By on March 20, 2015

Signing his life and wallet away for the next six or so years with a long-term auto loan agreement

In the past, six-year auto loans were few and far between. Today, more of those loans are being issued, with seven- and eight-year loans gaining popularity.

NPR reports such loans are helping to fuel a boom in U.S. new-car sales, with one-third of the loans lasting 74 months and beyond. AutoPacific analyst Ed Kim says the cars are one of the reasons for the long loans:

Consumers are demanding a lot more technology in their vehicles, infotainment technologies. There’s also a lot more safety features that are in vehicles right now. Emissions and efficiency technology that are in vehicles right now, that are making vehicles cost a lot more.

Kim adds that the main driver is that most consumers are still crawling out of the Great Recession, which Experian Automotive’s Melinda Zabritski says isn’t much of a problem as far as lending goes. She says that while it would be sensible to take on 36- or 48-month loans on a new vehicle, “the average consumer just can’t afford that.”

Critics counter that the long-term loans could hurt consumers and automakers alike in the near- and long-term. Consumer advocate Mike Sante states that those who are taking out those loans have no business doing so in the first place, and should buy a less expensive new or used vehicle with a loan of no more than four years. Honda Executive Vice President John Mendel, whose company offers 36- and 48-month loans, says loans beyond five years are too long, and adds that he hopes his competitors come to their senses.

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106 Comments on “More US Consumers Signing Long-Term Auto Loans...”


  • avatar

    Crawling out of the Great Recession and into another one? It’s laudable for the Honda Executive to be so noble as to come out against these 6, 7, and 8 year loan terms… so will Honda be refusing to sell a car, truck, SUV, or CUV to anyone who comes into a Honda dealership with prearranged financing from any outside companies who offer such loans? No? They have to move cars, and they have to move more cars than last year or last quarter even, otherwise they won’t increase their share prices! The train-wreck economy stumbles on, occasionally going off the rails before being set right back on the same track of endless growth and selling off the Credit Default Swap loans before you get caught left holding the bag.

    • 0 avatar
      S1L1SC

      It’s not their problem anymore at that point – Their own credit arm shouldn’t be offering anything longer then a 5 year note based on that statement…

      • 0 avatar

        Yes, that is what I’m saying. They will sell to anybody who can beg, borrow, or steal the cash. Don’t release a statement that ‘people shouldn’t get 7 year loans to buy our cars’ and turn around and take money from people who you know are getting 7 year loan money from a lender, who sells it on down the line to high-risk investors like a hot potato.

        You cannot preach “responsible lending” without being willing to refuse sales, which no salesman can really afford to do. Refuse a sale and your boss will hate you, perhaps fire you, and so will the customers, if they don’t sue you.

    • 0 avatar
      mkirk

      I’m willing to bet the finance manager has other lenders on speed dial. Either that or Honda would rater lease to these customers.

    • 0 avatar

      Train wreck economy? What’s your objective standard? CDS loans? What are you talking about?

  • avatar
    mictdxxx

    I think a lot of people plan on having a car payment their whole life, and every two, three or even four years trading in their vehicle anyway. As long as they can afford the monthly payment having a 7-8 year loan isn’t that big if a deal to them.

    • 0 avatar
      bosozoku

      They indenture themselves for life in exchange for some new shiny paint and gimmicky electronic toys. What delusion.

      • 0 avatar
        319583076

        But when you’re dead, no one cares about your fiscal responsibility and if you’ve accumulated wealth – you can’t take it with you.

        In some sense, leaving the living holding the bag makes sense.

      • 0 avatar
        brenschluss

        I bet this will be the most concise expression of self-important asceticism in this thread.

        Some people want to approach death with the biggest possible number next to their name; others want to enjoy the time that they’re alive. Looking down your nose at someone who has the money and the desire to trade whenever they want without having to sacrifice anything but some extra discretionary cash is humorous, but in a sad way.

        For our straw-person who trades in a nice car every two years, and who is happy to swallow a $500-1000 lease or car payment, this indenturing is a pleasure as it allows you to have things that you want.

        People love cars. Some people have enough money to finance new cars rather often, without worrying about the expenditure affecting the rest of their life.

        Of course this doesn’t apply if you really do feel the money coming out of your account every month. I would, but if I could lose a grand every month and not notice, I’d gladly lease some gaudy new convertible every couple years.

        • 0 avatar
          LuciferV8

          That is a good point to make. As with every thing, there is a tradeoff, and each of us must seek to find a proper equilibrium between living in the now and preparing for the future.

          Put off gratification long enough, and you might never have it.

          On the other hand, living as if there were no tomorrow is the most surefire way to ensure there is no tomorrow.

          • 0 avatar
            brenschluss

            That’s much more gracefully stated.

            It’s a select few who can provide for whom they need to and still drive that S63 Coupe without consequence, but saying that group doesn’t exist is disingenuous, and we all need goals, right?

    • 0 avatar
      LectroByte

      If interest rates are low enough, then why not go for the lowest possible payment by getting a longer-term loan? Still makes way more sense than leasing.

  • avatar
    TheEndlessEnigma

    I am awaiting the first remark that goes something like this, “If you can’t pay cash you shouldn’t be buying a new car”, or “If you can’t afford anything less than a 48 months loan you shouldn’t be buying that car”.

    Let the flaming and show of extreme arrogance begin!

    • 0 avatar
      S1L1SC

      If you can’t pay cash, then you shouldn’t be buying that car – That’s why I drive a 25+ year old Buick… ;-)

      There – happy now?

    • 0 avatar
      IHateCars

      ^Lol…totally agree “TheEndlessEnigma”, there’s usually a spate of those type of posts in response to an article like this.

      Credit can be a great tool if you know how to use it.

      • 0 avatar
        highdesertcat

        “Credit can be a great tool if you know how to use it.”

        It used to be that way. But these days, new college grads generally start off their working life with $30K+ in student debt, no dependable car, no place to live and no pot to p!ss in.

        Then, if they can’t find a job right out of college, or have to move to where the jobs are, there are the costs incurred with that move (or move-in with their parents/grandparents), and find a way to feed themselves.

        Credit is a great tool IF you have money coming in, and no incurred debt. But for most, that just isn’t the reality these days.

    • 0 avatar
      DeadWeight

      New mantra: “If you can’t stomach the thought of having 50% to 75% negative equity, you probably shouldn’t’t take out any auto loan with a maturity date more than 5 years, MAX.”

      Salesman in pic above: {As he sticks his hand up that guy’s arsehole} “So just sign here while I very roughly abuse your prostrate, using all 4 of my fingers and my opposing thumb.”

    • 0 avatar
      bosozoku

      Don’t you understand that all the B&B have 850 FICO scores and $500k+ in savings?

      • 0 avatar
        VoGo

        How else would we all afford that brown, RWD, manual transmission station wagon?

      • 0 avatar
        ellomdian

        Only the instant gratification schlubs.

        The REAL B&B have unscorable credit, as they have never had credit. Their hetero-normative upper-middle class white parents taught them the value of hard work and savings (while providing a cushy cash safety net for emergencies,) and the thought of making monthly payments on ANYTHING with interest added to the end makes them blanch (since they have never had a Mortgage, thanks mom and dad for the house!) They look down on ‘young, immature’ people who like different things than them (like a new cellphone every year, designer ANYTHING, or, gasp, a vehicle with an automatic transmission that serves as an appliance!) and the fact that they are paying for the depreciating asset with installments is just another reason why all those Millennial are crying that they don’t get paid enough or can’t find a job or don’t have healthcare.

        The truly disturbing part is how many of the above aren’t grouchy men in their late 50’s – it’s guys in their early 30’s who desperately need to look down on someone to feel good about themselves and the decisions they’ve made.

        I genuinely wonder how many of these long-term loans are being written at gob-smackingly low interest rates. You know, low enough that putting potential cash-outright money in a market fund will make more over the term than the interest you pay for financing.

        You know what else? I am in year 2 of a 5 year loan on a pre-owned, expensive, pretentious car with a German badge. It took me a year of shopping and applying and fixing my finances, and when I bought it, I had to take a 60 month note to get my ‘fancy’ ride. I pay a little extra every month because it means I will have the thing paid off early. Know what else? I am trashing a half dozen offers a week to re-fi the thing, from banks that didn’t want to talk to me 2 years ago. If I want to save a little on interest over the term, and am willing to make higher monthly payments, I can get a shorter note with a couple of points knocked off to boot, no questions asked, tomorrow. If not, I will probably trade it in on something newer in another year or 2 and see 7-10k equity AND I WILL HAVE DRIVEN MY SWEET CAR ALMOST EVERY DAY FOR 3 YEARS!

        Just because we’re signing up for long notes does not mean that we are less fiscally sensible. It might just mean that we are willing to pay for the privilege of doing what we want to do, right now.

        • 0 avatar
          brenschluss

          Ba-zing.

        • 0 avatar
          DenverMike

          ellomdian – Lots of assumptions you make. It’s totally possible to have an 850 fico without ever financing or leasing a new car. Or a used one, while paying cash for everything, including homes, aside from occasional credit card use. I’ve done it. And with zero help from ancestors or anyone.

          But who says *cash* new car buyers don’t have lots more money invested in a market fund plus other, more lucrative and possibly safer investments?

          Or that they/we don’t drive what they absolutely love, as you do.

          And I’m definitely not saying what I do is right for everyone.

          • 0 avatar
            highdesertcat

            Guys, I wouldn’t put too much stock in that FICO score.

            My FICO score is 830 according to my Discover Card statement, and I haven’t financed anything since the 1992 Towncar in 1992, and never had a mortgage.

            Nor do I have any debts now. Nor do I use my credit cards for anything other than buying stuff from Amazon, newegg or Rakuten. And then I pay them off by the due date.

            I’m a pay-as-you-go kinda guy, with cash money, when buying personal stuff.

            And a dedicated credit card user when buying stuff for the business.

            Bes!des, FICO scores often are different depending on which rating or credit agency you query.

            Mine may be 830 with TransUnion but 620 with Equifax. It’s all BS!

            There’s a lot more that goes into a credit background check than the FICO score. Banking info for one. Domestic abuse issues for another.

          • 0 avatar
            DenverMike

            It’s surely not everything, but a bad FICO can keep you for getting your dream job. Or put others ahead of you with your average FICO. For me, I look at my score as a game. No real difference when I’m about never applying for anything. But you never know when the need will arise for a loan or a job. And a poor rating (and or not paying your bills) can mean you’re loser to some agencies, if not a thief.

          • 0 avatar
            highdesertcat

            I think all that may be changing though.

            Somewhere I heard or read that more than 80 million Americans have inaccurate credit reports, hence inaccurate FICO scores.

            Supposedly, America has a labor pool of ~160million. If half of those have inaccurate credit reports/FICO scores, I don’t see how any employer can make a judgement.

            From what my car insurance company is doing to determine what they are going to charge me to insure my cars, houses and life, domestic abuse is one criteria, banking transactions are another, utility payments yet another, and possible police and/or court logs yet another.

  • avatar
    statuscrow

    A thought I had last night after seeing a Chevy Colorado commercial advertising 6 year, 0% interest financing:

    Isn’t this an implicit admission that the product is overpriced?

    Say 2 buyers are in the market for a $30k vehicle. One is paying with cash, the other is financing for 5, 6, 7+ years. While the automaker would ultimately receive the same amount of money in both situations, that $30k buys less in the future than it does today.

    So the guy paying cash is overpaying, or the guy financing is paying 30k for a 25k car, even though he’s financed that 30k for very low interest rates. Which one is it?

  • avatar
    bumpy ii

    Sportcoat: “Yes, you’ve got just the look we need to convince young, hip millenials to agree to 96-month financing on a CPO 3-series.”

    Fashion cut: “I get 2% commission on every fifth sale, and I can set my own hours? Score!”

  • avatar
    sirwired

    For the bazilionth time, the “Don’t finance a car longer than four years” standard was developed when you could be pretty pleased your car made it to 100k without any major problems. Now a car that somehow fails to make it to 100k, barring an accident, would be regarded as a piece of junk. 150-200k is not the least bit unusual. Remember, the AVERAGE car on the US roads today is over 11 years old… cars simply last a long time now.

    Cars simply do not depreciate as quickly as they used to, and can be held on to for far longer without being annoying. I could see somebody that swaps out their ride every 2-4 years wondering why anybody would take out a long-term loan, but it can be a perfectly reasonable and rational decision for everybody involved to finance a car for 6-8 years.

    The buyer: They get to finance a car at record-low rates. Meaning that while they’ll be upside-down for a year or two, the low interest payments mean it won’t be for nearly as long as when rates were much higher. They can also afford far more car than they could otherwise.

    The carmaker: They get to sell more, and more expensive, cars than they could if financing were more restricted. (On the downside, those longer-lasting cars and loans encourage people to keep their perfectly good cars longer.)

    The bank: 3% is better than 0%. –>If properly underwritten<–, it's not even particularly risky. Borrowers are likely to prioritize their car payments pretty high since it's so easy for the bank to repossess it, and since life becomes so difficult without one.

    Lots of TTAC-ers like to moan about people "shackling themselves with debt for years", but with rates that low, a loan is practically "free money". Why pay for a car in cash (or pay it off quickly) if you can either buy a better car or deploy the payments you aren't making elsewhere?

    I know that if I was buying a new car today, I'd finance that sucker for as long as the bank would let me get away with (without jacking the rates too high), and I have enough money in my money market to pay CASH for the average new car. Three times.

    Sure, it's nice to be without a car payment, but neither is it that much of a burden, unless you do something colossally stupid.

    • 0 avatar

      THIS.

    • 0 avatar
      30-mile fetch

      I agree with a lot of this. A 72+ month loan isn’t particularly worrisome to me if the buyer does the following:

      -Buy a reasonably priced car in line with your income; don’t use it to buy loaded trims or a status symbol you couldn’t afford otherwise.

      -Minimize time underwater by putting something down or choosing a car with low depreciation and/or cash on the hood so you can get clear of the debt by selling the car if you need to. An Accord LX would be a pretty safe way of doing this.

      Seems to me that regardless of loan length, the real money burner is switching cars often. You lose on depreciation, you lose on trade-in and you lose on transaction costs like paper fees and sales tax. For someone keeping the car for 10 years, an 8 year loan shouldn’t inherently be a problem.

      • 0 avatar
        sirwired

        Oh, I totally agree that one should not buy way more car than you need, and certainly not one that is more payment than you can afford. And to this I’d add that if your credit is terrible, a 6+ year loan at 9%+ or something will cost a *bleep!*ing fortune.

        But if the loan makes sense, why so much attention paid to the term? If the loan doesn’t make sense (and the term can certainly be part of that) why not say so? An 8-yr loan for somebody with sterling credit to buy a Camry isn’t risky at all. An 8-yr sub-prime loan to buy some thrashed jalopy would indeed be insane.

    • 0 avatar
      Dan

      “Cars simply do not depreciate as quickly as they used to …”

      Historically loose monetary policy combined with limited supply due to the roughly 15 million sales that didn’t happen during the great recession from 2008-2012. Of course used car prices are high today. There’s no evidence that suggests either of these market conditions will still apply in 2020, much less 2022.

      “Sure, it’s nice to be without a car payment, but neither is it that much of a burden, unless you do something colossally stupid.”

      Stupid like having one of the 8 or 10 million jobs that went away in the recession?

      • 0 avatar
        dtremit

        We may see the rate of depreciation after the first few years increase, but there is no way we are going back to a world where a five-year-old car is basically worthless. Cars have significantly more utility at 5+ years than they used to, and values will reflect that.

    • 0 avatar

      Sure, if you can get promotional financing that’s cheaper than what you could be earning on your money, it can make sense to go with it. Although given that I see ads promoting “high yield” savings accounts boasting about their 0.85% interest rate, it’s probably not worth it.

      The problem is that most people taking out that financing don’t have money in the bank – 46% of workers age 45-55 have less than 10k in investments and savings*. If you are living check to check and have a giant car loan, a job loss or other emergency can result in that car leaving your driveway on the repo man’s tow truck.

      I was able to pay cash for my most recent new car purchase, and did. My new rule of thumb is that I’m not going to buy another new car until I have enough money to pay for it in cash while still leaving a comfortable amount of cash left over in the bank. Maybe I’ll lose a few bucks in interest-rate arbitrage, but the security of knowing that I own the car outright is worth it to me.

      *http://www.forbes.com/sites/nextavenue/2013/03/01/next-avenue-money-scorecard-how-do-you-rate/

  • avatar
    NotFast

    Wait, average is 74 months? Who is lending for longer than 72? I thought 72 was the longest most lenders did.

  • avatar
    PeriSoft

    “Consumers are demanding a lot more technology in their vehicles, infotainment technologies. There’s also a lot more safety features that are in vehicles right now. Emissions and efficiency technology that are in vehicles right now, that are making vehicles cost a lot more.”

    Oh, what a load of crap. I just bought a 2015 Hyundai Sonata with leather, a reasonably big sound system, 8″ touch screen with nav that’ll stream Pandora etc, heated seats, backup camera, blind spot detection and cross traffic alert, stability control, a zillion air bags, dual zone climate control, push button start and proximity entry, remote start via my phone, and probably more stuff I’ve forgotten.

    It was $21k and gets between 26 and 35mpg.

    In 1991, before all of those things that the analyst in question claims make cars so expensive happened, the Honda Accord had, in its average guise, none of the features I mentioned. Zilch. Zero. Maybe a driver’s airbag, but no leather, no ABS, no subwoofer, certainly no infotainment. It was smaller and it had 60 fewer horses, and weighed 500lbs less, but the mileage was no better than my Hyundai even with the manual!

    And you know how much it cost, inflation adjusted? Almost $28,000.

    Don’t give me any BS about emissions and safety and infotainment costing more. If you actually did an apples-to-apples comparison space/power wise and added in the safety and infotainment features blamed for “modern cars being expensive” you’d get something that drives away for at least $12,000 less than the equivalent vehicle did 25 years ago.

    Sometimes I wonder about these analysts.

    • 0 avatar
      2drsedanman

      When we bought our house, the bank said we qualified for $325K. We only needed $150K because we had put down $40K. The loan officer and realtor try to get us to look at more upscale houses since we qualified for so much more than we required. There was no way in hell we could afford a $325K mortgage! At first, I thought they were joking.

      I wonder how many people get pulled into this scenario with auto purchases. I’ll say it again, this is still a free country (for now) and people are free to purchase what ever they like. But I suspect people get talked into or feel like they need more car than they can afford. I wonder if the people who take out the 72 month or more loans now also do this in the future. I’m not sure perpetual payments on a depreciating asset is a sound financial practice.

      • 0 avatar
        duffman13

        When we bought our house I never even bothered to pre-qualify us, because I knew how much I was comfortable putting out in a monthly payment. So instead, I figured out what that was, and ran it through a mortgage calculator to figure out what that would be in terms of sale price so we could start narrowing options.

        I don’t doubt that the lender would have given me a number at least 30% higher than what I had figured out myself. I mean, I could have afforded that, but without vacations, toys, eating out, etc. That’s no way to live if you have the choice.

    • 0 avatar

      I own a 2012 Pathfinder LE. and a 1989 LaForza. The LaForza was 45k back in 1989, which makes it about 95k now. The Pathfinder was 34k after rebates and discounts. The mainstream Pathfinder has air bags, ABS, prox key start, infotainment, gps, heated seats and steering wheel, and a thousand other feature. The superluxury LaForza had a tape deck and seat belts.

  • avatar
    smartascii

    People make very few decisions on a purely intellectual basis. As an enthusiast and someone frequently sought out for car advice in my little social group, it’s very clear to me that almost no one makes car-buying decisions on a purely intellectual basis. Recurring themes include, “My car needs $1000 in repairs, so I should buy a new one,” “I need something reliable and boring that suits my growing family, so I’ll get a Jetta GLI because it’s pretty and fun to drive,” “I’d rather have this SUV with more mileage and a worse reputation for reliability that also costs more because it has a sunroof and isn’t a sedan,” etc.

    I think that a lot of this comes from the fact that cars are a very large expense for most people, and there’s a strong emotional aversion to the notion that the $X00 monthly payment might go towards something that doesn’t make them feel good. So when the thing that makes them feel good costs $30k+, and they make less than $60k in a year, the only way to solve that cognitive dissonance is to stretch the term of the loan. This is also necessary for the manufacturers, since the shrinking middle class leaves them with fewer and fewer people who can actually afford their products.

  • avatar
    energetik9

    There are obviously multiple factors that influence this. Costs of cars being part of it and as rates eventually go up, I would expect this to be more prevalent. I suspect too that part of this is simply because they can.

    On my last loan, I opted for a longer term mostly because the loan rate was the same and I liked the flexibility of lower payments. That being said, I usually make double payments anyway. I also just pay off my loans once the balance gets to be lower. I just like the flexibility of it.

    • 0 avatar
      ckb

      I consider advice based on the overall market trend as a very introductory starting point as to what I should do (if at all). How many financial situations are the exact median of the US? 1?

      I’m with you. I put 25% down and took the longest term for the rate that was offered, which is almost 2% less than the already low rate on my mortgage. The big down payment gives me plenty of time to stay ahead of depreciation so I’ll never be underwater and beyond that, you save the most by paying off your highest interest loan first. And if I ever want a shorter term I just increase my monthly payment.

      In my situation, a 72 month loan seems pretty low risk and gives me the most flexibility. However, if you’re doing 100% financing the entire equation changes. And that’s the thing, there is no simple guide where following one piece of conventional wisdom will ever give you the right outcome! (how about that line as “one piece of conventional wisdom”?)

      This type of article may be helpful in predicting market bubbles but as for consumer advice, time would be much better spent with a checkbook and calculator.

  • avatar
    dtremit

    The biggest question I have is: at what point do warranties start to catch up with financing terms? I have no real problem making a car payment over a long period, but the thought of owing significant money on something that may require significant repairs is unsettling.

    Lessors typically require gap insurance to protect against financial loss. At what point will banks start requiring extended warranty coverage on long loans?

    Hyundai’s warranty and Mercedes’ unlimited mileage CPO warranty seem to be the first steps toward a change, to me.

    • 0 avatar
      VoGo

      Even if you had a warranty for the life of your loan, you will still need to buy wear items. Brakes, tires, battery — it’s easy to spend $1,000 in month 50 of a 72/84/96 month loan. This is the moment of truth.

      Did you sock away enough to afford repairs, or are you going to trade in your 4 year old car on something new, this time with negative equity and start the cycle all over again?

  • avatar

    And factory rebates and incentives will continue to rise to keep pace, as they have for 4 decades. That’s what overcomes the negative equity inherent in long term loans. These days, the lender dictates the available profit on a car deal based on what they will advance on a car loan.

    The “scandal,” if you want to use that term, is that lenders still use “invoice” as if it is a relevant number. It isn’t. But it seems to be working for them. Today’s car buyer takes delivery for less than the dealer pays off at his/her floor plan lender. That didn’t used to be the case. Its a consequence of more trunk money and rebates designed to accomplish two things. First, to hide true dealer cost from consumers. After all, it really isn’t their business. Second, to overcome the negative equity that goes with long term financing.

    • 0 avatar

      And the cars with the biggest incentives and rebates will find themselves on the top of the “highest depreciation rate” lists, because they use sticker price when they calculate them, even though nobody actually pays that price on cars that have rebates on them the day they hit the showroom.

      • 0 avatar

        This is generally true. Its one of the reason domestics have generally lower residuals. Their incentives are more often offered as rebates while imports are generally “trunk money.” There’s more to this, but this is generally true.

  • avatar
    DenverMike

    It’s like any addictive drug. It can be used for good or abused.

    Except we’re brainwashed at an early age, saving first, then spending on the things you want is bad. You’re a sucker if you do. Loser even. Loser if you’re only driving what you can easily afford. And by “afford”, it’s what ever you can pay off quick or in cash, and not have revolving depreciation cycles plus interest, over and over. For some it can add up to millions in lost wages in a lifespan.

    I hope they don’t end up eating cat food and living in their van, towards the end. I see it all the time and wonder what went horribly wrong. What’s up, Bark M?

    • 0 avatar
      30-mile fetch

      Hey Bark, just so the know-it-alls around here can further satisfy their urge to offer unsolicited financial advice to those about whose finances they know very little, how about you post your tax statements, mortgage documents, and monthly receipts here? I’m sure they could exercise their acumen on your grocery budget, clothes expenditures, and investment strategies as well.

      I wonder if it ever occurred to some that one can responsibly spend a lot of money if one is also making a lot of money.

      • 0 avatar

        Meh, Bark wrote an article accusing anyone who thinks it’s a good idea not to take on too much debt of “not knowing anything about finance”. I think offering a counterpoint is a fair argument.

        It’s silly to say you should always lease or always buy, always finance or always pay cash, always buy new or always buy used. It depends on a ton of factors – age, income, savings, how much you drive, how much you care what you drive, ability to do your own repairs, tolerance for risk.

        As someone who is risk-averse, I prefer paying cash to having debt, and am willing to not drive my dream vehicle in order to make sure I have enough money in the bank. Clearly that’s not right for everybody, but it doesn’t mean it isn’t right for somebody.

        • 0 avatar
          Big Al from Oz

          Boy, a responsible commenter on TTAC.

          Are you risk averse, or do you fear debt? There is a difference.

          There was an old saying “a penny saved is a penny earnt”. I don’t believe in that.

          I believe “a penny invested wisely earn 2 pennies”.

          So, at times you do need finance. How you invest that finance determines how well you succeed.

          Invest in a car or a home? When you are young invest in a home and future growth. Then when you get older, buy and travel and do what you want.

        • 0 avatar

          Best finance comment ever on TTAC (madanthony)

          I was too busy at Work when Barks post came out but I really do think there needs to be a counter point.

        • 0 avatar
          30-mile fetch

          madanthony & mopar,

          A counterpoint to Bark’s article is fine and legit and I don’t disagree with madanthony’s risk averse financial approach. But DenverMike made a point of specifically targeting one person’s automotive financial decisions without knowing the full picture of their finances. That’s what I was responding to.

    • 0 avatar
      FormerFF

      I’m not sure who would be doing this brainwashing, other than advertisers, and I don’t know anyone who listens to them. All the advice I get is to do the opposite. The only people I know that buy expensive cars have high incomes, and still keep their cars for many years.

      Also, the average wage earner will make less than 2/million in a lifetime, they certainly won’t be costing themselves millions.

      • 0 avatar
        DenverMike

        Not you or I, but someone like Bark can easily blow through a million plus in lost wages, over a lifetime, just on the wheels he drove, the way he’s going. Not counting lost investment potential. If he’s got the wages and rich still living ancestors to back him up, good for him. If not, 9LIVES.

  • avatar
    TW5

    Salesman: What brings you to the dealership today?

    Customer: My ambition in life is to never own anything ever, only to pay financing charges.

    Salesman: Well you’ve come to the right place. Sign this form please.

    Customers: What does it say?

    Salesman: It basically says you’ll never own a car ever, and you’ll pay financing charges for the rest of your life. However, if you have an accident, you’re 100% liable, even though you’re declining any basis in the property.

    Customer: Sounds great! Can I sign my tax refund over to you in lieu of first months payment.

    Salesman: Feel free. We’ll apply it straight to interest.

  • avatar
    Eric the Red

    Being a “Rain On The Parade” type of guy. We have been in a 4-5 year run of historically low interest rates. This is going to end and probably soon (as the Federal overseers are hinting/saying). Financing 6, 7, even 8 years at an extremely low interest rate isn’t a horrible deal as we can always convince ourselves that we can get a better return on our money than paying cash for a vehicle.
    $30,000 financed for 6 years at 1.9% is $1,767 interest, same term at 6.9% is $6,730.
    Financed for 7 years at 1.9% is $2,064 interest, at 6.9% $7,918.
    Financed for 8 years at 1.9% is $2,363, at 6.9% $9,130.
    And trust me 6.9% is still historically a good auto interest rate.
    So the longer term, lower payment, sell more cars starts to go away with the pending higher interest rates. How are the auto makers/dealerships going to sell cars when longer terms really don’t mean cheap payments?

    • 0 avatar
      dtremit

      You’re looking at the big numbers, though; many consumers never do. Consider:

      $30k financed for 6 years at 1.9% is $25/mo; at 6.9% it’s $93/mo. Principal is $416.
      $30k financed for 7 years at 1.9% is $25/mo; at 6.9% it’s $94/mo. Principal is $357.
      $30k financed for 8 years at 1.9% is $25/mo; at 6.9% it’s $95/mo. Principal is $312.
      And more importantly:
      $30k financed for 4 years at 1.9% is $25/mo; at 6.9% it’s $91/mo. Principal is $625.

      Interest costs the same *per month* no matter the term of the loan. I think, perversely, higher interest rates are likely to drive the payment-oriented buyer into longer, more expensive loans, rather than shorter ones. If they can spend $400 a month, and the interest is higher, they’ll need to reduce the principal payment.

    • 0 avatar
      LUNDQIK

      This!

      Here’s what frightens me. The intellegent will adjust, the rest won’t. And which is a bigger population? I’m with most of the posters here – buy what you can afford, don’t stretch yourself, and enjoy the low interest rate environment. The thing is, most people will get bored with a car after several years, consumers are expecting every car to be feature packed, and many buy for status.

      So yes, while cars are lasting longer, certainly past an 8 year loan, who will likely keep one that long? Most consumers want something new. Couple that with the fact that the average price for a new car is $32k+ and you’ve got a recipe for endless debt.

      My personal rule of thumb is pay off in under 5 years and enjoy at least 3 years payment free. Car payment not to exceed 10% of take home pay. If my paid off car is still going strong and I get that itch (I usually do) I end up doing something to refresh it, or I reward myself with another toy.

      The interest rates will increase, it will be gradual and it will take a few years, but its coming. When it comes, there will either be a large uptick in leases or 10 year loans will be the norm.

      We certainly aren’t in a car financing bubble. But we could be headed towords one. I do not believe the average consumer is capable enough to understand simple loan calculations. When it always comes down to $XXX payments per month the battle is lost. Easy credit, predatory lending, and greedy consumers are what led to the housing bubble.

      When you tell someone they can get a BWM for Corrolla monthly payments(just extend the term) which car is the average Joe going to pick?

  • avatar
    NoGoYo

    I’ve always wondered this…what happens if a car you’re leasing is totaled or suffers a catastrophic mechanical failure during the lease term?

    • 0 avatar
      sunridge place

      You’ve never heard of car insurance or OEM warranties?

      • 0 avatar
        jmo

        And gap insurance which I think comes with most consumer leases. If the car is totaled, your primary insurance covers you as it usually does and any gap between what is owed and what your primary insurance pays is covered by the aptly named gap insurance.

      • 0 avatar
        NoGoYo

        I guess I was a little vague…

        If your car is rendered unusable, is your lease canceled or do you get another car?

        • 0 avatar
          28-Cars-Later

          AFAIK In the event of the destruction of the leased vehicle the lien-holder gets a check for the value of the vehicle and you get squat. This is one the reasons you don’t want to put money down on a lease because you don’t get it back.

          Someone else please chime in if they have experienced this sort of situation to confirm or deny.

          • 0 avatar
            dtremit

            If it’s totaled, the lienholder will expect a check for the then-current *payoff* amount (residual plus remaining payments, more or less), not the value of the vehicle. Normal insurance will pay for the current value, and then gap insurance (which is required in most cases) will pay the rest.

            If the failure is mechanical, and the car is still under warranty, the manufacturer fixes the car.

            Of course, if your lease is longer than the warranty, and it breaks, you’re on the hook for fixing it. A good reason not to let your lease outlast the warranty.

          • 0 avatar
            28-Cars-Later

            Thanks for the detailed explanation.

          • 0 avatar
            NoGoYo

            Thanks for that. I don’t know much about leasing.

          • 0 avatar
            highdesertcat

            I think dtremit is correct on all counts. I called a couple of oldsters I know who are currently leasing, and they pretty much said the same thing:

            Full insurance coverage mandated by the lease company

            + gap insurance to make up the difference

            + term life insurance highly recommended for anyone over the age of 55, in case of untimely death before the end of the lease.
            ———————–

            Here’s an example of a 0-0-0 three year lease on a Lincoln Hybrid:

            0 due at signing, 0 first payment

            monthly lease payment: $589

            monthly insurance payment: $102

            monthly gap insurance payment: $32

            monthly term life insurance: $50

            Plus the charges for damage beyond fair wear and tear is brutal, and mileage exceeding 36K at lease turn-in is $0.35 per mile.

            Manufacturer’s regular-maintenance intervals are included and must be adhered to.

  • avatar
    turf3

    Of all the people above who imply that saving and buying things for cash (or the least amount of debt possible) is stupid, out of date, for suckers, etc., how many have parents that lived through the Depression? How many have had to deal with an extended period of unemployment?

    If you earn a lot of money you can spend a lot of money. Especially if much of that is debt service, this is a fragile existence. Remember, the loan payments don’t stop coming due just because your paycheck did.

    Who is better off and lives a more robust life: the person who earns a lot of money and spends lots of money on car loans, or the person who earns much less money and doesn’t owe anyone a dime?

    Remember, anyone who earns a lot of money today can become someone who earns very little, tomorrow.

    And finally, face it, most of the people who are taking lifetime loans are NOT people who have the money and prefer to invest it while taking advantage of low interest rates. Most of them don’t have two nickels cash to rub together.

    • 0 avatar
      sunridge place

      ‘And finally, face it, most of the people who are taking lifetime loans are NOT people who have the money and prefer to invest it while taking advantage of low interest rates. Most of them don’t have two nickels cash to rub together’

      And…you know this to be true because? Your gut??

      Do you have a clue about who actually buys most news cars in America?

    • 0 avatar
      319583076

      “Who is better off and lives a more robust life: the person who earns a lot of money and spends lots of money on car loans, or the person who earns much less money and doesn’t owe anyone a dime?”

      Who is the arbiter? The individual? His/her peers? His/her bereaved? God?

      Who says being better off and living a “robust life” are universally endorsed goals?

      • 0 avatar
        turf3

        Well, obviously, the decision about how to live your own life should be yours, with due attention to those dependent on you and those who will be affected by your decisions.

        The current state of our society indicates to me that a lot of people are not even considering whether the lifestyle they choose can be financially supported should things go awry.

        Your implication that people who choose a lifetime of debt are carefully thinking it out, comparing the financial impacts, and then making well-considered decisions, would be more believable if we did not have a society with record numbers of bankruptcies, decades of governmental deficit spending, abysmal personal savings rates, massive numbers of real estate foreclosures, etc., etc., etc.

        Those of us who post comments urging caution (pay cash for what you can; minimize debt, especially for luxury or consumable items; if you take on debt, keep the terms short and put as much down as you can) are regularly excoriated, but no one ever seems to produce an argument that explains how you continue to support the inelastic demand of ongoing debt when your income disappears.

        And remember, when you declare bankruptcy, the rest of us end up paying for the things you couldn’t, one way or the other. So, yes, I would say that the individual does bear a responsibility to the rest of society to live their life in a way that minimizes the chance they will be unable to sustain themselves. That responsibility comes as the price for having the social safety net we provide.

    • 0 avatar
      dtremit

      None of the people in my family who lived through the Depression were averse to financing; indeed, both of my Depression-era grandparents considered post-WWII mortgage programs to be pretty fantastic. (And don’t forget that most of them had much better job stability in their prime working years than we do today.)

      My grandfather on my mother’s side was in his late teens during the worst years of the Depression, and remembered cutting and delivering firewood to restaurants in the dead of winter. He could barely afford food.

      After his kids were off to college — he paid for all four of them to go — he had a new Thunderbird or Lincoln every three or four years, until well into retirement. He mortgaged his house — and paid it off. They were not well off; he worked in the Rouge foundry and worked his way up to foreman, and my grandmother was a nurse. He died at 89 in fine financial shape.

      Sensible people make sensible use of the financial tools available to them. It’s not a generational thing.

      • 0 avatar
        turf3

        Remember, I didn’t say one should never take on debt. I said minimizing debt, especially for luxury or consumable items; and paying cash when you can, is a recipe for being able to weather whatever financial storms may come your way. I am still waiting for someone to tell me how it was better for them to have a large car loan (or a big lease) when they lost their job and could no longer make the payments, than it would have been to own the car outright.

        There’s a big difference between a guy in his fifties or sixties, with a paid for house, retirement coming soon with a guaranteed pension, buying a new car every few years, vs. a twenty-something signing up for a lifetime of debt that they won’t be able to service should they lose their income in today’s world of the disposable worker, no pensions, and 40 years away from Social Security (if it even exists by then).

    • 0 avatar
      30-mile fetch

      “If you earn a lot of money you can spend a lot of money. Especially if much of that is debt service, this is a fragile existence. Remember, the loan payments don’t stop coming due just because your paycheck did.”

      Turf, this is obvious and that wasn’t the point of my statement. High earners can responsibly be high spenders if they are properly funding their retirement and emergency funds. A rotating multi-car stable in a big house doesn’t mean the owner doesn’t have half a million dollars socked away for emergency.

      “Who is better off and lives a more robust life: the person who earns a lot of money and spends lots of money on car loans, or the person who earns much less money and doesn’t owe anyone a dime?”

      You don’t have enough information to answer that question. Who says the person spending a lot of money on cars also doesn’t have a killer 401k and enough accessible non-retirement money to stay afloat for a year without their job? Who says the modest earner who doesn’t owe anyone a dime has enough in the bank to survive 2 months if they lose their job?

      • 0 avatar

        I don’t think there is much issue if you have a pile of money stocked away. The bigger issue is that most of these loans are going to people barley making their house payments who decide they need a new car in the 30k range with no real way to pay for it so they extend the payments over as long a period as possible.

  • avatar
    PentastarPride

    To date, I have never leased or financed a car. I plan to keep it that way.

    I have sub-accounts set up for different types of savings separate from my main savings account (emergency fund, vacation fund, car replacement fund) and what would otherwise be a car or lease payment goes into the car replacement account.

    This system may be difficult for people who are already in a financed car, unless their budget allows them to do this. It’s best to start when you already have no car payment and have a relatively reliable car that you can keep for at least three years (maybe more) to save for the new car.

    By the time I grow tired of my 2011 Chrysler 200 (in about ten to 15 years) I will have the cash to acquire a gently-used, three-to-five year old car. Private party, of course, no sense in paying a $5-10k premium for essentially the same car at a dealership.

    Unfortunately, I don’t think it will be the money that will be a setback when the time comes. I don’t think I’ll be able to find anything I’d want to drive ten to fifteen years from now because the cars today are getting ugly and too gimmicky and it can only get worse.

  • avatar
    Big Al from Oz

    There is one huge issue that hasn’t been discussed on why long term loans are bad. Especially on a highly depreciating asset, like a vehicle.

    The GFC. Long term or poor loans as I would describe these types of borrowing instruments are bad for each and every person living in a country.

    I’ve read that some believe it’s their God given right to do and borrow as they please. I don’t think so. I do believe this to be the view of selfish and greedy people.

    The use of poor financial instruments affects most, except the rich, ie, GFC. I’m not stating these loans will create a GFC, but when the debts can’t be paid, who pays? YOU.

    Who pays for bad debts? These people who think they have the freedom to do what they want, again at the expense of others.

    This is why realistic regulations are required to manage those who don’t know how to use finance. The arguments that cars last longer or whatever feeble excuses I see from those who can’t afford a pot to p!ss in is just an excuse for them to justify wasting a resource.

    Like most regulation that protects the consumer it protects us from greedy financiers to the dumb f#cks who couldn’t manage making toast, just like traffic regulations.

    Who will pay for these poor loans? Those who use them because they don’t have the money, or, those who have the money?

    I say if you can’t pay off a new vehicle in 3 years or pay off a couple of year old vehicle in 4 years, you don’t get to drive it.

    This protect the consumer. If you offer the consumer protection then business will flourish. F3ck selfish unions, large business, etc. The little guy the guy spending his money is the one to protect.

    Maybe many who drive vehicles in the US might be driving what they really can’t afford.

    • 0 avatar
      John

      This. Everyone who pays taxes in the USA paid to bail out the banksters when subprime real estate loans blew up. Taxpayers will pay again when subprime auto loans blow up. “Corporations are people, my friend”, and it’s their First Amendment right as PEOPLE of the United States of America to contribute as much as they want to their political candidates, who WILL vote to bail them out again.

      • 0 avatar

        RE: “Everyone who pays taxes in the USA paid to bail out the banksters when subprime real estate loans blew up.”

        What exactly did taxpayers “pay” to bail out the “banksters?”

        RE: “Taxpayers will pay again when subprime auto loans blow up.”

        And what exactly will they “pay” when subprime auto loans blow up?

        Define “pay.” TARP has shown a profit. Subprime car loans outstanding have averaged 14% – 15% of total auto loans outstanding for the last couple of decades, exactly where they are today.

  • avatar
    28-Cars-Later

    Wait, are we still mocking the stock photos?

    THE DEVIL: Yes, sign right there and I own your soul!
    MAN: Wait, I thought I was buying a used BMW as-is?
    THE DEVIL: You are, I will own your FINANCIAL soul! Muhahahahaha.

  • avatar
    Carilloskis

    I have a friend who works in the dealer financing arm of a German Car dealership in our home town. He was telling me a few months ago how he approved a lady who was on her 5th repossession, I asked whats the interest rate he said it didn’t matter she’s not going to pay it. He explained that if they didn’t finance her on the car then she would go to a competitor dealership who would and they would loose the sale. After she leaves with the car its the finance companies responsibility to make sure she pays and they approved her, so the Dealership gets paid regardless of whether or not the customer pays the bank. my friend records that this lady has really gamed the system having never made a car payment and getting a new car every few months on the zero down bad credit financing schemes and she is either smarter than everyone driving cars for free, and has no need for good credit (i.e. already has her home financed) Or incredibly dumb and lazy.

    • 0 avatar
      DenverMike

      How *wouldn’t* the finance co find the car as soon as she misses the 1st payment. GPS trackers are cheap and there’s no reason to not hide more than one unit in the car, especially if it’s a new BMW and the lady is a known habitual skip.

  • avatar
    mkirk

    What an upstanding company Honda is. This sort of thing makes me believe in Honda and know that they are looking out for me and I trust that if they made a mistake like, I don’t know, installing a claymore mine instead of an airbag in a steering wheel that they would make it right quickly and not do shady things like having customers buying those models used sign statements absolving them of liability should the lifesaving device fill the drivers face with shrapnel versus saving them. Hooray for Honda’s corporate responsibility.

  • avatar
    John

    One third of auto loans made in 2014 were subprime. Subprime eight year loans on big trucks and coovies is going to end well. OTOH, the price of compact used cars has dropped significantly, as the barely making it sell their Corollas and Civics and buy new gass guzzlers.

    • 0 avatar

      RE: “One third of auto loans made in 2014 were subprime.”

      For the last couple of decades a third of auto loans are either sub prime or BHPH. Is this a big deal? That’s how millions have the opportunity to rebuild their credit scores after the Great Recession. Some will move up to near prime or prime. Many won’t. They lack the discipline. This is nothing new.

      We still have an extreme pre-owned vehicle shortage after the Great Recession robbed us of millions of new vehicle production, from 16.9 at the peak to about 10.5 million at low ebb. Then there was Cash for Clunkers that took many more and crushed them. Prices on older vehicles with high mileage have never been more valuable. Dealers in the BHPH/Sub Prime business call those vehicle “inventory.” There’s a lot of demand and not a lot of supply. This is much ado about nothing.

  • avatar

    RE: If interest rates are low enough, then why not go for the lowest possible payment by getting a longer-term loan? Still makes way more sense than leasing.”

    Even if you have the money to pay cash, why do it? Keep your money in the market paying you 8% plus, and take a 0% – 3% car loan, and pocket the difference.

    • 0 avatar
      DenverMike

      Not everyone is going to put everything they have into the “market”. Or any of it into the “market”. I definitely don’t believe in putting too much into any one area for investing. Nor that 100% of your surplus, free and available income should be invested at all.

      As said over and over, one rule doesn’t apply to everyone.

  • avatar

    Certainly one rule doesn’t apply to everyone. Would you bury your surplus in the back yard?

    • 0 avatar
      DenverMike

      I wouldn’t bury a lot of cash in the back yard, but that’s the way it’s always been done. Still done. Over a 100K is risky. But same with banks.

      Lots of things you can own off the books or have vague value.

  • avatar

    In Canada it revolves around a monthly payment of $500. per month which is a constant for the past several years.

    Transactions are closed on the basis of the monthly payment, and who can turn over deficiencies.

    Aspiring towards vehicle ownership is a thing of the past, having mobility for a monthly fee is the new direction. Especially with increased technology that makes vehicles obsolete (from a technology perspective) and disposable.

  • avatar
    Ennis

    I took the 0% 6-year offer VW gave me when I bought my current car (’13 Golf TDI). They were heavily advertising 0% for 5 years, and when the F&I guy said they could actually do 6 years I couldn’t see any reason not to. I will probably pay it off in another year or two at bonus time, otherwise given the miles I drive (15k or 16k a year) it would have just under 100k by the time it is paid off. That’s a little frightening for a VW (I have had three GTIs prior, both good and bad experiences), so I added the mechanical breakdown coverage to my Geico policy (~$5/month covers you up to 100k with a $100 deductible per occurrence). As long as you are reasonably smart about it, I don’t see a reason not to take the free money for as long as they’ll give it to you.

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