Wave a Solemn Goodbye to Cheap 84-month Loans, Shoppers

At 0%, I would be seeking an 84 month loan even if I could pay the balance in cash.

@jack4x You're saying that because 0% is a nice discount (maybe 15% with today's low inflation), but if you paid according to the loan schedule you'd be upside down for 5 years of the loan. I prefer to pay off a depreciating asset ASAP.

@SCE to AUX Being underwater is not bad in itself. Failing to plan ahead for the possibility of needing to call in the note, whether through gap insurance or keeping liquid reserves is bad. Similarly, whether an asset is depreciating or not shouldn't make a difference in whether you pay it off sooner. The car will depreciate at the same rate whether you own it outright or finance. Paying early on a low interest loan is simply sacrificing potential returns on the money elsewhere for a feeling of security in not having the debt. Only you can decide if that tradeoff is worth it in your case.

@jack4x: "At 0%, I would be seeking an 84 month loan even if I could pay the balance in cash." The times I've looked in detail at 0% loan deals, they do effectively charge a fixed interest rate. It's just hidden elsewhere in the cost of the car. The deal is that you usually forgo discounts on the car in exchange for the 0% interest rate. If you do the math, it usually works out to the same amount out-of-pocket as other pretty-good-deal interest-rate. That's not to say a 0% interest rate loan is a bad deal (it's probably a pretty decent deal). However, the devil is in the details and giving up $1000 in incentives (or whatever) is just another way to charge you for borrowing the money. It's something you should investigate before signing the deal -- especially if you plan to pay off the car early. Always read the fine print, with your calculator out.

@Luke42 "Always read the fine print, with your calculator out." On this we can agree wholeheartedly.

@Luke42 - I mentioned this very fact earlier. Discounts are less or nonexistent with an alleged 0 % loan.

The banks aren't selling the money at 0%, the mfg is paying the interest for you, usually instead of a giving you that money as a rebate.

They are NOT giving 0% loans to people who are much of any risk. If you don't have super-prime credit you are NOT getting one.

@SCE to AUX From an accounting perspective, that is an idiotic way to look at it. A car isn't simply "depreciating", you are using up it's useful life. So matching the ongoing cost of the car to that useful life is actually a much smarter thing to do, when the cost of funds is negative (or even just less than the inflation rate). A 0% loan, all else being equal*, is effectively PAYING you to take their money - due to inflation, a dollar today is worth significantly more than a dollar at the end of the loan term. GAP insurance mitigates the risk of a loss, and is available quite cheaply with many car insurance policies. So as long as you are sure you are going to want to keep the car most of the length of the loan, the smart money is on taking the long loan. *I fully realize things are never equal, and inevitably these finance deals come with a significant loss of discount on the price in most cases. And of course, nobody knows the future, so I won't owe money on a car out of warranty (I'd still take the longer loan period, but I'll pay it off when the warranty ends). But that has nothing to do with it being a "depreciating asset". Spreading the cost of the car over it's useful life let's you do more useful things with the money in the meantime.

@jack4x I refuse to be underwater on a vehicle, and I *freely* admit it is both irrational and in many cases today financially stupid to even worry about it. But I had the good fun of having to get rid of a car I was underwater on due to a job loss almost 20 years ago (bailed out by the 1st Bank of the Old Man, and paid back with interest - nothing sucks like making payments on a car you no longer have). And I can afford to be a little financially stupid now and again. :-) I also just paid off my Fiata after only 15 months, and given I had a 2.5% note that pained me. Needed to for an upcoming real estate deal - darned debt to income requirements on investment property meant that $500/mo payment needed to go away. But better than having to sell investments to buy it and realize gains and pay taxes on it (and not as much gain as it should be since the market is still down). But if anything happens where I need a bunch of cash in the very short term, I can drop by CarMax and walk away with a big check, so no big thing. A nominally 2yo car with 5K on it is right up their alley.

That worked great for me when I had the time, energy, and a place to work on cars, and no money. For many years. Today I don't have any of those three things, but I have plenty of money. So I buy new cars.

You really need to read the piece (on TTAC) by Jack Baruth: "You gotta be rich to own a cheap car." It should help to show you the folly of such (buy cheap) sentiment.

Agree completely. This is also why I paid off my second (and current) house as quickly as I could afford to, which was 13.5 years instead of 15, and that included an 8-month layoff only two years into it. My FIL always believed that a house is the best investment because it will always appreciate, but that is not my experience. Corrected for inflation, and accounting for updates, I'd barely break even on my house today, and it's a decent house in a decent neighborhood. In contrast, after 12 years in my first house at 30-year rates of 9.5%, then 7.0%, I sold it having less than 20% equity. I had relatively good income at the time, but the lengthy note and high interest rates worked against me. I much prefer the security of minimal net liability, which starts with spending modestly and aggressively paying it off.

I did 66 months on my TDI wagon, and I don't plan to do that again. Having a car payment hang over your head that long isn't a good feeling, especially for an anxious person. When VW bought the car back, I had already bought a used car that was paid for immediately. It was a great feeling to be free of car payments.

@brettc Yeah Brettc, 66 months isn't too bad..if I really love the car, I could see myself do that. Like I said, my personal rule of thumb is..if I am not comfortable with the size of payment for a 60 month loan with 10-15% down, then I can't afford the vehicle. Of course we all have our threshold. For me, things get a bit weird once they get to $30,000. Honestly, it is more of a psychological threshold not necessarily based on my buying power but it is what it is.

@SCE to AUX While it is true that houses don't always appreciate, long term they are a good investment, if you buy right and/or buy at the right time they can be a good short term investment too. My first house had an interest rate in the 9's, was purchased with a FHA 2.5% down loan. I owned it for 2 years and walked away with enough cash to put 10% down and pay the closing costs on a house a little more than twice what I paid for the first. There was more money left over than what I had put into the first house too. Then there were tax savings on top of that. Much of that was timing of course, and a little bit of making the house more presentable, cleaning up the overgrown yard, painting a couple of the rooms, and a general spit shine. Of course shortly after purchasing that second house appreciation rates leveled off and it took ~6 years to achieve the same percentage of appreciation as I did in two on that first house.