Americans Are Taking Out Ridiculously Long Auto Loans

Discussion in 'The OT' started by Mark Holtz, Oct 2, 2019.

  1. Oct 2, 2019 #1 of 22
    Mark Holtz

    Mark Holtz Day Sleeper

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    From Car and Driver:

    Americans Are Taking Out Ridiculously Long Auto Loans
    With the average loan term exceeding 60 months and $30,000, can people still afford new cars, and how do you avoid falling into the trap of long-term debt?
    FULL ARTICLE HERE
     
  2. Oct 3, 2019 #2 of 22
    SamC

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    Well, obviously if a person can, it is best to pay cash for a car or anything else. With the exception of if you are making more from an investment than the interest rate on the loan, which is the situation I am in.

    However, that is not possible for most people. Is 60 months “ridiculous” ? Five years. IMHO, no. A new (if you are financing a used car, you cannot afford it, and need to get a yet more used car or move to a place with bus service) car, well built (AKA not GM, Ford or Chrysler) and properly maintained (do everything they say in the owner’s manual, period) should certainly last 5 years with no problem. And will be covered by a warranty for most of that time, if not all of it. And have some residual value at the end, reducing the loan amount for the next car.

    So a car costs $X/month. Every 5 years you get a new one. Obviously reason and common sense are needed. Never buy more car than you can afford, buy a car that fits your needs and which the payment will be affordable. Buy gap insurance if you cannot afford to self-cover that. Simple.

    The days where most people were stuck with Detroit’s garbage, and thus had to trade cars every two or three year just to have a car that was road worthy, are thankfully long gone. A quality vehicle should certainly last a decade or more.
     
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  3. Oct 3, 2019 #3 of 22
    AZ.

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    Wages have been stagnant for 40 years!....Everything has gone up,and up, so the only way to afford anything new is with credit....
    The American people have been fooled, and now its to late to change or fix anything that can help them.
    40 Years ago it was a big deal to hear about multimillionaires....Now its billionaires!......The regular Joe has been left behind in the dust.
     
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  4. Oct 3, 2019 #4 of 22
    dmspen

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    My credit union has 7 year car loans available. I have purchased 3 cars in the last 9 years and got 7 year loans on each.
    The reason? It keeps the payment smaller. I pay them off as soon as I can, in fact all 3 are paid for now, free and clear. The amount I paid in interest on the 7 year loan was smaller than a similar 5 year loan.
     
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  5. Oct 5, 2019 #5 of 22
    Mark Holtz

    Mark Holtz Day Sleeper

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    I'm actually in a fairly good state. I'm fortunate in that my own 2013 Buick Verano (76.5k miles) and my mother's 2016 Buick Verano (28k miles) are both paid off. Much of the wear and tear on a vehicle is through a daily commute to/from work/school as well as errands. My usage went down because I was working from home on the weekends and, after my recent move, went down further as I am extremely close to my workplace. I actually consider myself lucky. The only thing that my present vehicle doesn't have that I really want is Android Auto integration. At this point, that's a bad reason to do a trade in.

    The problem is that people treat cars as status symbols, and end up buying more car than they really need. I know that when I was car shopping in 2014, my list included an item or three that I really didn't need, but would be really handy, such as remote start and Bluetooth. But, my intention is to keep my car for at least 10-12 years, or at least 150,000 miles.
     
  6. MysteryMan

    MysteryMan Well-Known Member DBSTalk Club

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    mercedes-benz-g63-amg-6x6-by-mansory_100514115.jpg My idea of a motor vehicle status symbol.
     
  7. jimmie57

    jimmie57 Hall Of Fame

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    One of the major problems with looooonnng time frame loans is that the vehicle's value drops at a faster rate than the principle of the loan. If you get in a wreck and have to replace it, the insurance gives you the value of the item and not what you owe on it.
    Or you go to trade it in 3 years and the same situation. Bogus numbers: 3 year old item is worth $18,000 but you still owe $22,000. When you trade that extra $4,000 is added to the new item and now your problem is going to be even worse.
    Bottom line, get a loan that keeps the principle dropping at the same pace with the value of the item's drop or get a lesser value item.
     
  8. scooper

    scooper Hall Of Fame

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    Ever heard the expression "drive them until the wheels fall off" ? Well - that describes the wife and me. Our history to date has us buying a new or "new to us" car about once a decade. We just paid off the last one (a 2015 VW Golf SE TDI on a 54 month loan - new). Our other car is a 2000 VW New Beetle TDI - we bought it used in March 2003 with 67,000 miles - it now has 371,000 miles. We've put more into keeping it running than most people would ($3000 for an automatic to 5 speed manual conversion at 252,000 miles when the automatic died), but at the time it was the most economical decision (witness the additional 120,000 miles we have put on it since - and I still use it as a daily driver).

    Our previous cars that we have had -
    1983 Ford Ranger pickup - my graduation from college car
    1988 Acura Integra - right before we moved to KC, we gave it to a friend who wanted it and he's been slowly correcting the issues it had developed. - When we gave it to him, our last fillup had been at 279,285 miles
    1990 Honda Civic Station Wagon - I screwed up on this one - overheated it at 290,000 miles after we had already acquired the Beetle. (coolant lines leaking)

    And that's it. I expect to buy another car in the 2020's sometime to replace the Beetle, and it will probably be the last car we buy. I also expect it to be used (unless we get lucky and hit the lottery).
     
  9. Rich

    Rich DBSTalk Club DBSTalk Club

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  10. MysteryMan

    MysteryMan Well-Known Member DBSTalk Club

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    If you never heard of it you probably can't afford it. :D
     
  11. Mark Holtz

    Mark Holtz Day Sleeper

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    Yeah, kinda describes my mother's last car. She obtained it in the mid-1990s, and we finally replaced it two years ago because all of the seals were failing and fluids were leaking. She liked my 2013 Buick Verano so much, she got one with a slightly lesser feature set. I have the funny feeling I'll be inheriting it.
     
  12. Rich

    Rich DBSTalk Club DBSTalk Club

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    Yup. Looked at the prices and lost interest.

    Rich
     
  13. SamC

    SamC Hall Of Fame

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    Well that is called being "upside down" or "under water". As with paying cash in the first place, the best solution is to self-insure yourself for that risk. If it is truly a life changing amount of money, then the solution is gap insurance, which, because the risk is really quite low, not very expensive.

    As to trading a car when you are under water, simply don't do that. If you owe $22K and the car is worth $18K and you want to finance another car including the $4K gap, you cannot afford to trade cars. Don't.

    As to a loan where the principal drops at the same pace as the value, assuming you are financing something close to 100%, I know of no such loan. The first mile is the most expensive, and you are likely to be under water on any loan, regardless of term, until the last 25% of the loan.

    From a financial standpoint, that is an option, provided you really mean it, which means truly drive the car until its remaining value is the scrap value of the parts. That is different from "keeping a car a long time" and then expecting a return on a trade. That is almost never financially wise.

    From a lifestyle standpoint, that is a different discussion. As with all such Dave Ramsey (the world's worst financial adviser) views, yeah, you can live under a tarp and eat bologna every day too, but, as Lord Keynes wisely said "In the long run, we are all dead".
     
  14. jimmie57

    jimmie57 Hall Of Fame

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    My post was just pointing out pitfalls.
    You must study loans and their terms and compare them to the expected drops to get a loan that keep up with the depreciation of the item.

    As for me, I have a 2012 Kia that has just 25,000 miles on it. I am keeping it until the drive train warranty runs out and then I will trade it in.
    I pay half of the value of the item, finance the rest for 3 years and pay it off in 1 year.
    My son has a 1998 Chevy S-10 PU that has 52,000 miles on it.
    We are not trading it unless some unforeseen disaster happens to it.
     
  15. James Long

    James Long Ready for Uplink! Staff Member Super Moderator DBSTalk Club

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    Paying cash will never leave you upside down or under water. The vehicle may lose value quicker than expected, but you won't be left owing debt on something you no longer have.
    GAP insurance is intended for accidents, not loss of trade in value. While I won't say that no one would ever guarantee the future trade in value of a vehicle, one should carefully read the policy.

    The only reason why the math works for less than 100% loans is because the quick drop in value immediately after purchase is compensated for by not having a 100% loan.

    Here is an experiment anyone can try: Go to KBB.com or NADAGuides.com or anywhere else that gives car values. Compare the retail price to the highest trade in value. On the used car I purchased earlier this year the difference is currently listed as $3,000. (On the 2019 version the difference between purchase and trade in is $10,000!) Drive it off of the lot and the value drops immediately.

    My only expectation is to get the "blue book" value out of my trade ... if that is $1,200 or $500 the dealer needs to offer what the trade in is worth on the open market.
    I normally keep a vehicle at least a year after it is paid off ... so I don't end up upside down or under water.
    I have GAP insurance in case my plans are cut short by an accident or theft. GAP doesn't cover an early trade in.

    One has to make choices. Good choices begin with buying what one can afford to pay for. Bad choices begin with paying more than one can afford. Most of Mr Ramsey's advice is against making bad choices that will lead to less real choice in the future.

    Buy a car that one can't afford with a loan that one can't afford and there is a better chance that one will end up under a tarp eating bologna. But get away from the impulse shopping and buy a reasonable vehicle (not necessarily a "Dave Ramsey" special, but something that runs and doesn't need daily repairs) and one might end up being able to afford a nicer place to live than a tarp and better food to eat than bologna.

    Yes, it is a lifestyle choice ... choose to have the best car in the parking lot at work (and trade every year or two to maintain that status) or choose to have a decent house. If one does not have income that allows one to do both make a choice. In Dave Ramsey's world one can have anything that they want (including the Lamborghini Aventedor) as long as they can pay for it.
     
  16. billsharpe

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    I haven't had a car loan in the last 30 years. Nor have i run a credit card balance except for one month back in the 60's when my entertainment center stopped working and I had to replace it quickly. Four kids at home then -- needed TV service!
     
  17. Mark Holtz

    Mark Holtz Day Sleeper

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    From what I've seen of Dave Ramsey, on a macro level, I agree with him. On the micro (or detail) level, we disagree on some points.

    The challenge I have is that the salespeople market towards the payment, and structuring that loan to make that payment work. I'm not interested in the payment, I'm interested in the price. And, since you don't purchase a car everyday, and usually, when you do, it's under a pressure situation, the car salespeople often have the advantage.... sometimes to the point of the local professional football team playing against a pee-wee team. Guess who wins? In my opinion, the best time to start saving up for a new vehicle is when you are finished paying off the current vehicle.

    Hopefully, I'm interpreting that as "pay off the credit card each month", not "never use the credit card". I usually try to pay off the entire credit card, but because the moving company put the entire cost of the move to Texas on my credit card, plus the cost of staying in a temporary hotel for three weeks, I almost maxxed out my credit card. :( It took about three-four months to get it all paid off. Thank goodness that credit card had a low interest rate.

    With the exception of the mortgage payment, all of the monthly expenses (gas, electric, water/sewage/garbage, Internet) are charged to my credit card, and I pay off the balance each month. Because it's a rewards card, I got two $100 Home Depot for use for home improvements. I'm single, and my mother lives with me. That helps. But, I don't see a new car for me in the near future.
     
  18. James Long

    James Long Ready for Uplink! Staff Member Super Moderator DBSTalk Club

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    My problem with most car dealers is that they seem to be selling financing more than vehicles. Cash shuts that down quickly ... as well as bringing your own financing. I got the car I wanted for the price I wanted but did not buy a loan from a car dealer.

    Even with the finance company (a credit union where I already have an account and mortgage) I stayed in control of the deal. They gave me a rate that was better than the dealership, I figured out how much I wanted to pay per month. It was a little higher than I was comfortable with so I made a larger down payment to lower the amount financed. I am a firm believer that people should control their money and not let their money control them.
     
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  19. SamC

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    You guys are not paying close attention to Ramsey's really bad advice. He says to NEVER borrow any money EVER for ANY REASON.

    That means, as it relates to cars, driving (assuming you live in the majority of the country where car ownership is necessary) ONLY what you can pay cash for, which for most people means ancient cars always in need of expensive repairs; and living ONLY where you can afford, which for 99.9% of people means renting for life, never building any equity.

    No, responsible borrowers understand that it is necessary to borrow reasonable amounts to have reasonable cars on a reasonable cycle; and a home, and that by doing so you can not only live a life that is reasonable and pleasant, but be much more financially responsible than Ramsey's drones.

    Worse advise than Ramsey's is hard to find.
     
  20. Rich

    Rich DBSTalk Club DBSTalk Club

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    I never understood that kind of logic. I've known people that lived like that. I know it can be done. Don't think I'd be happy. Financial responsibility is difficult to teach and credit cards are a gateway drug to financial ruin. The world we live in makes it easy to ruin our lives financially. Good arguments, Sam (hoping that's really your name). Well said.

    Rich
     

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