Living the life (Of endless loans)

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There are a lot of things that make me incredibly jealous of America. New York’s 2nd Avenue Deli, for example. You also have a plethora of cheap used cars, and you don’t have to pay through the nose in import fees every time you want to buy anything from the Internet.
Having said that there’s one thing I absolutely don’t want… car loans with excessively long terms.

Having gone to private school, I am more than familiar with the concept of “Keeping up with the Joneses”. This is something that is sadly too often taken to “Dazzle, shame and humiliate the Joneses until they’re begging for mercy” by the upwardly mobile. The results speak for themselves: Credit card debt, over reliance on loans, and bankruptcy filings. You don’t need to be a physician to deduce the amount of stress all this financial juggling brings to the equation. But hey, at least you went to Hawaii last year while the Joneses stayed at home. That’ll show them, if they’d care.
Which they very likely don’t.
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Now if you’d just put a drop of your blood here

Turning the discussion back to cars, I was reading some distressing numbers about autos loans the other day. Apparently the average ownership time of a new car was around 66.2 months in 2012. Although I’ve read some sources that pin the number at 93 months. One thing is certain though, the length of automotive loans is increasing.
Forty percent of loans are 72 months long, with more and more people deciding to go even further and committing to a payment term of 84 months. Is it economically sound? Well, it depends on a couple of things. First, how long are they actually planning to keep the car? Good. Now subtract half of that and that’s probably the amount of time they’ll actually own it. Cars break down, get stolen, and ordinarily people just get tired of them. Which has absolutely nothing to do with the fact that Jenny from down the street got the new model and won’t stop driving it around, mocking everyone with it. There’s also depreciation, wear and tear, and maintenance costs to consider. Nothing worse than having your car have a catastrophical failure when the warranty has expired and you still have to make payments on it.
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And let’s not forget the unknown factor. I think few, if any people, go into a car loan thinking they’ll default on it. But if we’re honest, who can really guess where they are going to be seven years down the line? Maybe they’ll get that promotion they’ve been burning the midnight oil for, or Murphy rears its ugly head and the company decided to outsource everything on year 6 and they’re fresh out of a job. That’s not to say that this can’t happen over a shorter period of time, but at least you can cut your losses easier and pay less interest to boot.
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But if I were to guess, I believe that none of these thoughts cross the mind of the happy car shopper. They just see that they can have a nicer car while making the same monthly payment, nevermind that they’ll have to be making the same monthly payment for a couple more years. But their brand new car will certainly show those people in the gym who’s boss. And to the Joneses too. Their car is so much cheaper. Let’s see them try to keep up for once.

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  1. P161911 Avatar

    The ones concerned about keeping up with the Joneses are the ones leasing a new car every 24 months. The reason folks are having to finance for 72+ months is the increasing cost of a new car. What is the average cost now? Close to 30 grand. And if you are looking for a full size trucks you choices are new ones, used ones with about 50k miles for 85% of the value of a new one, or cheaper used ones with 150k miles on them for about 50% of the new price. (Beater work trucks can be had cheaper.)

    1. Sjalabais Avatar

      Interestingly, the average pay of American workers has not been going up much since the 70s, in real terms. Right now I am too lazy to look up the numbers, but I’d assume that the cost of a new car rises in line with inflation, and that’s before looking at what you can get for your money (lots of stuff is standard now, generally high quality products, good choice).
      I recently posted info about the Lada Kalina here, which is a 7500$ new five door wagon in Europe. Sure, you wouldn’t want to own a Lada, but Dacia is not far off, Peugeot and VW also offer new cars at very low prices etc. Used cars are cheap by all standards almost everywhere in Europe and in the US right now.
      So…I’d say nobody is forced to buy a new car they really can’t afford.

      1. P161911 Avatar

        While content in cars has increased dramatically, the base price of cars has out paced inflation by a good bit, at least 25%. A base full size Chevy truck could be had for $15,235 (in 2015 dollars) list price in 1973, a 2015 V-6 short bed Silverado work truck lists for $26,105, that’s an over 50% price increase adjusted for inflation!

        1. Sjalabais Avatar

          Just checked your numbers – If we look at the median household income in the US (which makes sense because the average is quite affected by great inequality), the nominal numbers were 9129$ in 1973 and 49486$ in 2012. Adjusted for inflation, median household income in 2012 is 2500$ higher. Original MSRP for a truck like that would be below 3000$…wow! You’re right! That’s an actual and serious disparity between the US and Europe. Have to look into that tomorrow (almost midnight here).

          1. Vairship Avatar

            Now look at CEO pay, and you’ll see where the difference went…

        2. Tanshanomi Avatar

          Here’s a relevant tidbit I posted to the forum a while back…

      2. crank_case Avatar

        I think the only country bucking the trend on cheap used cars in Europe is Ireland. It flipped between extremes of 8 year old cars being seen as “old” to being sought after. Perfect storm of an economic downturn, collapse of new car sales between 2008-2014, when a lot of people had already been holding off in 2007 due to a change in the tax system from CC to CO2. A lot of our used stock was sourced from the UK and Japan too but sterling and yen haven’t been favorable lately so there’s been a choking of used supply. People want real money for 100,000 mile Honda Civics, when they would have been beater territory previous. New car “registrations” are on the up which is being hailed as a sign of recovery, it sort of is, but I think a lot of people are getting to the stage of actually needing to replace a car and going for a cheap Dacias or Seat on PCP finance because used isn’t as good value as it used to be. (In real terms probably still cheaper than many euro countries, but we’re talking in relative terms)

  2. CSM Avatar

    The car I can afford is the one I can buy with cash.
    I don’t believe anybody is forced to buy (or finance) a car. All are there voluntarily. Marketing professionals have created desire for the latest and greatest cars. Such professionals are quite adept at helping us rationalize spending half our annual salary for shiny new things that depreciate by 20 percent within moments of our signing the paperwork.
    Some people can afford buy or lease new cars regularly. Many cannot. We are all subject to very high quality marketing however, and the smartest among us are the ones who clearly understand what they can or can’t afford.
    Life is always a series of choice among priorities. For some, driving a car with V8 and this or that is vitally important, and a priority strong enough to forgo other investments—like real estate. I am fascintated by all things automotive, but I have placed a higher priority on saving for my children’s education and my own retirement. Thus I drive a base model Kia.

    1. Sjalabais Avatar

      Amen. I am driving a gutless, non-spirited van with some pleasure, too, with my main priority being to pay back loans while interest is low. Just finished my student loan, which is a milestone, and we might own our house after 12 years, not 20 as initially planned. I see more interesting wheels on the horizon!

    2. Andrew Avatar

      Great post.

    3. ptschett Avatar

      I might resemble the remark about the V8-driving bachelor who earns bonuses but is still paying rent. 🙂 [I’d be willing to consider giving that up for a house, kids, and less-expensive cars if I ever found the right woman, though…]

      1. CSM Avatar

        I wish you luck in that pursuit. I was successful, and life is great.

    4. Vairship Avatar

      I can’t say that I agree that NOBODY is forced to buy/finance a car. Certainly in the western 2/3rds of the US, there is basically no public transit worth talking about. I live in the middle of a city of a million-plus inhabitants, 4 miles from work, and getting there by public transportation would take me 45 minutes. About the same as by bicycle (due to lack of bike-safe direct roads). By car/freeway, it’s 10 minutes… So if I were making a non-college degree salary (say $20,000) and needed to drop kids off at school, I’d need to buy a car and I’d be unlikely to be able to buy even a used one cash.
      And that’s assuming I’d be able to afford housing in the center of the city…
      Now I agree with you that for the vast majority of people, they simply spend too much on their cars/purses/shoes/sports games/etc…

      1. Sjalabais Avatar

        The realities of the working poor are very harsh…yet I tend to wonder: Is there no better place to move to then? I know, big cost are associated with moving and you have to have a job to go to. But, in your example, one might end up to work for fetting to work, say, all of monday.

  3. Rust-MyEnemy Avatar

    Join the Rust-MyEnemy Automotive Plan.
    Proudly finance free for fifteen years of driving. And I the have skinned knuckles, oil and rust stains on my driveway to go with it. Kind of completes the look.

    1. Batshitbox Avatar

      I’ve been a fan of used cars since I read in the Boston Globe (John R. White, I think) in about 1987 that you could drive a used Cadillac to Venus and back and not create as much pollution as the demand for one new car creates. (I believe that was an estimate.)
      This has kept me and my clear conscience in gas guzzling V-8s, and out of debt, for almost 30 years! That, and dropping out of college.
      I did finance my Laverda back in 1988, but I regret nothing on that choice. It turned out to be the very last Laverda triple ever sold new in the US.

  4. Krautwursten Avatar

    I wouldn’t want loans in the first place, and (without any judgment, merely inquiry, so correct me if I’m wrong) it appears to be a much more common thing in the US than in Europe to finance cars. In fact Autoblog recently wrote that by the end of 2014 all Americans collectively owed $886 billion on outstanding car payments, that’s $2,778 per capita. Not per car loan or even per car, but per living person. I have to agree with CSM on the notion that I don’t consider a car affordable if I can’t buy it straightaway. But saving up or having reserves doesn’t seem like an American thing (anymore?) anyway. Once again educate me if I’m wrong.
    Edit: Here’s the article:

    1. P161911 Avatar

      I have been on both ends of the spectrum. I have owned about 20 cars and only financed 5 of them (two of those were new vehicles and the other two were used Corvettes that were finance creatively, and one really stupid modified Z3 (what are you supposed to do when your wife tells you to buy a S52 powered Z3, you make it happen some way some how!)) I don’t think I have ever been upside down on a vehicle loan though, except for the stupid Z3. Thanks to generous rebates, a family discount, and high truck resale value, that includes a new Silverado bought with 0 down. If you don’t have the time in your life to deal with unreliable cars and the repairs that go with them, sometimes the piece of mind of a newer vehicle is worth spending a payment every month instead of worry about the impending doom of a catastrophic failure or even the small niggling problems of older cars. I want to work on cars because I want to, not because I HAVE to. I have been in the situation of installing a starter in the dark and 30F outside just so I would have a ride to work the next day. It isn’t fun. I never even considered buying a new car until I was 31 years old.

      1. Andrew Avatar

        The dark and rainy roadside repairs can definitely make a compelling argument for spending more than you have.

  5. PotbellyJoe★★★★★ Avatar

    When it’s 0% interest, or .9% in my case. I take the loan instead of paying the cash. Let the bank lose money.

    1. GianniB Avatar

      That’s the thing right now, with low rates and the high flying stock market, does it make sense to tie up capital in a depreciating asset or finance and take advantage of low borrowing rates and deploy that capital elsewhere? 0.9% to borrow and Fidelity’s 500 index fund yearly for last year return was 15% and 17% over the last 3 for example…

  6. JayP Avatar

    When buying the Focus the salesguy came back from the finance guy with some numbers. My divorce cratered my credit so it took a while. His numbers looked fishy compared to the numbers I had figured. He said that was for a 6 yr loan and “That’s how everyone buys these days. We just assume everyone wants 72 mos.”
    They can get a lower monthly payment and snag these folks who haven’t done their home work.

  7. Sjalabais Avatar

    What about the manufacturer’s side? TTAC has been running a couple of articles on the issue. The Nissan ad above is brilliant in that it shows three signals of distress repackaged into an ad:
    1) Nissan discounts its cars.
    2) Nissan offers an interest rate that is below inflation, losing more money.
    3) Nissan expects customers to pay for their new car for as long as seven years, probably through two business cycles.
    There is a lot of risk in doing business this way for the manufacturers, too…

    1. Vairship Avatar

      I believe it’s known as The Mitsubishi Business Model here in the US 😉

  8. Surfer Sandman Avatar
    Surfer Sandman

    I’m in year 2 of a 5 year term on my car. I hope that I’ll be able to keep up on my payments while juggling student loan payments. I do think that anything beyond a 72 month term is overkill.

  9. DeCode Avatar

    I’ve financed 3 cars since I moved back from Japan (where really cool modified and interesting cars could be had for less than 10 grand all day) and I say if you must finance, buy what you really want from the get go. Then you will avoid the trap of going upside down on a car you don’t like after the new wears off, or feel compelled to trade in as soon as you pay it off.
    I also double up on payments from time to time and only finance a new car after saving for at least a year. What was saved became the down payment on the next car. With the exception of the Wife’s car, I LOVE my two cars; have no plans to get rid of them. I will probably not finance, or buy a new car for at least 10 years.

  10. Maymar Avatar

    When my last car was knocking on death’s door, I was faced with either buying something else with cash (which, I could afford about $5k, which pretty much limits me to rusting and over 100k miles), or financing something newer. I got 0% on a new car for 84 months, there was no way I’d get anywhere near the same rates on a used car, which really cuts into the depreciation advantage.
    At the same time, I looked at a Nissan Micra, a 2.Slow Jetta, and the Mazda2 I ended up buying – the “free” money from the bank was never an excuse to spend more, it just facilitates lower fixed costs, and being able to put more money to the less-free mortgage. Ultimately, it’s not unreasonable to expect more than 7 years out of a properly maintained new car.

  11. Andrew Avatar

    Thanks to living within my means (ie. frugally) and some help from very generous family members, I’m nearing the end of my student loans. The goal is to finish in five years instead of the allotted 10. I may be an idiot, but I’m not stupid. I’ll have saved about $2,000 in interest by halving the repayment period.
    I’ll never, as long as I can avoid it, go into debt for anything short of a house or perhaps more education. Back in high school economics class we learned that a car is a “depreciating asset,” but in my opinion it is not an asset at all. The freedom of movement it provides is the asset. Any given car is a liability in itself. It can be broken, stolen, or destroyed far too easily to be considered part of one’s net worth.

    1. Vairship Avatar

      Debt is the most expensive thing you’ll ever buy: it adds cost without any extra value.

  12. Citric Avatar

    For me, it was a case of financing only making sense on a new car. Interest rates are absurdly low – mine are below 1% – but only on new, used you have way more interest. Plus actually finding a manual in this area was tricky at best and this way I know the entire history of it. I fully intend to keep my car for a decade, if not longer, just because I like it and it has gone on adventures with me already – coming on two years, not getting dissatisfied at all – but it did make more sense for me to buy new.
    Also, don’t care about the Joneses they all drive chrome encrusted trucks here, which aren’t my bag.

  13. Pete.Z Avatar

    I never really understand (be it in the US, Europe, or anywhere else) why people are willing to loan for something that is actually worth at least 12 payments less the moment you drive it of the showroom floor… something you can pay with cash you have, and who gives a **** if it is old? There are a lot of older cars for very little money out there.

    1. P161911 Avatar

      Trucks can be a rare exception to this. After 2 years I refinanced my truck to a lower interest rate through a credit union (no I didn’t extend the terms). The loan value was still more than I had paid for the truck new.

  14. Alff Avatar

    I have no idea what this story is about.

    1. Kiefmo Avatar

      Evidently, if you’re exceptionally well-heeled, you can buy a car with zero miles on it and something called a “warranty” which means the manufacturer guarantees it won’t break for something laughably low like 3 years or 36,000 miles, or else they’ll fix it free of charge unless they can approve you abused it or modified it in some manner.
      Some dealers (businesses that sell cars — how’s that even legal?) will even include oil changes, brakes, and tire rotations. Not sure what these owners do with their Saturday mornings, but they’re rich, so it’s probably something like play golf at the country club or watch the maid polish the silver so she doesn’t steal any(more).
      I want nothing to do with that nonsense, but I’m grateful that someone buys cars like that, so I can guy them years later, once they’re properly broken in (minimum 75k miles).