate the best possible cash purchase price and then take advantage of the 0% if it’s available.

        These offers usually run on some sort of giveback from the manufacturer, so an alternative to 0% financing might be a cash rebate. It could be that if you don’t take the rebate or the 0% loan, you are leaving money on the table.

      • 0 avatar
        Ben Brown

        Definitive statements are dangerous. In thirty seconds of research, I can debunk your claim that every 0% offer is offset by a cash discount. For example, VW is offering 0% for 60 months on the 2012 CC but there is no alternative cash rebate.

      • 0 avatar
        Toad

        Ben, congratulations on your find. Still, nothing is free. Just because the cost of the financing is not being disclosed does not make it free. Chances are if the financing cost is not disclosed in the advertising the VW dealership F&I manager knows what it is, and it affects the selling price.

        The money is coming from somewhere. If you don’t know where the money is coming from, it is usually coming from you.

        For decades advertisers and marketers have spent billions of dollars convincing the mass market that “our loss is your gain.” Apparently, it still works.

      • 0 avatar
        Ben Brown

        Your argument is true at the macro level but not at the micro level, in my opinion. An individual buyer has no reason not to accept a 0% financing offer once they have negotiated the best cash price, if it doesn’t affect the cost of the car. At the aggregate, macro level the manufacturer probably does have to pad the MSRP or reduce advertising or something to fund 0% financing. But the car buyer is going to have to pay for the manufacturer’s marketing whether it is a beneficiary or not. This is an externality in economic terms. Everyone must pay a little more to fund 0% financing schemes, regardless of whether that individual buyer accepts the cheap credit.

      • 0 avatar
        Pch101

        “I am presuming one would bring one’s own financing, negotiate the best possible cash purchase price and then take advantage of the 0% if it’s available.”

        When rebates and low/no interest packages are being offered together, they are almost always offered as an either/or choice. You don’t get to take both the rebate and the cheap money.

        Which means that you have to sacrifice the rebate for the loan. In that situation, the loan isn’t free.

      • 0 avatar
        CJinSD

        When discount financing isn’t accompanied by a rebate alternative for cash purchasers, there is a very good chance that there is an unadvertised factory to dealer incentive.

      • 0 avatar
        duffman13

        We bought my wife’s Mazda3 during the 2010 depths of the carpocalypse, specifically because they were doing the 0% at the time. The only cash discount they were doing was $500 for repeat Mazda customers, and I scoured the internet for any and all discounts that applied.

        They were more than willing to give it to me for my asking price, which was invoice, plus invoice for the one option package we wanted, plus $500 – about $2k below sticker and at 0%/60 months. I thought it was a pretty good deal all thing considered. I know there was probably some dealer hold-back involved, but hey, the salesman and dealer need to get paid too.

        Of course at the time Mazda, and the industry as a whole wasn’t doing too hot and I think they were looking for any qualified customer they could find to actually purchase a new car.

      • 0 avatar
        joeaverage

        Sometimes it is cheaper to keep the factories going via discounts…

  • avatar
    Nikko River

    The best method in the long run, though there would undoubtedly be issues and complaints in the short run, would be to more tightly regulate standards for automotive loans.

    Between buy-here-pay-here dealerships and the shift to 5+ year loan terms people are over-leveraging their debt to get into cars, along the same lines as sub-prime mortgages in the past decade, and the only real way to get it under control is via external influences like federal/state regulations on lending terms/standards.

    Unfortunately that ends up making it so some people can’t afford cars (either not being able to afford a down-payment or the monthly finance rate for a 36 month loan), but ultimately that’s what has to happen (many communities had reasonable public transit, and carpooling should be an option for those who need longer to save up for a down payment or cash outright).

    • 0 avatar
      Robstar

      The problem is that many communities have NO reasonable public transit. If you are living paycheck-to-paycheck (for whatever reason0) and you need that $5k used car NOW as you can’t afford a $2k new transmission on your current car that just died, you’ll do anything to get that car if it keeps you employed, no?

      • 0 avatar
        Nikko River

        Yes, when you have no option for public transit it’s much more of an issue (and there isn’t an easy solution).

        In most (but not all) cases it’s possible to work out car pooling with a friend/family member (though it may require a longer commute, more waiting around, and likely some aggravation).

      • 0 avatar
        Robstar

        Not sure on the car pooling thing. I don’t know any 2 people that have the same schedule. I’ve never been able to car pool myself as I have an on-call shift every 2nd week (have for my 20 years in IT) and MUST be able to go somewher @ 2am if needed.

        Other people have different daycare pickup times, different soccer/baseball practice schedules etc. If you are called to pick up the kid from school because he’s sick and you don’t have public transport & depend on car pooling, now what ?

      • 0 avatar
        28-cars-later

        Agreed, assuming your a stand up guy trying to keep the lights on at home, you lose leverage when time is not on your side. This is compounded by the fact America has always been in love with automobiles, thus major capital investments in public transit were often ignored or very poorly made/managed. I may be getting off subject but the irony around my part of the world is our local public transit is more mismanaged than ten GMs, requiring yearly cash injections and fare increases to ‘survive’. The best part is PAT Transit consists of two light rail lines and tops 50 bus routes, 20 or so of which carry little to no loads due to remote locations. If something doesn’t work for years and years it needs to be broken up and sold to responsible parties. If there’s a buck to be made, someone will find a way.

    • 0 avatar
      Syke

      Amazing how few people keep a well-maintained bicycle around as a last-ditch transportation alternative. Yeah, I 10-mile commute (one way) isn’t the easiest thing in the world (until you’ve got your muscles in shape), nor the fastest (count on 50-60 minutes for the distance), but it sure beats paying through the nose just to have immediate transportation.

      And very few people would even consider a bicycle as a real means of transportation. What a pity. An expensive pity.

      • 0 avatar
        redav

        Compound that problem with the attitude that it’s perfectly fine to live as far away from your job (or other destinations) as humanly possible. Not only does it increase operating costs (more fuel, more frequent replacement of vehicles), but it also decreases the odds of finding someone else heading your way, and turns alternatives like bikes into an exercise in futility.

      • 0 avatar
        Sinistermisterman

        I think in the more temperate areas of North America, bicycles should definitely be a consideration. I’ve noticed in places like Portland OR that more and more people (hipsters?) are cycling around town, but up in Seattle, less people seem to be on two wheels. I’ll wager that the reason is the extra rain that tends to get dumped on the Pacific Northwest. No one likes turning up for work freezing cold and soaked to the skin.

      • 0 avatar
        Robstar

        I could see a bicycle being a viable backup method in some places, but not in most. The best would be in year-round warm climates with good roads & friendly drivers. Unfortunately that describes a very small part of the US.

        I told my wife I’d like to get a bicycle to ride on some of the “back roads” nearby where there isn’t a lot of traffic. She told me it was too dangerous (this coming from someone who lets me ride a motorcycle) because when cars do show up on these not-heavily-traveled roads they go 60-70mph (in a 45-55 zone) and there is no speed enforcement.

        In any case, using a bicycle for more than emergency transportation is simply not viable. People can crow “live next to work instead of far away you dumb suburbanites!” which is a good idea until you or your spouse change jobs.

        One of the reasons we chose where we lived (50 miles from the downtown area of 2 major cities) is that so we have a bigger (viable) area to look for work if/when we must change jobs.

      • 0 avatar
        Slow_Joe_Crow

        I think viability of bicycles as transportation depends on attitudes and environment. Portland Oregon has lots of bike commuters due to a combination of mild, albeit damp winters, lots of bike lanes, and public transport that supports bicycles for long distance multi mode commutes. Since we decided it was better to junk our second car rather than fix or replace it I have been using a combination of bicycle and rail to do my 15-17 mile one way commute from Beaverton to Hillsboro along with dozens of others. For me, once gas hit $4 gallon it was cheaper to buy a transit pass and ride a bike to the train station.
        Interestingly lack of good public transport can actually drive bicycle commuting. In Bend Oregon the bus system is very poor so lots of service industry workers and hipsters use bicycles as primary transport because they can’t afford cars and the bus is inadequate. As an aside, Bend’s climate is significantly drier than Portland, but much colder in the winter so it’s still relatively bicycle friendly.
        Regarding Sinistermisterman’s observations on the prevalence of bike commuters in Portland versus Seattle, I think it;s a matter of attitude rather than climate, while Seattle does get more annual rainfall the number of rainy days is about the same. The difference is transport policy, culture, and Showers Pass rain jackets (the badge of the Portland bike commuter).

      • 0 avatar
        joeaverage

        Give me a bike path running through town and I’ll ride. Without the dedicated path, the ride is plain old scary. Have done it several times. 8 miles each way. The steep hills suck though. Have considered an electric bike conversion would fix that.

  • avatar
    vagvoba

    Long term loans are a scam. People are tricked into getting them by banks and bank associates. If people actually understood what they are getting, much fewer would go with it. Of course banks try hard not to explain all the juicy details so that people sign up without having an idea about how much they are being ripped off.
    This applies to virtually all 30+ year mortgages and 5+ years auto loans. Suckers taking these are the ultimate cash cows for the banks.
    There is a very simple way to tell if you can afford getting a house: if you need a longer than 15 year mortgage for it, then you can’t afford it. The same goes for cars: if you need a longer than 3 year loan, then you can afford that either. (You might still want to go for longer term if you get a very low interest rate, however these guidelines are still good indicators of what is reasonably affordable for you.)

    • 0 avatar
      JuniperBug

      The problem with this thinking is that these days, if people followed it, almost no one could afford a house. Then you’re stuck with the question, “Do I get hosed on interest, or do I spend my whole life renting?”

      Of course, houses and cars are different things. The house will usually appreciate in value and contribute considerably to you and your family’s quality of life. On the other hand, as long as the car gets you around reliably, safely and economically, which just about any near-new car these days would, anything more is just luxury, especially given that it’ll be near-worthless within 10 years anyway.

      • 0 avatar
        redav

        Another notable difference is that cars come in a much wider (and lower) range of prices. There is a plentiful supply of very affordable cars. You can find a perfectly good car for $5k. However, in some places, even the most affordable house is realistically beyond the reach of many; hence, they make bad decisions to stretch to get one.

    • 0 avatar
      pdieten

      At my credit union, all of the used car loans are at the same rate for prime borrowers. You can get a 4-year loan on an ’05 or a 6-year loan on an ’11, 3.70% in any case as I write this today (higher for tier 2 and tier 3 credit, of course.) They don’t advertise shorter term loans than those. I suppose you could get them if you asked, though I don’t know how cheap a loan they can write and still turn a profit.

      • 0 avatar
        Dr. Kenneth Noisewater

        My CU also has no prepayment penalty for auto loans (or mortgages after 7 months except for FHA) so you could get the lower monthly payment for 60-month auto loans, then when you’re flush pay extra towards principal, and that reduces the # of months you have outstanding.

      • 0 avatar
        redav

        Dr. Kenneth Noisewater, IMO, any loan that includes a prepayment penalty is a scam.

    • 0 avatar
      seth1065

      No way I could ever do a 15 year mortgage and I have owned 3 houses in 20 years would never have pay that nut with real estate taxes being what they Are in metro nj I pay more each month for taxes than my mortgage bottom line you do what works for you and live within your means for me that means a fixed 30 mortgage only one car loan at a time in my family and no loan I am paying interest on longer than 48 months

    • 0 avatar
      Felix Hoenikker

      Do you watch Suzie Orman?

  • avatar
    pdieten

    “The 61 to 72 month term is now the most common one in the United States”

    At least around here, many banks and credit unions offer 63 and 66 month used-auto loans at the same interest rate as 60 month loans, with a corresponding cut in the monthly nut.

  • avatar
    JuniperBug

    What’s needed is better education. When I was in high school a decade or so ago, home economics and shop classes were being cut, an indicator to me that the priority isn’t in teaching the kids how to be self-sufficient, and this in a highly respected private school. Economics was a one year course that did precious little to counter the consumer-whore mentality that kids are brainwashed with from the moment they start watching TV.

    People’s attitudes need to change, especially regarding cars. On one hand everyone is up to their eyeballs in debt – a seven year loan is excessive on a new car, let alone an old one – and that fuel has gotten too expensive, but on the other we’re crying about how we *need* our big trucks. We need our V6s to keep up with “high speed traffic,” while the Germans do fine on unrestricted Autobahns with <2.0L 4 cylinders. People are too focused on what they feel they deserve to rationally take a look at what they can afford.

    Does it suck that we can't afford to spend like our parents' generation did? Absolutely, but life will suck a whole lot more if we refuse to accept our reality and instead spend money we don't have on stuff that, quite frankly, doesn't really matter in the grand scheme of things. How is a 3 series going to improve your life enough compared to driving a Yaris to justify sacrificing your financial well-being?

    • 0 avatar
      indyb6

      ^^This

      Better education, a dash of reality and a pinch of grand-scheme-of-things outlook will eventually make things better for people.

      Also, people of my generation (genY or X or what is it being called? Essentially, mid-20s and early 30s) need to suck up to the fact that it might not always be possible to spend like our parents’ generation.

    • 0 avatar
      duffman13

      I’ve owned/driven 7 cars in the last 12 years since turning 16.

      Only 2 have been V6s, and one of those was a Xterra. Of all of those cars I preferred those 2 the least. Granted I stick to more of the sporty side of things, but all things considered I prefer a well-tuned 4-banger in a lighter car to anything else.

      My last car was an 04 RSX-S, and I’m currently in a 12 year old S2000 (high school dream car). My wife has a 2010 Mazda3 hatch that replaced her 2000 Civic.

      I know we’re the minority, but I never felt any of those cars had problems keeping up with anything on the road except in a full throttle drag race. and the 2.5 in the 3, while less powerful than either my RSX or S2k, it a torquey little thing and accelerates very nicely.

      Maybe Gen-Y is getting smarter, but I don’t know anybody who doesn’t use their truck for work that actually owns one. I also don’t know many people who have cars with >4 cylinder motors. My friends for the most part live within their means.

      • 0 avatar
        joeaverage

        Yeah we’ve got a pair of daily driver four bangers that just keep on going despite being against the “common wisdom” of our social circle who claimed they’d never last. I too prefer four cylinder cars and CUVs. A V-6 is useless to me. If I buy a boat at some point I’ll buy a cheap SUV to tow it with and leave it parked except when I need it.

        That said I got 27.5 mpg in a Chrysler minivan on a 10 hour run up north with six peopl ein the vehicle and the a/c on. Around town the mileage was mediocre but on the highway it was good. A little better than my 1999 four cylinder CUV.

  • avatar
    Toad

    Economic illiteracy is very tough to combat. Bad decisions compounded by more bad decisions can equal debts that are impossible to escape and a life lived paycheck to paycheck, even for some people with big paychecks.

    I really believe many among us are no longer willing to defer gratification and that is leading to economic ruin for those that choose this path.

    Want a family someday? Don’t wait for marriage, get pregnant now.
    Want a college education but don’t have the money? Don’t work, join the military or save, just borrow the money.
    Want a nice car? Don’t save, just lease or finance for 80 months.
    Want cool toys? Put them on the Visa right now.
    Want a nicer house? Do an interest only mortgage paying no principal.

    You get my drift. You can’t break the debt cycle if you want everything right now.

    • 0 avatar
      noxioux

      +1

      People won’t change this on their own, either. Even when they’re foreclosed on, and someone takes away all the stuff they couldn’t afford in the first place–it’s somehow someone else’s fault.

    • 0 avatar
      28-cars-later

      Agreed, this attitude (and those providing the means, i.e. crooked banksters) will be the downfall of our society.

    • 0 avatar
      CA Guy

      So right. There is nothing better than being raised by Depression Era parents to learn how to handle money and understand deferred gratification. My parents never bought anything they could not afford to pay for – in cold, hard cash. They never tried to keep up with the neighbors and owning the latest in anything was not nearly as important to them as having money in the bank. My Dad had a comfortable life in his later years and in retirement as a result.

      The one area that has changed significantly is in the dwindling public subsidy for higher education that is pushing student fees to higher and higher levels. The resulting huge student loan debt is a looming threat to our whole economy. When I did undergraduate and graduate study in public universities in the 60s and 70s, student fees were heavily subsidized and part-time work or modest loans could cover costs. Today this is not the case.

      • 0 avatar
        28-cars-later

        My 91 year old grandmother was a big part of my life growing up, probably why I think the way I do. I also agree with you on the student loan time bomb, but I’m not sure public subsidy is the answer, the school districts are also in a mess and are 100% public subsidized. The trouble is these schools keep building grandiose facilities they do not need, spending huge amounts of money on sports programs which cannot sustain themselves, and most importantly *huge* amounts of money on worthless facility most of which have never worked an honest day in their lives. I think there is and always will be a percentage of educators who like to teach and are always in the pursuit of knowledge, whose ultimate goal is a tenure and life dedicated to students. That’s fine, but the majority of your educators shouldn’t be in it for the money. They should be doing it after 20 or 30 years in the real world for some extra income and a want to share their experience. If you have spent your whole life on campus then by no means are you a worth 100K+ salary I’m sorry, nor are you worth a sweetheart pension and Cadillac benefits, its a total divorce from reality of the marketplace. Smart schools will realize this early on and begin to run themselves a little more efficiently, maybe even set away a nest egg of sorts for when the loan bubble bursts and you see a whole load of schools go bankrupt. Honestly if I was in government right now I would be actively working on a program to evaluate the schools as they supposedly did banks (stress tests I believe) and identifying the weakest ones for possible closure. Imagine the bubble bursting and the credit line for loans halving between semesters, you’d see students unable to finish, schools unable to make payroll. Too easy credit, too many schools, too many mismanaged, its a bomb waiting to go off.

    • 0 avatar
      duffman13

      I watched my boomer parents do this and now they’re going through bankruptcy. It’s telling behavior that I’m glad I get to see the results of while I’m in my 20s, as much as it is painful to watch.

  • avatar
    APaGttH

    Confess to taking 72 months on a loan. But the term was 0% and I planned from the word go to keep the vehicle for than 72 months. At 0% I’m making someone elses money work for me. My DTI less my mortgage is 7% – total DTI below 36% and that includes child support.

    Other vehicle bought 100% cash – I feel no guilt in my soul.

    • 0 avatar
      28-cars-later

      No I think you made a smart move, if its zero pct your basically playing with someone else’s money at their expense as you pointed out. I did something similar with my car.

      Had a 98 Saturn around 150K breaking down every few months on a 60 mile daily commute. Had 3K in 2010 for a basic down payment, but I wanted a 3800 because at the time I didn’t know how much longer I would be at my last job and snow gets rough here so FWD is a must. I like to own my cars, until this point I had never had a car payment in my life. Got a 10K personal load through Citizens for the sucker rate of 14% (yikes i know). But… went to the auction, picked up a final year loaded Grand Prix for $11,200 (which should have bid less but i digress), was $11,950 after the buyers fee and a $500 kick to the dealer, $12,900 out the door with PA fees bullshit. Paid $288 a month for 11 months until I got the current job with a nice salary bump and a 5 mile commute. Now here is where I’m proud of myself, I paid the 10K down to 5K pretty quickly after the switch, and then I got a 14 month promo line of credit through Citizens Mastercard, took out 5K, and paid off the 14% loan to the parent bank with their own money. I currently owe $1700 of the original $10K after 20 or so months and am currently at 0% for another I think 10 or 11 months. Hehe other peoples money…

  • avatar
    raph

    How are those stagnant(and more recently receding)wages working for you america? Thats the way I see it at least. Since 1980 (where it seems alot of articles place wage stagnation in the US) the change in inflation has been around 178% and with most jobs offering a 3-4% cost of living adjustment pay hasn’t been able to keep pace.

    Add to this an ever increasing number of ammenities that are considered essential like cable/satellite TV, the internet, and mobile phones and its not hard to see why so many americans are going into a debt to debt lifestyle.

    They also game the credit system as well, its no secret that lending institutions make most of thier bread off of delinquent payments and over extended credit with ever changing rules (in partiular I remember in the 90’s when creditors tightened thier terms in repsonse people managing thier debt better).

    And I suppose with our “gotta have it now” attitude (coupled with things like an abhorrent tax code) there is no incentive to save for a large downpayment or even to pay for a car outright.

    • 0 avatar
      JuniperBug

      It’s all the rage to blame the institution right now, and I agree that the middle class is being deliberately wiped out, and that it’s criminal. But too many people use that fact to just keep going into debt and blaming it on the man.

      Despite how crappy things are getting, we still have it better than most of the world. The difference is that most people in poorer parts of the world understand the simple concept that you can’t spend money you don’t have and the importance of prioritizing your spending. In fact, many 6 year-olds understand it. Much of our society today chooses not to, and for that I blame the media and an education system that doesn’t place value on personal responsibility and self-sufficiency.

      • 0 avatar
        indyb6

        +1 Most people in India do not dare to spend money they don’t have. Actually, it was REALLY hard to get a loan. This was true about 5-6 years ago.

        But on a recent trip, I saw more and more people being suckered into financing in lieu of instant gratification. Most financial institutions seemed eager to hand out credit and the idea of credit card among middle-class is becoming more commonplace. All this, when there is no central system in place to determine a person’s creditworthiness.

        Education is the best defense.

      • 0 avatar
        28-cars-later

        I’m not familiar with Indian culture but I have noticed in many other cultures debt is frowned upon or even forbidden (I’ve read its forbidden in UAE or Qatar, can’t remember which). There’s some wisdom there for us all.

    • 0 avatar
      el scotto

      Uh, your internet comment was on a blog, just saying

  • avatar
    DC Bruce

    Well, I guess that’s how you view the role of the royal “we” that you posit. If the royal “we” is like the parent of a 5-year old — whose proper role is to protect the 5-year old from all kinds of dangers, most of which are unknown to the 5-year old, then sure … tell ’em what’s best for ’em and don’t let ’em do anything different. No used car loans longer than 24 months (I remember when this was the norm, when I bought a 6 month old 1987 Mustang GT.) Fortunately, like lots of the top 5 percenters, I had access to other lines of credit, so it wasn’t a problem for me. And I saved a lot of money on a nearly new car, which even had an extended warranty that the prior owner had purchased. (Regrettably, for the 5 years I owned it, it was stone reliable.)

    And, since you’re in the business, you know how these restrictions can be evaded — for a price, of course. For example, if the government prohibits used car loans of longer than 36 months duration, you can set up some sort of “rent to own” deal, like the appliance guys do and make a ton of money.

    Rather than continue to add layers to the nanny state (and I have grown up with the growth of the nanny state, beginning with Ralph Nader-inspired expansion of product liability) which I personally believe makes people stupid and even less risk averse (and therefore requiring even more nanny state protection), let me suggest two things:

    1. Instead of teach self-esteem or whatever in public schools, teach people a little bit about living. Teach people math using the cost of owning a car as an example.

    2. Instead of having the government issue standards for everything, have the government test the beejezus out of everything (kind of like Consumer Reports) and publish those tests in a readable, easy to understand format. Today’s economy works very much on information and processing information is now cheaper than ever. Make information widely available to people and, for kindergarten on, teach them how to access it. Teach them that the “smart guy” isn’t really “smarter” but has an information advantage; and teach them how to counter that by getting their own information. Don’t give people money; give them access to information and teach them how to get it and use it.

  • avatar
    bikegoesbaa

    I don’t really do debt, as I find it easier and more fun to save for something then then write a check for it and own it free and clear.

    With that said, is it possible that longer loan terms are a rational reaction to the greater durability and reliability of modern cars; as well as longer warranties and overall higher content?

    If it’s 1980 and you can only expect 100K or ten years out of your car before it rots away or becomes terminally unreliable, you better have it paid off in three years. Now that the bar is closer to 200k or 20 years; is it unreasonable to expect the payoff interval to increase in proportion?

    I’d at least consider the possibility that the majority of consumers are not “suckers” and are making somewhat rational decisions; even if they are not making the same decision I’d make in their circumstances.

    Did the guy who had his Vega paid off in three years get a better deal than the guy who has his Cruze paid off in six? I don’t know, but I don’t expect the Cruze will require a near-term engine replacement or have fist-sized rust holes in the quarter panels within 5 years of the purchase.

    • 0 avatar
      Dukeboy01

      Good point. Given the fact that a new Cruze also costs three or more times as much as a Vega did, it seems reasonable that you’d need longer to pay it off.

      • 0 avatar
        geeber

        Dukeboy01, the real point of comparison to the Cruze isn’t the Vega.

        What everyone seems to forget is that today’s Cruze is a better all-around vehicle than a Cadillac or a Mercedes from the 1970s, let alone a Vega. It is safer, cleaner, more economical, better built and more reliable than any of them. It also has features that were not dreamed of by Cadillac and Mercedes owners in the 1970s.

    • 0 avatar
      toplessFC3Sman

      Very good points

    • 0 avatar
      geeber

      The problem is that too many people don’t take advantage of the longer life spans of (most) new vehicles. They still trade too often, or don’t buy a reliable vehicle in the first place, then dump it when it starts to need annoying repairs.

      • 0 avatar
        nikita

        Granted, but there is some logic to the longer loan term on a higher priced product that lasts longer. In the old. old days, a 24 month note was common on a used rust-bucket. Heck, the note was probably only 24-36 months on it when it was new. Todays CPO with a warranty out to 100,000 miles could easily justify a much longer note.

  • avatar
    Educator(of teachers)Dan

    Debt is all about how you use it. If you take out that 72 month car loan and keep trading cars every 3 to 4 years, stay upside-down on your trade in vs loan value, and then are amazed that your paying $700 a month on a Ford Edge then you are a sucker.

    • 0 avatar
      28-cars-later

      Agreed. Know quite a few who have done this…

      • 0 avatar
        Educator(of teachers)Dan

        My “one bankruptcy under her belt” boss does this.

      • 0 avatar
        duffman13

        I don’t know why these people don’t just lease. Oh, right, because leasing is for businesses or poor people.

        I mean if you really feel the need to get a different car every 3-4 years, it really is the smarter way to spend your money than buying and rolling the old note.

        I’m paying ~$375/month on the full value of my wife’s car on a 0% note. I was in the mall a week ago and the have a Hyundai Equus 4-year/12k a year lease for $600/month. You can do a similar lease on a 328i for $3-400/month. Is having that much more car and the ease of swapping frequently really not worth it, if you’re the type of individual who does that?

        I’ve decided I’m more of a buy for 10-year kind of guy, but seriously. If I wanted to switch frequently, that’s the smartest way to do it.

  • avatar
    ajla

    All the numbers you cited show that people using financing are agreeing to longer terms, with less of a DP, at slightly higher payments.

    However, what has been the change in the overall number of loans or the overall amount of auto loan debt? I didn’t see it in the link, but I may have missed it.

  • avatar
    JMII

    I took a long term (low rate) used car loan for another reason: double payments! That’s right… since there are no early payoff penalties I fully planned on making double payments from the start. Thus my 60 month term is really only 30 months. The advantage is if my financial situation becomes ugly (IE: I lose my job) I can still afford the monthly payments. However while I’m working the payments are low enough that I have no trouble putting twice as much cash towards the principal of the loan. I paid off a previous car the same way and have also used this to buy furniture and other pricey items. If you can get generous terms and have the means to take advantage of them its great. Its hard to pass up 0% financing, why tie up your cash when you can use your credit. Granted you have to have excellent credit and pay everything off on time. For example I don’t carry a credit card balance either, but I purchase plenty of stuff using my Bass Pro Card just so I earn points. Credit is just another tool… its all in how you use it.

    • 0 avatar
      PlentyofCars

      If you can afford double payments, it would be smarter in my opinion to put that extra payment in the bank.

      Lenders do not give you future credit for extra payments. If you miss a future payment, you are dead even if you made double payments for a year or two.

      You can always pay the loan off early with that money, and in the mean time you have a cushion for your lose your job worse case scenario.

      You could continue the payments with your banked extra payments, and not touch other savings or dent any unemployment comp.

      • 0 avatar
        redav

        Not necessarily.

        When I was paying off my car loan, I paid well over the std payment. As a result, my “next required payment” went to zero, then moved out several months. (I had a mortgage piggyback loan that operated by the same terms.) I have no idea how many loans are set up this way, but I do know that loan companies want you to pay as much interest as possible, so if you can be persuaded to stop payments (for a while) and let the interest re-accrue, that’s to their benefit.

      • 0 avatar
        PlentyofCars

        Redav, You have a loans designed to keep you in debt. A mortgage piggy bank loan is charged interest even if you make no payment. It is basically just a line of credit. They just add the interest to your loan balance if you make no payment. Because with a line of credit you could borrow the payment.

        It is just like getting a cash advance on your credit card and then using the money to make your monthly payment.

        On a conventional loan you do not get credit. Try paying double the minimum on your VISA card, then skipping the next payment and see what is does to your credit score.

      • 0 avatar
        redav

        PlentyofCars: you aren’t describing a mortgage piggy-back. This is a product designed to break up a mortgage to eliminate PMI even though you borrow more than 80% (e.g., an 80-10-10 loan).

        Lenders want to get as much money out of you as they can. In fact, they deal with “prepayment risk” which is when they don’t earn as much as planned because a lendee pays off the loan early. It’s also why some use prepayment penalties–they want to guarantee their income regardless of what the lendee does.

        Only a fool would actually not make a payment even if the bank says it’s not required. I know of lenders who give a Christmas ‘break’ by not requiring loan payments in December, or they say that no payments are required for the first 90 days. They are obvious scams–the interest doesn’t stop accruing.

    • 0 avatar
      28-cars-later

      Honestly JM I’ve been preaching that for years. You always want to give yourself room for the unexpected.

  • avatar
    wstarvingteacher

    We have a new car that we are paying that everyone seems to badmouth but we love. Have an old pickup that seems to be pretty reliable. Wish the new car was paid for and putting enough miles on it that it will probably be done in by the time it’s paid for if we keep it up.

    Life is choices and consequences. Not unhappy about ours. Don’t think I am hearing that sort of contentment. I think everyone of us could wish for a better world (butterflies and unicorns) but we are stuck with making it for ourselves only with one decision at a time.

  • avatar
    gslippy

    “How can we reduce the number of suckers in our society?”

    I’m afraid we can’t.

    The US population has adopted an entitlement mentality seeking immediate results in everything. Why wait a few years to purchase the car you want when easy credit can put you in it today?

    This problem afflicts us from top to bottom, rich or poor, Democrat or Republican.

    We can thank the previous generation for ‘giving the children a better life than they had’, which did nobody any favors.

  • avatar
    Landcrusher

    If you regulated a maximum 60 months new, 36 months used, with only exceptions for length of a comprehensive warranty, what would be the downside? How would it get exploited? What would be the unintended consequences.

    For instance, if you regulated a 20 year max on mortgages in the land of the 30 year mortgage you would hurt the sub million dollar home values (above that I understand lots of people pay cash).

    • 0 avatar
      geeber

      Regarding any limitation on mortgage lengths, it would hurt people who already own a home, along with builders (at least initially), but it would help first-time buyers. I would imagine that prices would eventually fall to reflect what people can afford to pay.

      • 0 avatar
        200k-min

        I don’t subscribe to the premonition that some type of regulation would let prices “fall to reflect what people can afford to pay.” Only the free market can do that, which it has by using creative financing, i.e. longer term loans. Ditto what happened in real estate.

        The problem is that there is a cost of building a car or a house or anything. Most modest cars these days are sold as razor sharp margins. The manufacturers cannot cut cost out of them very much. Even if they assembeled them with slave labor and forced all engineers to take massive pay cuts steel and other raw components are commodities that have a set cost.

        Housese are the same way. A “used” house is cheaper than a new one because the seller of the used one can take a loss on what it would cost to build it new, the contractor can’t do that. I run into clients all the time that watch the news and then have the audacity to think that construction is cheaper now. Hello, everything that goes into a house is more now than pre-crash…why would it be cheaper?

      • 0 avatar
        geeber

        The “creative financing” was not in response to the free market run amok. Those exotic mortgages came about because, at the national level, specific federal policies encouraged the purchase of, and, in some cases, speculation in, houses. In many areas, local and state regulations also drove up the cost of housing.

        Even if you leave the state and local regulations in place, the elimination of various federal policies that fueled the run-up in housing prices during the last decade would still leave a considerable distance for prices to fall.

    • 0 avatar
      Landcrusher

      Yes, shortening legal mortgage terms would reduce the supply of cash available for homes and cause a price drop. It’s simple Econ 101.

      New homes would be built to a lower price point, existing homes would drop in value to reflect lower demand (at least higher end homes). You just couldn’t do that.

      Cars are different, but how much? How would cars react? How would the manufacturers react? This is a car site, after all. Would used prices drop? Would the makers crank up the volume on small cars and reduce turnout of luxury cars?

    • 0 avatar
      Landcrusher

      Btw, used houses are not necessarily cheaper because some established neighborhoods bring added value to the land. The structure may have less value (unless it has some desirable traits not found in new homes) but you gotta buy the lot as well.

      The risk in new developments is ridiculous. Developers often start with high end homes and then build cheaper and cheaper until your country estate is surrounded by starter homes, apartments, and even subsidized housing. When the furniture store moves out and they divide it up to put in a pawn shop and a cheap liquor store you know you will be lucky to get your money back out. Forget appreciation.

  • avatar
    Syke

    In my eyes, there’s a real easy solution. I bank, say $250.00 a month towards my next car purchase. Every month, just like I’m making a payment. When I’ve got enough money accumulated for a car(s) that interests me, I go shopping. And write out a check at purchase time. At which point, I start “making payments” to my savings account again.

    Granted, I’m not exactly in the thrall of “instant gratification”. Or, at least, it’s overwhelmed by the gratification of a constantly growing bank account.

    • 0 avatar
      krhodes1

      I do this too. Except when the time came to pay for my BMW, the offered rate (1.9% for 5 years) was low enough that it made more sense to leave my money in the market and just make the payments on the car. I’ll still have the car paid off in 3-4 years though, I won’t make payments on a car out of warranty.

  • avatar
    Matt Fink

    I agree with JuniperBug. We need more education. Less time teaching our kids cursive writing, and more on car repair, and FINANCES. My wife and I decided years ago we would never (if at all possible) take out a loan on a car. It never makes financial sense. That meant driving older cheaper cars for a couple years until we saved enough to get a nice used car. The average new car in America has 6-year loan at 9.6% interest for a $475 monthly payment. Author Dave Ramsey teaches that instead, if you buy a $1,500 beater and pay yourself that $475 a month for just 10 months you’d have $6,250 (with selling your beater) for a car. There’s a lot of nice used cars for that price. Or if you can make your car last for 20 months, that’s over $11,000 for your next car. I’d much rather do that then spend over $7,000 in interested on a 6-year loan.

    • 0 avatar
      Felix Hoenikker

      I like the math, but have you looked at the prices of used cars lately? I was shopping for a beater for my college age son, and found that the only cars under $3K were crusher food. If you are buying from a private party, there is very little under $3K. Prices for anything with more than a few months left on it are north of $4k.

    • 0 avatar
      krhodes1

      If you have the income and credit rating such that you should be considering buying a new car, you will not be paying anywhere near 9.6%. Less than 3% is more like it. And realistically, if everyone stopped buying new cars, there would be no nice used cars for anyone to buy. Which is pretty much happenned a few years ago – look at the current prices of used cars.

      I do think people buy new cars much too often, and for silly reasons. Buy new if you can comfortably afford it, maintain it properly, and keep it for a long time.

    • 0 avatar
      Mathias

      >> Author Dave Ramsey teaches that instead, if you buy a $1,500 beater..

      Dave Ramsey is the master of GIGO — garbage in, garbage out.
      He makes unrealistic assumptions about rates and yields and comes up with advice based on that. It’s easy and irrefutable, but it’s not useful.

      There are no $1,500 serviceable cars. At least I can’t find them, and my friends can’t either. There used to be, but my time machine is in the shop…

      The used market being what it is the last few years, most people looking to save transportation money should buy a new $16k car and keep it 15 years… it’s not sexy but it works.

      If you live two miles from work, then buy a well-preserved gas guzzler for cheap and run it into the ground. But the 12,000 miles-a-year, have-to-drive-every-day crowd is best served with new. If the credit’s good, that is…

      • 0 avatar
        Landcrusher

        If you really paid attention to Mr. Ramsey you wouldn’t be so critical. His message is a good one that goes beyond dollars and cents. He uses some techniques to sell his method that the guys who sell indebtedness and low value do. He is trying to get to the people we criticize here for not being able to get out of debt.

        He admits that some people can manage debt to their advantage (many more think they can), but he points out they are a small minority, and they likely would be happier just dropping it and getting out of debt. You don’t know what you don’t know.

        I have a mortgage and a business loan and after several years I have decided the biz loan was a mistake. I could have avoided it entirely, started smaller, and been much better off. The spreadsheet was PERFECT, 2008 could have been absorbed, but federal regs and tax policy changes killed me. With no loan I could have walked away at any time.

  • avatar
    carguy

    I am a fellow debt hater but when I purchased my last new car in 09 I had the option of 0% for 72 months. I had fully intended to pay for it in cash but took them up on the finance offer. The money I would have paid for the car I invested in equities and my returns so far have nearly paid for half the car (thank you Ford and Delta). Needless to say I do not regret my decision.

    It is true that a lot of people get taken for a ride with auto financing but assuming that all such deals are bad is not quite accurate.

    • 0 avatar
      Syke

      Which goes to show there are legitimate exceptions to every situation. I too, would consider borrowing money at 0%. Being in debt pisses me off to the point, though, that I’d probably pay the car off 2-3 years early – just because owing somebody money was eating away at me.

  • avatar
    getacargetacheck

    People are paying more for higher mileage cars with longer-term debt because they don’t have a choice. The pullback in production to 1992 levels combined with “cars for clunkers” has propped up new and used car pricing. Meanwhile, median incomes since Bush took office have tanked:

    http://www.nytimes.com/interactive/2011/10/10/us/declining-household-income.html

    Bottomline, buyers are getting less but having to pay more.

  • avatar
    Ryoku75

    Another problem is our love for decorating our cars, those buick port hole stickers alone are $25. Those shiny 55′ rims? More than what the rusty Tahoe that they move is worth.

  • avatar
    Dan

    People have always aped their social betters in hopes of fitting in with, passing for, ultimately joining them.

    500 channels of TV, Hollywood, the tabloid press, rap “music”, all are rubbing the rich at their most vulgar in the public’s face every minute of every day. They are continuously visible like never before in human history.

    Of course they get imitated. The conspicuous consumption, the drug and alcohol abuse, the promiscuity.

    Where it breaks down is that you can’t imitate the actual wealth to avoid the consequences of that behavior.

    Real single mothers don’t get to hire nannies while they keep on partying.

    Real drugs and DUI don’t get an adoring entourage taking your picture on the way into the courthouse.

    And real luxury goods have to be paid for. One miserable weekday morning, one more month until retirement, one less paycheck away from a friend’s couch at a time.

    Want to fix suckers? It’s as simple as turning off the sucker box.

    But don’t throw it away. Sell it to someone else. Somebody’s got to scrub the toilets of the world.

  • avatar
    robc123

    Ok guys here are some thoughts on this-
    some assumptions through;
    1. you can make more money later in your career
    2. there will always be inflation
    3. taxes go up.
    4. you can refinance, if you need to later.
    5. at any point you can sell the car.
    6. you need a down payment- bank downpayment is higher than 0% financing.
    7. Your portfolio outperforms your rate of interest + inflation.
    8. points 1-7 are not always interrelated.

    Simple basis is money is worth more now than later, unless an optimal interest or return is provided with risk factored in.

    A. 40,000 car new @ 0% financing for 72 months

    B. 10% discount with 100% cash payment.

    C. 10% discount with bank finance at 6.5% over 3 yrs

    What’s the worst deal? Answer – B. Why? Ignores time value of money. Or a lease, even if you are writing off the interest- assumes company car with reasonable miles not semi-truck.
    What’s the best deal?- if the amount of discount is greater than the interest paid over the life of the loan, factoring in the points 1-7 then pay via bank debt. But if the interest and points 1-7 are higher than the discount then take the 0% financing with no discount and a minimal down.

    Usually the best deal is the 0% financing, and it’s not suckers at all – car companies have to show quarterly profits and have very demanding shareholders. It’s the kick the can down the road- they have to make it easy for people to buy new cars.
    If everyone was thrifty, and assuming used car prices are normal then it has been better in the past to just buy an older car and drive it to the ground. But used car prices are so high now, it’s cheaper to buy new.

    Most people blindly ignore the time value of money.

    Witness posters saying buying a house is good and appreciates in time. That may well be but usually that profit goes to the bank. Most times it is better to rent, factoring in:
    -you pay for all costs- does anyone ever tally this time and cost, compounded with an average rate of return on their money? No.
    -Does anyone factor in utility cost? Nope.
    -what about insurance?
    -what about realtor commissions?

    -you do the basic upkeep, which is time- how many people think of and keep track of the hours they work on the lawn or fixing the bathroom? When they can get a second job or get overtime, then just pay someone who works for less than you per hour to do the upkeep? Who does? Rich people. If I said I will give you 4 dollars an hour and give up your weekends would you do it? Of course not. But this is exactly what people do in the burbs all the time- idiots. Unless- you really like painting and mowing and cleaning on your free time- I would rather do something leisurely or something with friends/family.

    -Huge liability- miss 1 payment you are out (in normal times), miss rent payment you are out but you only forfeit a damage deposit, not a huge mortgage down payment nut and equity. Walk down the street and get another rental.
    -Taxes go up. Sure rent does but the DP is better spent on a nest egg and security to counter job instability.
    -Everyone I have ever met, including small home developers say they make money on houses, but can never show me the exact or ball park interest they paid over the life of the loan.
    -mortgage is French for death pledge.

    • 0 avatar
      28-cars-later

      Seriously you need to write this down and drop it in leaflet form from a blimp. Very, very, wise.

    • 0 avatar
      DenverMike

      I see what you mean, but what would you pay over your lifetime on renting a home? Payments on the last decade of a 30 year fixed mortgage may be 1/3 of the original when adjusted for inflation. $100 of mortgage payment got you a pretty nice home in most parts of the country in ’70, but how much home could you rent for that in ’90 thru ’00? Then you may be paying rent for 70+ years that’s adjusted for inflation the other way. What’s in it for your landlord to keep making your house’s payments? He probably has no payments and paid cash for your home from revenue of other rentals. Still I agree that you should avoid a mortgage and pay cash for a home you can truely afford. My first home was laughable but it was all mine. Not paying rent freed up income to fix it, sell it and move further up the free’n clear home ladder. BTW, I have renters so ask me which I’d rather be.

    • 0 avatar
      redav

      “Everyone I have ever met, including small home developers say they make money on houses, but can never show me the exact or ball park interest they paid over the life of the loan.”

      Well, strike that one off the list. The total interest I will have paid for my home is just under $81k on a house that cost ~$190k. Most of my friends & coworkers keep track of this kind of stuff in a spreadsheet. I think you need to start hanging out with a different crowd.

    • 0 avatar
      FromaBuick6

      The one problem with these self-righteous “Home ownership is for suckers” arguments I keep hearing lately is that it presupposes that rentals are of good quality, reasonably priced and readily available. I want to know where these rentals are, because I’ve never, ever encountered them. All I see is apartment complexes that are beat up and inhabited by the dregs of society, no matter how high the rent. Or I see grossly overinflated condo/house rentals in which you’re subsidizing somebody else’s overinflated mortgage (plus whatever profit on top).

      Home ownership is a necessary evil for a lot of people. Moreover, if you’re not too cheap/lazy to scrape together a down payment, or dumb enough to buy more house than you can afford, home ownership is cheaper for a lot of people. Rent is guaranteed money down the drain and almost always more money month-to-month for a comparable property. At least with owning, you have a chance (albeit a small one these days) of recouping some of your investment.

    • 0 avatar
      Philosophil

      These are all good points when viewed through the narrow, rather abstract lens of pure finance, but as you yourself suggest, life is about more than the simple measures of a ledger.

      There can be lots of good reasons for opting to own a home rather than renting. Many people like to put their own stamp on the things they live with and in, as an expression of themselves. I’ve heard of ‘pride of ownership,’ but don’t think I’ve ever heard of ‘pride of renting.’ The satisfaction that some people get from making a house their own (as a home and not merely a dwelling) is not easily translated into some abstract calculation on a ledger, and some people value this just as much, if not more, than the so-called life of ‘leisure’ to which you refer.

      • 0 avatar
        replica

        In states with property taxes, such as Texas and Washington, it’s impossible to own your home or even own land. I don’t know how it’s Constitutional, but everyone seems ok with it.

        I’ve owned a home and will never do it again. There’s no guarantee your house will go up in value. Even then, will it go up in value enough to overcome the interest of the loan, the cost of the insurance you wouldn’t carry if you were renting, 1% average annual cost of maintenance, things you buy because you have a home, increased utility, remodeling, inflation and so on?

        If I don’t like the price of rent, I just move. If I want to “remodel” I just move. If the maintenance isn’t being taken care of, I just move. If I get a new job somewhere else, I just move. If I don’t like my neighbors, I just move. If taxes go up, I just move. Home ownership is an illusion. You’ll never really own it.

      • 0 avatar
        Philosophil

        Your openness to that kind of mobility is admirable in certain respects, but many people like to settle down in a dwelling on a more or less permanent, long-term basis, and home ownership is typically the best way to accomplish this (and other things as well).

        I have no doubt that the ability to afford a home is problematic in a lot of places, particularly around large urban centers, but that fact in and of itself does not make home ownership an illusion for all people. In my neck of the woods, homes are quite affordable.

        Finally, not everyone who buys a house does so for investment purposes. Some people buy a house because they want a place to call their own, a place they and their family can identify as ‘home.’ I understand that not everyone thinks this way, but to try and dismiss those who do as ‘illusory’ or financially dysfunctional is unreasonable and somewhat myopic.

  • avatar
    nickoo

    When you’re getting a loan at between 0-3% APR, it makes sense to take it out as long as they will let you, you can always pay extra if you want, but good luck paying less.

  • avatar
    Philosophil

    Here’s an oversimplified caricature of the problem:

    1) On the one hand you have various deeply-seated behavioral tendencies, dispositions, patterns of inference, and so on (as evolved traits, let’s say, that can serve as effective strategies in certain natural/social contexts), combined with various culturally constructed values, norms, expectations, and so on (e.g. market-driven status measures), and…

    2) On the other hand you have those self-styled ‘clever’ individuals (e.g. con artists) who are attuned to the dispositions, tendencies, inferential patterns, and so on, in others, and who try to devise strategies to ‘sucker or ‘take advantage’ of these common dispositions, tendencies, etc.

    There are at least three typical ways of responding to this problem:

    1) Try to help people get better control over the deeply-seated dispositions, tendencies, inferential patterns, and so on through some sort of educational or other process (thereby making them less vulnerable to the tactics and strategies employed by those ‘clever’ cons), or

    2) Try to stop the ‘clever’ cons (e.g. through regulations, threats, threats of threats, and so on).

    3) Some combination of the above.

    The first is for the more optimistic among us, the second for the more pessimistic, and the third perhaps for the ‘realist’ (for lack of a better term).

  • avatar
    DenverMike

    Saving then paying cash is as much an addiction as it is gratifying. I did pay cash for my 1st home early on (a fixer on a dirt easement) and drove older, but OK sports carS with salvage titles (despite an 800+ credit score) and watched as my friends drove nice newer cars to their modern tract homes along with 30 year mortgages. I did envy them in a way, but today I turned 44 and live a far better, care free and debt free life style than any of them. If my chosen line of work took a sudden downturn, I could take a part-time job at McDonalds and still keep my home, cars and toys. Three of my friends went into construction, lost it all and are living with mom. Two of those are ducking the repo man. I consider them victims of the vicious cycle of instant gratification that society encourages and really pushes like crack dealers.

  • avatar
    chaparral

    There’s also seasonality to consider.

    I bought a Corvette a couple years backin November. Up north, a Vette will be worth a couple more grand in the summer than the winter. I could’ve saved till spring and bought one, but I took out a loan with no prepayment penalty. The term was 72 months at 6% interest, but I had it paid off in the spring. It cost me around $250 to borrow the money for that time, but I saved around two grand. I’d have been ahead even if I took a year and a half to pay it off.

  • avatar
    fincar1

    Always, the best thing to do is to look at the terms of any spending or financing proposition and see if you can make them work for you.

    We had a 30-year fixed-rate mortgage on the house, and switched to an ARM. “Oh, no, are you crazy?” our friends said. Well, no. This particular ARM had a first-year “teaser” interest rate of about 3 percent/year, with a cap of 1.5%/yr on any subsequent rate hikes, and annual resetting of the rate. That first-year rate was so low that we could make double payments, and when resetting time came, lo and behold, the principal was quite a bit lower, thus the new payment at 4.5%/yr still wasn’t all that high, and we paid extra every month that year too. A few years like that and the principal becomes remarkably low. Paying extra every month on the 60-month car loan insures that the entire term won’t be needed and gives us some added flexibility.

    Of course it takes a certain amount of grit and foresight to stick to a program like that, and unfortunately that’s a quality that seems lacking in many people.

  • avatar
    wwvmd2008

    My wife and I got taken. We bought a 2004 Pacifica in ’05 and when I traded it in 2011 I noticed that the interest rate on the loan had been 6.9%! We financed our new ride at 0.9%. Since our financial state hasn’t changed in any significant way I have to guess the dealer that sold us the Pacifica must have seen us coming!

  • avatar
    SP

    Well, the cost of many essential items keeps going up…

    But wages are stuck …

    And interest rates are really low…

    So could it be that the average joe has a primordial sense that now actually IS a good time to buy a car?

    The issue of how much car is appropriate is a separate one, and we probably aren’t doing very well there …

    But if I needed a new car and had $40k cash sitting around, I would NOT pay cash. Why would I pass up 0% financing to do that? I could put it in the bank and be much better off. If I bought $40k worth of gold or silver, there’s a pretty good chance I might double my money in 5 years. Even an unfavorable result in that market would probably result in breaking even at worst.

    The government won’t allow price deflation. Simply won’t allow it. And neither will any of the other major world governments.

    So the culture of easy money will continue with no end in sight.

    • 0 avatar
      28-cars-later

      TTAC needs to spin off another thread called The Truth About Money, there are alot of good things being shared here.

    • 0 avatar
      DenverMike

      Even though you have 40K in cash sitting around, you can’t truely afford that $40k car if you haven’t an additional $40k to invest in whatever. You need and want decent transportation and should invest $5K in a car, max. The problem is, people with only 5K cash consider it a good down payment on a $40k car instead of what it really is, depending on income level or lost investment opportunity.

  • avatar

    I am no expert in autofinance.

    However, with Fed Funds Rate so low; -I think they just voted again recently to keep it there,

    0% Finance doesn’t seem that bad.

    -Especially if you have a substantial $k amt. you could hedge against it as an offset,

    getting in near ~recent support or one of the MAs + with some time & black-swan tolerance,

    Because there are companies out there that can run the juice between FedFunds and what they can charge SIGNIFICANTLY better than you could.

    Their market will be slowing eventually, but they Are out there.

    No, I’m not telling you what the stock symbols are.

  • avatar
    pb35

    Bought a new car last month. $5k on the hood, $5k down, finanaced 1.8% for 48 months. I think I did ok.

    • 0 avatar
      28-cars-later

      I’m curious what did you buy?

      • 0 avatar
        pb35

        I traded my paid in full 2004 G35x (financed @ 1.9/36 in 2004) for a 2012 Dodge Charger R/T Road and Track. The G was starting to nickle and dime me so I decided to dump it while it was still worth something. I realize no matter how great my deal was that depreciation is going to get me someday but I keep my cars for a while. I just won’t have as big of a downpayment next time around.

  • avatar

    My credit union of offering 2% on new car loans and basically zilch on savings.

    A $20000 5 year loan will cost $351 a month and incur $1034 in interest charges over 5 years. Over that 5 years I’d hope to have little in repairs costs.

    To save $20000 over 5 years would require $333 a month. While saving, my current car will probably require a brake job and a timing belt change. In five years’ time the $20000 car I was looking at today will cost $21000.

    It seems if you’re committed to buying a new car, saving up or repayment work out about the same.

  • avatar
    stevelovescars

    The rent your house vs. buy argument shares something in common with the auto financing point that was overlooked. I think the comment was made “over the course of paying off the 30-year note…” Perhaps this is a generational difference again, but I have never stayed in one home or city for very long. 6 years is my longest stint.

    I get moved around for work, for graduate school, for life changes. I’m curious what percentage of people ever truly live in the same home long enough to pay off the mortgage all the way… I imagine it’s far lower than the percentage of those who keep their cars long enough to own them outright at the end of the loan. At least for those of us under the age of 60, I and most of my friends are a lot more mobile (out of necessity) than our parents were. The days of working for one company in one town for a career and getting a fixed pension is long gone.

    Financing a car note is simple if you have good credit as there are usually no extra fees involved in getting the loan. Buying a home is much different. There are so many leaches grabbing at your wallet and increasing the transaction costs of both buying and selling a home it’s ridiculous. Seriously, mortgage insurance? That scam makes BHPH dealers look like volunteers with Doctors without Borders.

    Anyway, if you KNOW you’re going to live in a home for 15 years or more, I think buying can make sense, especially with the low interest rates these days. Otherwise, even if the home appreciates a lot, which could happen but it won’t be happening any time really soon, you won’t see much return.

    Another thing that’s different today vs. 30 years ago… interest rates. I think in 1978 a home mortgage rate was something like 15% on a 30-year note. Today it can be had for 3.5%. Car loans were also more expensive before captive financing companies were used for sales incentives. If you have great credit, you’d be silly to dumpy $25k in cash into a depreciating new car if you can get a no-interest loan… but if you have great credit you probably already realize that.

    • 0 avatar
      DenverMike

      Why is it any less silly to finance a $25K depreciating asset over paying cash? You pay zero interest with cash regardless of price settled on or credit rating. You can run straight liability insurance and no lease mileage penalty. Financing does free up capital to invest elsewhere, but this assumes it was my entire savings. This could be chump change or ‘walking around money’ for me. Not everyone that drives a new $25K car or truck maxxed out their entire savings or available credit. More people live within their means than you realize.

  • avatar
    Landcrusher

    You can’t compare renting vs buying a home like leasing vs buying a car. People generally rent less home than they would buy and lease more car than they would buy.

  • avatar
    Crosley

    Even in these dire economic times, people are just not willing to take any real hit in their consumption. I know people who within months of getting their home foreclosed, they’re out car shopping for vehicles that cost more than they probably make in a year. Heaven forbid they drive around in a $6,000 car for a few years to get their finances in order.

    Ultimately, I’ve seen people that live their entire lives like this, but it REALLY comes apart when they’re at their retirement age. They’ve enslaved themselves to poverty.

  • avatar
    smartascii

    I recognize, objectively, that purchasing a car for cash is the cheapest option. But having been laid off in the past and having suddenly fretted about how many months I could go before everything imploded, my present mentality is a bit less interested in long-term cost and a little more interested in short-term viability. I have $10k in the bank. I could go and buy a working vehicle for that money. I could decide that I want a reasonable new car, put that down, make $400/mo payments, and own the new car in 2-3 years. But when I consider those two options, I think, “What if….” and the thought of losing my safety buffer scares me out of doing either one.

    I can also go buy a new, reasonable car (let’s say in the $18-20k range), put TT&L down, finance it for 72 months, and now I know that a) I have a cushion if something goes wrong, b) I can pay $700/mo and pay the car off quickly if I want, and c) If I lose my job, I only HAVE to pay $280 or whatever. And I could still live for a long time on unemployment during a job search without ruining my credit. So, if I were to buy a new car, that’s what I’d be thinking about.

  • avatar
    robc123

    This is pretty neat rent vs buy gizmo that the nyt put out- but here is the thing, how do you know what X interest rate you will pay over the next 30 years? if you even think that you could imagine what that would have been then you would have been rich in 2008 when the world went bust.

    https://www.nytimes.com/interactive/business/buy-rent-calculator.html

    again it doesn’t pay you for investing your time into the property- also doesn’t factor risk, are you willing to risk bankruptcy and all of your worldly possessions for a house that is made to spec with styrofoam and tape? Employers now are vetting people based on credit rating.

    • 0 avatar
      DenverMike

      A credit rating is a character reference that you give yourself. It can be used against you, but it can also help you land a great job. You decide.

      I agree signing a 30 year anything can be risky and risk does have it’s rewards, however, consider plan C. Unless you’re already living from paycheck to paycheck, set aside 1/4 of you wages for a year and buy the best house you can, just in cash and live rent free for a year while setting aside 1/2 your wages for a year. The next year fix up and trade up, free and clear. Then repeat process or?? Look at like it’s a game if you must. I do and think it’s a blast.

      • 0 avatar
        krhodes1

        Where do you live that you can buy anything even vaguely resembling a livable house for 1/4 of any “normal” salary? I live in Southern Maine, which by New England standards is a pretty cheap housing market, and 1/4 of my salary would not buy a unimproved building lot within an hour commute from Portland. And I make more than DOUBLE the national average household income. You can’t buy a livable used mobile home for that kind of money around here. A friend did buy a bank forclosure farmhouse with no electrical system, heating system, or plumbing for $40K recently, he will be in to it $200K by the time it is done, and that is with doing a TON of the work himself.

        I bought a tiny crappy house with a large garage for $127K 11 years ago (when I was making ~$40K a year, but had two roommates for many years, just one now), and am quite happy with my decision. My master plan is that in another 10-15 years I will bulldoze this house and build the equally small (maybe smaller) but much nicer house of my dreams. I have found my 1/2 acre, I ain’t moving. :-)

      • 0 avatar
        DenverMike

        Bargains are out there if you know where to look. I saw an old guy mowing the weeds on an old wreck of house and I stopped and asked if it was for rent. He looked at me like I was crazy and showed me the place. It was disgusting inside with piles of rat feces, foundation issues, and otherwise needed a new roof and cosmetics thru-out. I offered $300 a month rent and he bit. What choice did he have? I just wanted to buy it, but since it wasn’t on the market and didn’t know the guy or if he’d sell it, possibly carrying the note, I figured I’d start with a month to month. We agreed on $30K @ 3% for 3 years and $3K down. I would try to pay it off in a year but asked for 3. This was in ’00 and I did finish paying for it in one year while earning $80K. It’s not that hard to do if you live within your means. I had no home repair experience, but it’s not exactly rocket science. Medium home prices were $130K IIRC. I kept it as a rental and it’s served me well.

  • avatar
    robc123

    … piles of rat feces, foundation issues, and otherwise needed a new roof and cosmetics thru-out.

    That was at the turn of the century- 12 yrs and a world away from now- I agree there are “bargains” out there but I would like to live in a place were there is none of the above issues and put cash to work as I get it-

    You have to factor in how many hours and how much it costs you- add inflation cost, material cost, hourly cost, interest cost and benchmark that to a normal investment return or possible income that can be derived by overtime or a promotion or a second job.

    Its really just about looking at a holistic picture and saying, is this worth it?

    2000-2008 was the biggest real estate bubble in history- its tough to get perspective because everyone thinks they are real estate geniuses. Hell, my birth moms husband is a builder and I told him he was nuts back in 2005 thinking a small 800sq ft apartment will be worth a million in a couple of yrs. I was never invited back to Christmas diner after that. People get really emotional with real estate, more so than any other asset class.

    The other problem of flipping is it skews the real value and makes it very hard for your kids to ever buy a home because of the inflated prices.

  • avatar

    Here in the NY metro area, you can’t find anything like that, even if you are willing to give up personal security and live in the ghetto. The only other alternate is to live far upstate, but can you tolerate a 2.5 hour commute each way every day ?

    The real driver of home prices are school districts. You will pay to live somewhere your kids will get a decent public education. You might get that upstate, and you won’t in the ghetto-so it’s private school. You have just not saved much and now live in an unsafe place.

    My street has million dollar homes (not mine) with low end subarus out front. The money goes for mortgage and taxes (ow ow ow) not car payments.

  • avatar

    In my opinion, one of the biggest issues that’s leading to problematic vehicle loans is that so many consumers simply don’t know any better. You don’t want to be spending more than 18% of your monthly budget on transportation in total – not just car payment, but fuel, maintenance, parking, public transit passes, and all that jazz. And that’s at a maximum. Most experts will tell you that no more than 8% should be allocated to your actual car payment itself.

    Unfortunately, that doesn’t get a lot of consumers the car they want, and dealers/lenders are incentivized to go with the biggest loan/most expensive vehicle possible. That means prolonging the lending term, so that the monthly payment is effectively lowered (and increasing the risk of negative equity, etc).

    We could hope that they would not do this out of simple kindness, but in a free market economy, you can’t realistically rely on that. What people need are cars they can afford, financed with the smallest and shortest loans possible (if a cash purchase isn’t an option financially). AND they need to know that this is the right, best, smartest option. I don’t think we’re a nation of suckers. But I do think that financial education is sorely lacking.

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