One thing that I see is carmakers stuffing their trims with all kinds of unnecessary extras. Sun/moonroof, heated seats, powered seats, humongo speaker system, etc.
All those extras do two things:
Drive up ave selling price and added complexity (meaning more maintenance).
It’s probably near impossible to get manual windows in any trim level.
They also tell customers “hey you can wait 10,000mi before changing oil”. That kills engine life, and they know it.
This is another reason for the Uber/Tesla/Lyft vision of the robotaxi future. If a service can provide both the cost-effectiveness and autonomy of a taxi network, there's a generation of tech-savvy buyers that will be grateful to take the car shopping/ownership costs out of their lives.
That may be true, but outside of eliminating labor cost of the driver it’s hard to see how it’s significantly cheaper. And even though vehicles are a depreciating asset, there’s often a point when depreciation stops.
I’d really like to see how these services compare with the costs of running a cheap used vehicle in the majority of the US.
There are a lot of very affordable cars, but according to this article people are purchasing beyond their means via financing. Here's a list from mototrend of 10 vehicles starting between $15k-20k https://www.motortrend.com/news/top-10-cheapest-new-cars/
While it’s true that automakers are driving up their trim levels for margin purposes they also have to contend with supply chain complexity and legislative complexity.
So if 80% of people want automatic windows and 15% of the remaining don’t care one way or the other it makes sense for a carmaker to deprecate manual windows to remove a part set.
Similarly I don’t want a fancy av system in my car, but the law requires a backup camera so standardizing on a single screen powered by ever more complex av software only makes sense for the car maker.
Counterpoint / Devil's Advocate: By reducing the amount of options (e.g. giving the buyer the choice between electric or manual windows), they reduce their own costs. With enough scale, for the manufacturers at least, electric windows are only tens of dollars more expensive per car than manual ones.
I think the most costly difference between cars is found in leather seats. Leather is often the best choice if you have kids and pets... In European cars, the leather quality is usually ages above leather in cars from Japan and China. you pretty much have to pay 60k or above to get a car with non-bonded (inferior) leather.
Options add value, in luxury cars, a sunroof and alloy wheels are pretty much essential, not getting one means negative value on resale.
The dealerships often mark up prices on cars just because... It always amazes me how many people think sticker prices are firm and fixed. I have never purchased a car in my life without getting at least $7k off the sticker price.
There are many walks of life. A self employed realtor, for example, can write off a car lease, and may need to regularly carry clients, so an expensive sedan or big SUV ends up helping them more. People are so used to projecting their own circumstances on evaluating everyone else when it comes to economics, benefits of financial decisions are always subjective.
Exactly, certainly not if we are talking used cars in the Internet era. These dealerships are not pricing cars for $7k+ over auction price unless they rebuilt the title because it's going to show as a horrible deal on any internet site.
I was pretty much laughed out of two dealerships for trying to get $2k off sticker and they refused to negotiate much.
When I bought a car in 2010 I had no problem finding a small car (industry reeling from 2008.)
In 2018 I went car shopping and found that both Asian and American car dealers had no small cars in stock (the usual state w/ American car dealers) and all sorts of excuses why they didn't.
Right after that they will point you a whole bunch of trucks and SUVs all in a row, all with deep discounts.
Looking at this, I'd conclude that car dealers want to sell big cars, not that people want to buy them.
(A retired ag economics professor I knew bought the $70k corvette that the chevy dealer had for show for $35k at the peak of the 2008 crisis.)
Completely incorrect. The market demand for gigantic cars in the US is virtually insatiable. And will remain so as long as the price of gasoline stays around $2-3 per gallon. Once we see ~$6/gallon like what's common in UK for instance, cars will start to shrink again.
Even with tax incentives and huge profit margins, the cost of a modern truck is still sometimes three times as much as a family car with the same seating capacity. It's the small social circle status symbol mentality which perpetuates it. Same mindset of people who collect hyper-expensive athletic shoes I feel.
My brother-in-law has a big-ass pickup truck with a plow attached and he takes a chunk out his big-ass payment by plowing driveways in the winter. He has worked his way up building roads and really does use his 'truck' like a truck.
> Options add value, in luxury cars, a sunroof and alloy wheels are pretty much essential, not getting one means negative value on resale.
I've heard the opposite, that options don't retain their value as much as the core of the car itself. It probably depends on the timeframe though.
I bought a 2011 Volvo C30 brand-new, with absolutely zero options. It was the cheapest car Volvo made that year - manual transmission, no extra-cost paint, nothing. I sold it last year and, looking at price guides, those nice options would have gotten me maybe an extra $1-2k. So sure, I could have spent an extra $5-7k to get a nicely equipped model, but there is no way I would have gotten an extra $5k back when I sold the car.
I'd concede that if you trade cars in while they're still quite fresh there might be some truth to this. If you have a really oddly configured 2-year-old luxury car, maybe it'd be "lot poison" without leather and a sunroof.
I live in europe, so it may be different here/there.
The cars here in ads are shown as very cheap (but zero extras). Want cruise control? 300eur. Want powered back windows? 200eur. This? 500eur. That? 300eur.
So a car with a price of 12.000eur is 15.000 just after the basic necessities for a comfortable ride (without heated seats, adaptive cruise control, sunroof etc). Automatic transmissions are usually the most expensive 'extra' here.
All those things are usually covered by warranty (~5years for most).
And most cars here need oil replacement ("service done") every 15.000, 20.000 or even 30.000 kilometers (a bit under 10k miles a bit under 20k miles). I dont't know why americans like changing oil so much. I had an old hyundai last 320.000km that way (service every 20.000), until it was too rusty to fix (engine running without issues).
Actually 10,000 mile oil changes extend engine life. Your least wear is between 8,000 and 9,000 miles, and not opening the sealed area where the oil is keeps dust out Even checking your oil lets a little dust in and is harmful - not as harmful as running low on oil but still harmful and to be avoided if you don't need to!
The oil change industry wants you to think otherwise because they make a lot of money selling needless oil changes. Much better to put in a good oil and a good filter, great oil might be more expensive but the engine will last longer.
You're correct, the oil change is actually a high-stress event for any engine. Doing an oil change every 3k miles is actually very wearing because--even for a split second--there is possible metal-on-metal contact as the oil pump reprimes itself.
But engines are very different today than they were 15-20 years ago. They are machined with blueprint accuracy such that clearances are very fine and the resulting break-in period is very short if its needed at all. Additionally, most new vehicles use synthetic or synthetic blend motor oil which is much more durable and retains detergents for much longer service intervals.
I use the best oil I can find and do two oil changes a year unless there's a more driving than usual during a period. Generally, the service interval on my car is ~ 7500 miles, though 10k would not be a problem.
Manual Windows (And Transmissions) can actually be more expensive (in an industrialized nation, the labor to install the additional pieces is more than the cost difference of motors/electronics/etc)
> They also tell customers “hey you can wait 10,000mi before changing oil”. That kills engine life, and they know it.
Depends. Some MFGs are still very strict about oil changes.
You're right that the trim 'bundling' is to drive up price though. Nowadays you can't get 'just' a sunroof if you want one, you need to pay for -all- the other stuff.
Can't really blame them though - alot of these 'high tech features' (bluetooth, led lights in the floor, yadda) cost the manufacturer like $5 and can either be sold as $2000 packages or used to 'keep up with the jones' in the same category/price/etc. Far better to add the extra to your lineup for $5 than have a customer buy the other model because you didn't have some feature
I recently jumped from a nice 2002 Subaru to a recent year Mazda. The Mazda is the 'top' trim, which I wanted, but lacks an autodimming mirror like my Subaru.
I get that simple cars are cheaper but I'm real disappointed that such a new car, top trim, is lacking such a basic feature (at least to me) from a car built almost 20 years ago.
It is so easy to find a used car that will be good enough for $10-$15K. Even though I know we probably pay slightly more, we always go to CarMax. Just not dealing with slimy car dealers makes it worth it. We have never had an issue.
If you have kids or intend to have them in the future this is a life lesson they need to have drilled into them.
I bought the cheapest house within commuting distance of where I work (in London) and am still trying to figure out how the hell to get out of that mortgage sooner than the final term. My car was bought outright as was my campervan.
I don't know how the people who drop half a million on a house and 50k on a Chelsea tractor, earning the same wage as me, sleep at night.
Maybe a warning like on a cigarette pack could help? e.g. "spending more than 15% of your income on a car can lead to a financial ruin". Warning on cigarettes reduced smoking by a few percent.
They do although they don't necessarily call it that. When I had to get my dad a phone in a hurry from AT&T, the only option was to pay for it monthly as part of my phone bill.
This is better than the old days of getting it 'free' but being locked into a contract that requires you to pay the full cost of the phone if you leave..
All four of the major carriers and Apple offer 0% interest loans on phones.
At least with T-mobile. Even if you have horrible credit as long as you pay your bill on time with them for 12 months, you are eligible for a no interest phone loan.
Alternatively, there are individuals who live month to month and having tired of beaters and decide this looks affordable. While clearly a false economy, some individuals may have other motives, like status seeking.
This doesn't mean they are rock-headed. Like all of us, they could have a blind-spot where a decisions made may not be in our long term economic interests.
I think if you are living paycheck to paycheck and don’t have disposable income, it may make more sense to buy a cheap new car with a warranty than a cheaper used car.
It’s much easier to get a car with a $350/month car note where you won’t have unexpected repair expenses than getting a $200/month car note on a car without a warranty and then have an unexpected expense.
Now we have a credit card with the car shop we used that has a six months/no interest program. I use that even if I do have the money. But if we had bad credit, we could get a car loan much easier than an unsecured credit card.
I am at a point in life now where I can afford an expensive car repair bill and it just stings a little bit. When I was first starting out decades ago working at night as a computer operator while I was in graduate school during the day, any unexpected expense meant a call to my parents. Many people don’t have that luxury.
Yea, except for the part where you’re paying 12,000 more over the course of a 7 year loan and the new car warranty ended at 4 years leaving you with a higher payment and you still can’t afford repairs.
It can be rationalized with emotions, but not financial sense.
If you don’t have access to cash or credit to take care of car repairs, the last thing you want is to be paying a car note on a car that you can’t afford to have fixed.
As far as four vs seven years. You’re hoping that you can figure something out in four years.
> Anyone that signs up, of their own free will, for a seven year loan on a depreciating asset has rocks in their head. For fucks sake.
Whether this is good or not is completely dependent on the loan interest rate, a person's cash flow situation, and what they will do with the free cash flow otherwise..
$50-100/mo saved due to lower 7y payments reinvested elsewhere could quite feasibly offset the higher cost associated with the (assumed) higher interest rate of the 7y loan.
And, according to the assumptions in financial/economic theory anyway, if you can get a loan at or below inflation rates, you're getting a 'discount' on the total price w/r/t paying 100% cash now
But yes, this should be made as a 'financing' decision, not an 'affordability' decision - if you can only afford the vehicle with 7y loan at all, and aren't taking the longer loan as an savings/investment decision among weighing the TCO you probably should be buying a cheaper one.
So I have rocks in my brain for taking a 2.9% interest loan? I don't see it that way considering my investment horizon allows me to earn 8% in a vangaurd sp500 etf with the money I could have used to pay for my car outright.
The alternative isn't to buy a brand new car for the same amount of money. The alternative is to actually buy a car you can afford.
You are still losing maybe 50% in the first year in depreciation. If you are paying it over 7 years then you are under water on the car from the minute you pick it up until it's paid off in full.
You can finance a cheaper car. Buying with cash carries a large opportunity cost due to compound interest being a helluva drug.
If you can finance at an interest rate below what you are earning in the market then you are better off financing. People who pay in cash are leaving money on the table for non-financial reasons.
It seems improbable that dealers / manufacturers can't do simple compound interest calculations too. If they are offering loans at below market rates they are basically giving you a discount on the cost. If they are willing to do that then you should be able to get a similar discount on a cash basis.
This doesn’t make sense. You’re arguing that this was about capital allocation for you, but if that’s the case, buy a used car for half of what a new car would cost. If you buy from someone like Carmax, you can get access to loans which are almost as cheap as what you’d get on a new car, and you’re buying a car with very little wear and tear.
crikli said "Anyone that signs up, of their own free will, for a seven year loan on a depreciating asset has rocks in their head."
I'm saying that financing can easily make sense with low interest rates. Nothing in my comment nor criklis has anything to do with buying a used vs new car as the same logic applies to both.
Its basically the same thing when you borrow at a longer term to invest the difference.
Mathematically, it makes a lot more sense for us to refinance to another 30 year loan (to get rid of PMI) and invest the difference but I am planning on refinancing to a 15 year.
It's not that simple. If you plan on keeping the car and the interest rate is low enough you are likely better off taking the longest term loan possible.
Consider a $30,000 vehicle. I can finance it at 1.9% for 48 months or 84 months. The payment on the 48 month loan is $650/month (scenario 1) and the payment on the 84 month loan is $380/month (scenario 2).
In scenario 1 I invest $0/month for 48 months and then $650/month for 36 months. After 7 years I paid $31,178 for the car and earned ~$26,000 from investing (at 8%).
In scenario 2 I invest $270/month for 84 months. After 7 years I paid $32,062 for the car and earned ~$30,000 from investing (at 8%).
In scenario 2 I paid $884 more in interest but earned an extra $4,000 from investing.
There is a lot more that goes into this type of calculation but it is not nearly as cut and dry as "you're an idiot if you financed a car for 84 months."
If you listen to Freakonomics, they often say that we aren’t “Homo Economicus”. While what you say may make sense economically, that’s not how most people operate.
I'd be willing to bet that MOST people who take out 7 year car loans don't invest half of their interest rates in stocks that average at 8% or higher...
While a long term average for mutual funds at 8% is pretty reasonable, I'd argue that 3-7 years is short enough that you have a reasonable chance of ending up with less money than you put in, never mind out performing the 2% interest.
Besides, as I've mentioned elsewhere, anyone offering a loan at 1.9% is aware that they are subsidising your purchase. You should be able to negotiate most of the difference into a decent cash deal.
Not to mention the non-trivial risk of being involved in an accident in a car which is worth less than is outstanding on it (which for a 7 year loan is probably 6+ years).
Your financing argument is actually flipped. You will get a better cash price if you finance because that is where dealers make money. Your best strategy if you want to pay cash is to finance the car and then pay off the loan immediately.
As far as being underwater is concerned... most dealers throw in GAP insurance these days. Removing GAP to lower the cost is counterproductive because the banks buying your loan want you to have GAP.
There really are just very few scenarios where paying cash at the dealer makes the most financial sense.
That there is a scenario that, effected perfectly if you stand on one leg and squint and get super-favorable rates at just the right times, makes an 84-month loan not the worst economic choice possible does not mean that it's not the worst economic choice possible. Because it is the worst economic choice possible.
The people who understand money and finance will end up ahead of those who don’t.
Denying this reality will lower your risk profile but also lower your potential rewards. If you can’t control your spending and investing then don’t finance a car for 7 years.
But don’t pretend that economics and math are wrong.
But also don't pretend that your prime rate example is the typical case for the 7-year loans, which are mostly subprime borrowers who don't plan on perfectly maintaining and keeping the car forever.
Assume some charity here. Everyone was speaking in generalities about the trend. You can always find non-central, imperspicuous examples, but that's not really responsive. (Scott Adams has made the acronym BOCTAOE, but of course there are obvious exceptions, to head off such replies.)
The recognition that something -- like your case -- is an extreme exception proves the general validity of the rule. (Yes, I know there's a frequently misused version of the quote, but I use this modified, correct version.)
>That’s only true if you are already bad at personal finance.
That's kind of the point: you can't just assume away the case of "people making bad financial decisions", and that might be -- and probably is here -- the reason for the trend.
> After 7 years I paid $32,062 for the car and earned ~$30,000 from investing (at 8%).
Nitpicking, but you didn't earn $30k from investing. You contributed $22,680, and ended up with $28,910, assuming dollar-cost averaging contributions monthly (bulk contributions at the beginning of the year would get you $31,223). So your total return, assuming 8% annual growth, is $6,230.
Agree with used. I've gotten both my cars from Carvana and it has worked out quite well; saving over 10K per car by going for a 2 year old car each time.
Is this true? My understanding is that they drop it off for you to inspect before final agreement, and if desired you can arrange for this to happen at a service location of your choosing...
Reading their FAQ it sounds like you get to take a quick test drive and do a visual inspection, no mention of being able to take the car to a mechanic for a thorough pre-purchase inspection. There is a 7-day Money Back Guarantee (that does not cover delivery costs), so you could take a car to a mechanic post-purchase and then potentially get a refund if you find something you don't like.
They're under no legal obligation to cancel the transaction if your post-purchase inspection turns up something. In almost every state, used cars are sold AS-IS. It's entirely a 'good will' policy and from this video it sounds like they won't give you money back, but instead allow you to swap with another vehicle in their inventory.
I did this last year on a 10 year old Camry, bought the car fax, paid for a pre-purchase inspection, everything checked out.
Six months later, a major electrical issue damaged a significant portion of the internal computer system, which cost almost as much to fix as the car was worth.
Almost $8k down the drain in 6 months. You’re always rolling the dice on an old car, no matter how much research and prep you do.
I don't know the real statistics, but typically buying a 10 year old Camry is rolling a 100-sided dice and unless you roll a 1 or a 2, you're fine. You just had a particularly unlucky roll.
For most people, over a lifetime of buying cars (say 60 years) buying the $15k car (at today's prices) every 5 years vs $30k new car every 5 years will save them $180k. You can replace a lot of computer systems with the savings (ignoring even more savings with insurance, etc.)
Yup, you got it. No assumption here that the car itself will only last 5 years. Just that people have their habits. If they weren't willing to buy a 5 year old car over their brand new car, they're also likely to want a new car when their current one is 5 years old.
Of course, lots of people make better (in my opinion) decisions than that. But then they aren't the ones that need to understand where rationalizing spending money isn't actual logical.
> I don't know the real statistics, but typically buying a 10 year old Camry is rolling a 100-sided dice and unless you roll a 1 or a 2, you're fine. You just had a particularly unlucky roll.
Without concrete data to support this, it's absurd to suggest that any vehicle has a mean failure rate of just 1-2% after 10 years on the road. Years of being subjected to the elements (extreme elements in certain parts of the country), normal wear, etc. constantly cause failures in older vehicles.
First, of course without data it's anecdotal at best, and feelings at worst! I certainly feel like Toyotas last forever. That is, of course, variable on a lot of factors. I've seen average miles per year range from 10,000 to 15,000. Assuming the high end, 10 years would take us to 150,000 miles. Well-maintained models would likely still be running, but maintenance would have increased beyond brakes, spark plugs, etc. to alternators, timing belts/chains, water pumps, exhaust, radiators... they add up.
But more to my point, second - I'm talking about Big Failures like a very expensive CPU system or an engine or transmission. Those aren't likely to die before 150,000 in a reliable vehicle, and the Camry is one of the best.
To add my own anecdote: I've never paid more than $3k for a car. Worst case that has occurred so far is that my most recent one threw a rod less than a year after owning it and I had to spend another $2.5k on replacing the engine. So now I'm $5k down, but that's still a hell of a lot better off than $10-$15k let alone $50k or whatever the fuck insane price new cars are these days.
Same here. I usually get 10-15 year old Japanese cars, and I'm fairly capable of identifying major flaws during a test ride. I spend 2500-3000 euros on the car, and another 500-1000 to get it sorted. Our last family car, a Mitsubishi Grandis, lasted 6 years without major repairs. We traded it on for our new car, a Mitsubishi Grandis, and I got 1000 euros for the Space Wagon. The Grandis is still going strong after 5 years and no major bills other than regular maintenance.
It's just beyond me why people would buy a brand new car on loan.
Only if you're poor/living from paycheck to paycheck and absolutely rely on a car to get to your job I understand why it would make sense on some level to get a car loan.
There are a ton of reasons taking a loan is better than buying outright if you have any sort of risk tolerance and you can get a low APR. Over 5 years, on a 20k car, inflation would have eaten ~2k purchasing power of the loan, while the car's value isn't affected. 2014-2019, S&P500 has returned >10% (inflation adjusted). AND you can always trade money for a lien free car, but it's a lot harder to trade the car for money (you're gonna still need a car and title for loan deals aren't great).
Taking a loan out for the car means I'm buying a 20k car for 18k, being able to return 10% a year on the money I borrowed, with the ability to pay off the car anytime I want.
Buying a car in cash is for those who can't get a low APR loan and/or are too risk averse to use debt properly.
The cost to repair was around $5k, which is a very large amount of money to put into such an old car. The vehicle also subsequently lost most of it's trade-in value when this issue appeared, which completely contradicted the entire argument that old cars retain their value better. They only do as long as they don't have any issues.
That's why I like certified pre-owned. It's the sweet spot between new and used IMO. Get a car that is just a couple years old (often from a trade or a lease), an extended manufacturer's warrenty, and let the original owner take the major hit on depreciation.
You can mitigate this by purchasing something pre-owned certified or equivalent. When I bought my used Volt, I had to bring in a print out that indicated the particular car was indeed already listed as certified for them to honor it, but it ended up being useful when the Transmission Control Module went out and needed to be replaced.
I got the impression they list everything as pre-owned certified on the website and then try to up-charge people for it in person, without actually doing any of the supposed checks. On the other hand, if you can get it the warranty should help with any gremlins in the first few years.
CarMax typically doesn't sell cars that old. 3-5 years is their typical upper age. The odds of a major issue with a car that's only half as old, I'd imagine, are lower.
But very seriously, it goes through life; the drum major instinct is real. (Yes) And you know what else it causes to happen? It often causes us to live above our means. (Make it plain) It's nothing but the drum major instinct. Do you ever see people buy cars that they can't even begin to buy in terms of their income? (Amen) [laughter] You've seen people riding around in Cadillacs and Chryslers who don't earn enough to have a good T-Model Ford. (Make it plain) But it feeds a repressed ego.
You know, economists tell us that your automobile should not cost more than half of your annual income. So if you make an income of five thousand dollars, your car shouldn't cost more than about twenty-five hundred. That's just good economics. And if it's a family of two, and both members of the family make ten thousand dollars, they would have to make out with one car. That would be good economics, although it's often inconvenient. But so often, haven't you seen people making five thousand dollars a year and driving a car that costs six thousand? And they wonder why their ends never meet. [laughter] That's a fact.
That's their style. I'm surprised they don't have a Hellcat Journey "just because". It works fairly well for them. Jeep SUVs sell well. Chrysler and Dodge sedans, SUVs and van like vehicles pretty much have half the market for people with bad credit (with Nissan having the other half).
The Journey Hellcat Edition (Would that be the 'Don't stop believin'' option package?) was probably discussed, then deprecated only on account of not having a transverse automatic rated for arbitrarily silly nM's of torque.
Sorry for being even more tangential, but an Israeli friend joked about this that "You shouldn't mix your Rams with MLK." (i.e. Dodge Ram and Martin Luther King vs the kosher dietary restriction of not mixing meat with milk)
Whenever people make a comment about references like that, or with sports teams, it makes me think:
- If it was common to make references like that in Germany to Jewish institutions, groups, or tribes, ambiguously "honoring" them, would that be a bad thing? Would it be gloating over victimizing them, or commemorating their bravery?
- Given that (my impression is) they don't, what does the cultural difference really signify? Are Germans entitled to feel superior for it?
Like, I can imagine a world where there were sports teams called the "Maccabees" or the "Ghetto Fighters". I think that German cars do make reference to groups in ways that surely someone could find offensive, like the VW Touareg. Is this better/worse/as bad as using "Cherokee" as a name?
I don’t think you have the context. President Andrew Jackson violated a Supreme Court ruling to basically commit a genocide and expulsion of the Cherokee from land that was theirs by treaty.
First I've heard of the suggestion that the cost of a car should be 50% of annual pay. To me that's insane, but then again I view my car as an appliance[0].
For a coherent analysis, you should use the median income of two earner households. Two people where one makes $75K and the other makes $50K equals a household of $125K.
And it seems obviously extravagant to me for a middle class family to have two new cars. One maybe, but two? But even so, by the formula, the family can afford two $30K cars.
in 2005, the last actual data I could find that lists 2 income households, the median income was $75,293, assuming that income kept pace with inflation that would be $98,562 today not 125K,
Such a family would not want to spend more than 49K total on their cars. so that is 1 car for 49K or 2 for 24K
Yes, he financed the remaining debt on two previous cars. And he borrowed enough (based on monthly payments) for he and his girlfriend to make payments - but then they broke up. All around poor financial planning.
Dumb stuff like this happens across the country, at a wide range on incomes, and on more than just cars. It really is a problem with education - people simply don't understand interest rates, loans, or general financial planning/budgeting.
It's a good loan I guess, but the real question is, can he afford it? Can he afford an outlay of 36.000 over 7 years? Can he afford to pay X per month for 7 years straight?
The loan is good. What is not ideal is how the cheap money gets you to buy things you wouldn't buy otherwise. This didn't need to be a $27k purchase. But since he could get a loan that felt easy to pay, it was.
> the cheap money gets you to buy things you wouldn't buy otherwise.
Who should be held responsible for a bunch of molecules in your brain making you feel good about buying something you shouldn’t have? Who’s to say what you should and shouldn’t have bought?
I don't know if responsibility or blame are the best ways to think about this. There is a system. Here are its effects. We should think about whether we like those effects and if not how to change the system. Fault is not that relevant.
You could do other things to make expensive cars unattractive. For example, you could make them much more expensive by imposing a sin tax on them. For example, you could impose a 100% tax on every dollar spent on a car purchase above $24k. I'm not saying this is a good idea, but it's one way you could attack this problem without making lending illegal in general.
Your entire premise is based on considering this a problem. Why do you think how other adults choose to spend their money should be a problem that needs correcting?
Everyone has something they think other people should be prevented from wasting money on. The difference is where we draw the line. Fwiw I'm not saying I think this is a big enough problem that it should be addressed with such severely punitive taxes. I'm only saying that there are other policy tools besides banning loans if you think something should be changed.
I honestly don't care what people spend their money on. I may think it's a bad idea, or it's even stupid, but I'm far from arrogant enough to think that I should in some way, work to "protect them from themselves."
I'm skeptical that there is no thing you would prefer the government to regulate the purchase of for the benefit of the buyers. But if that is actually true, feel free to substitute in "almost everyone."
Considering that the $36k loan (assuming that's principal) indicates he's rolling in some negative equity it sounds like he traded down to something far less expensive (therefore lower monthly payments). Overall that transaction was probably a sound financial decision as far as new cars go (whatever he traded in was probably a less sound decision).
If you already have a vehicle and saved what you would be making in payments for the same term as your auto loan, could you earn more than 1.9% interest and then purchase a vehicle for cash? If you can afford the payments, you can afford to save that much each month. The problem is either a) you don't have a vehicle now or b) you can't delay gratification of purchasing a new vehicle until you've saved up enough.
So let's assume the person can pay off the loan (A lot of these loans have clauses where if you miss a payment or are late for a payment they can charge a collection fee or repo the car).
From my understanding, what is used is called an "opportunity cost". Meaning, if I took this loan rather than pay off the car, I now have $36,000 in my possession that I would not have otherwise. I have to be able to make more than %1.9 off the money I spent over seven years for that loan to have been worth it.
So let's say I just store $36,000 in a savings account that had a yield of less than %1.9 and used that to pay off the loan. I am still losing money on the deal. If I put it into some sort of investment that made more than %1.9, then I make more money than if I spent it entirely on the car.
This is at least my understanding of how it works out. I welcome other's thoughts if I am wrong.
I am trying to answer the question posed, which was "is this a really good loan?" I took that to mean "If I have the money to buy the car, is this advantageous enough to take a loan anyways?"
Even very safe investments will get you an expected rate of return higher than 1.9%. Hell, my bank's current rate on a 5 year CD is (barely) above 1.9%.
In short, the loan is a great deal if the terms of the loan did not affect they buyer's willingness to pay more for the car.
That's what I was thinking too....but this assumes a few things:
a) You have that sort of cash on hand.
b) You do NOT miss payments.
If you miss payments, they typically have late/collection fees against you (I don't know how bad they are) or repossess your car depending on the situation. I assume both are structured to be advantageous to the dealer (I don't know specifics).
Also, it is in the dealer's interest to make the loan as long as possible, as this makes the advertised monthly payment as low as possible.
In addition, making the loan payments as low as possible helps decouple the true cost of the car from the buyer. This encourages more spending that otherwise would not happen.
Isn’t this just another sign of consumerism and poor financial decision making for “status”?
Automakers are having trouble selling affordable and reasonably priced new cars causing them to drop them for pricier SUVs. Consumer behavior is driving these trends.
I’ve seen plenty of friends buy a new car that costs what they make per year. The only way to get by is to have 5-7 year financing or they’d be left with nothing after payments and insurance.
It’s remarkable how similar all of the cars look now. If you didn’t hear the engine, or didn’t know what you were looking for, even the new Lamborghini mini SUV looks the same as everything else on the road.
They all have to minimize aerodynamic drag in the same atmosphere, comply with the same vehicle class/dimension based (depending on location) fuel economy regulations and are all judged by the same set of benchmarks. It's no surprise that they mostly resemble each other now that all the easy gains have been made.
Also pedestrian crash laws and safety regulations etc. By the time you plug all those values into the computer along with the hard points of your platform/chassis you are obviously gonna end up with the same thing.
When I can buy a new car for (pick a number) $20,000, or a 3 year old car with a lot more luxury features for the same price why would I buy new. Thus the frugal are mostly not in the new market, and so nobody is buying the bottom line cars. (exception: businesses who run on a different model). What is left are those who are willing to pay for a new car. Since I win in this model I'm not going to complain - my cars are new enough to last for 10 more years (as opposed to 13) an cost half as much up front.
Is it really that the middle class can't afford cars, or is it that a lot of folks want to buy a car they really can't afford?
My much higher concern is that the reason people take a seven year auto loan, as it is the default option given to them and see a lower monthly payment. By doing that, one can think they can afford the $40k or $50k car, not realizing that the total cost of ownership (i.e. maintenance, gas bill, etc.) also just rose, and the money they are paying in interest is also much higher now.
I've noticed that car commercials in the US never show the price of the vehicle anymore. They just show a low monthly payment amount. Often, it is a lease payment which is even worse because you're renting the vehicle at a very high effective interest rate that doesn't need to be disclosed because you're not technically borrowing money. US regulations don't currently require disclosure of interest rates and fees on vehicle leases.
The effective interest rate is the difference in the actual depreciation of the vehicle and what your buy out price is at the end of the lease. The dealer has the ability to set the price at the end so they can manipulate how much over true depreciation you're spending.
You can do the math and convert it as a loan equivalent. If you get a loan for a car, you're paying the value of the vehicle + an extra fee for the convenience of not having the full amount upfront to purchase it. When you lease a car, you're doing the exact same thing. The only difference is that the car company is not legally obligated to disclose your effective interest rate. You can calculate it yourself here:
Worker productivity in the US has risen while wages have remained flat and expenses for healthcare and education have gone up. People really can't afford their cars any longer.
Besides, if you have a 90-minute megacommute a nice car is no longer a luxury, it's a necessity.
> if you have a 90-minute megacommute a nice car is no longer a luxury, it's a necessity.
I used to commute 90 minutes on the bus and rail on a daily basis. I assure you, even at 90 minutes, a nice car is _still_ absolutely just a luxury. A dependable car may be required, but not a fancy one.
If you have a long commute you probably want a fuel-efficient car, which is usually going to be a small (and inexpensive) car.
My impression also is that many of the most dependable cars are inexpensive. I've been so amazed at the reliability of the Honda Fit (it required no major repairs until it got totaled around 120k; my main beefs were with the hatchback which needed to be oiled quite often, and the tire pressure sensors that seemed to fail around once a year or so) I was amazed enough that I bought another one (with a three year payment)
I haven't encountered anything in the last 20 years by Honda or Toyota that wasn't dependable, regardless of price point. Specifically on tire pressure sensors, I never had an issue with my 02 Acura CL (owned 2006-2016), and have not yet had issues with my 09 Pilot (owned 2016-present).
When you are driving 90 minutes in the early morning on busy roads, when everyone around you is just as sleep-deprived as you, you'd like to minimize distractions, so you can pay attention to the road. You really want a good suspension and a silent engine. (I agree about the fuel efficiency, but that's not the whole story.)
I like Hondas, I like the Chevy Sonic, I like the Nissan Altima. I think the Nissan Sentra has dangerously little purchase on the road, and can't stand the drivability of either the Toyota Corolla (almost crazy optimization of gas car for high m.p.g.) or the Camry.
I think the roar of the engine and the sounds outside are an important sensory channel in driving, so "super quiet" doesn't matter for me.
After two mornings of standing in near-freezing drizzle waiting for a bus that I hope I can get a seat on, I don't agree. The reasons I take the bus are that my commute is actually faster (yay Exclusive Bus Lane!) and a lot cheaper ($13.60/day, which wouldn't even cover the toll for me to drive).
It's only a small fraction of the USA where a 90-minute commute by bus and rail is even possible.
Even when I lived in a smaller city where the route would have allowed for such a thing, it isn't necessarily an option, because bus service often starts too late in the morning. Or there's my parents' house - they live in a moderate-size American city of about 250,000 inhabitants, but the nearest bus stop is half a mile away, along a road that lacks sidewalks. That walk would have barely been possible, let alone reasonable, many days of the year.
And yeah, all of that does imply that modern urban planning may be something of an own goal in the proverbial class war, but, nonetheless, that's the situation.
If you have a mega-commute, you should be buying the cheapest efficient, reliable car possible. You do not need a $30k+ car; you need a car that gets good gas mileage. Buy a Honda Fit and you'll get configurable storage and fun handling as a free bonus. Worst case scenario, you buy a ~$20k Corolla/Civic/Mazda 3. (The horror!)
EDIT: OK I just looked at the 2020 Honda Fit. Don't buy that. It's just too ugly.
I was absolutely blown away by the 2020 Corolla LE we had as a rental for two weeks in the US this Christmas/New Years. The adaptive cruise control was better at braking at just the right time and amount in suburban highway traffic than I was, and the gas mileage when I left it to its own devices was 40-45 mpg. The trunk fit two large suitcases, two roll-aboards and various groceries and backpacks.
When our 2008 Fiesta ceases to be economical to keep using, it’s at the top of our list for a replacement, especially as it’s available in Germany as a station wagon with enough towing capacity for my husband’s glider. Impressive little car.
Correct but many people do it's quite common. Most ordinary vehicles these days tend to be around $30,000. That's a bit more than the total yearly take home pay for someone in my region making minimum wage. Even used at half that is a large amount of money to spend on a vehicle.
People scoff at multi millionaires spending hundreds of thousands or a million dollars for a sports car. But that's a small amount of their total net worth or even their yearly salary.
Cars are so expensive to own too. I don't think people realize how much it costs to operate a vehicle let alone but it. The AAA says it costs about $7,000 per year in expenses; gas, maintenance, insurance, depreciation.
Vehicles these days are on average more expensive simply because SUVs outpace smaller car options in terms of overall volume sales, and SUVs are on average more expensive. Somehow auto manufacturers have convinced the middle class of this ridiculous notion that they can't transport their children safely in anything other than an SUV. So the middle class tend to buy more expensive vehicles they can't afford as easily because of marketing propaganda. The irony is, as more of these nuisance-sized SUVs flood the roads, the less safe everyone in smaller cars become, and road wear increases exponentially, leading to higher fuel taxes, etc... lather, rinse, repeat.
People (mostly) aren't buying Chevy Suburbans. They are (mostly) buying crossovers. Crossovers are basically the station wagons of the 21st century. If you want two rows, a hatchback and usable trunk space your options are crossover (technically an SUV, even if it's just a lifted wagon) or spending tons of money for a proper wagon made by either the Germans or Swedes. The reason the OEMs won't build wagons en-mass seems to be emissions classifications.
To haul their crumb-snatchers, yes. But this also doesn't explain why people are choosing to misappropriate farm vehicles (pickup trucks) as single passenger daily commuters.
People buy trucks because they like them. It's the same as any luxury item. I like guitars for example, don't need them, don't need any more, but I bought one recently. Because I liked it.
The question isn't why do people choose to buy luxury items but why debt is so easily accessible for the purchase. That's much more troubling.
The question is why isn’t illegal to externalize on my and my kids life by burning gas as if it had no consequence beside being an asinine financial move.
In reality, cars are safer now then they have ever been. Allowing people to buy pickup trucks isn’t some dastardly move made out of excess and negligence. Anyone who needs a pickup truck has there own reasons, and as long as the vehicle has passed the legally required safety measures, why not just let people have the freedom to do what they want?
IMO vehicles of a certain size should have to follow specific rules (in densely populated areas). I live where is snows; and when it does, there are lots of 2-way streets that are large enough for 2 reasonably sized vehicles, but not if one of them is a huge truck / suburban. Last night I had to back out of a road because some lady in an Escalade was driving down the center and refused to squeeze right to allow traffic to flow as intended. It also bothers me that you cannot see over these automobiles on the highway. Many times I've been traveling in the left lane on the highway with a big truck in front of me (that's going slow, but I assume it's because of the person in front of them). I move left even more to try and peek around them to discover that there is no one in front of them, they're just oblivious / refusing to yield. If you want to drive something huge, that's okay with me, but keep it in the right lane and off of small streets like all the shipping trucks.
I don't see what the label has to do with it. Isn't it the total amount that matters? If the externalities of a gallon of gas are $X, and the total taxes are > $X, then the purchaser is paying for them. How do you know one or more of the taxes doesn't identify as a carbon tax?
I guess you could assume that the current taxes are precisely applied to externalities other than CO2, but given the large differences in taxation due to jurisdiction, I don't see how they could broadly match up. And requirements for them to do so surely aren't strict or universal.
Because the actual harm done from emitting via gasoline usage is not dealt with under the current tax regime. I’d argue that any tax that exists does not encapsulate the cost of removing those emissions from the atmosphere. Considering it costs somewhere between 90 and 400/ ton (possibly more) to remove co2 from the atmosphere, I don’t see how the current tax regimes are quite enough but more importantly the economic harm that’s being done is not being addressed with those tax dollars.
In theory, you could tax gasoline to the level of true removal cost, but unless a market exists to actually remove the carbon it’s moot since the mechanism to clear the damage can’t exist without a functional market on carbon.
Thus, when you burn gasoline you are externalizing. As a result I cannot understand the desire to needlessly do this just so you can drive a superduty to your office job.
It's seriously like using a spoon as a knife. Do people not care about handling any more? Weight distribution? Cornering? Braking? Acceleration? Top speed? Gas mileage?
Trucks are for towing / hauling loads. If you're not towing or hauling a load then you're doing it wrong.
Rent a truck for 30$ the two days a year that you need it. You can put your sweatshirt and your backpack in the trunk of a correctly purposed vehicle for the other 363 days. I think you'll enjoy having an automobile that performs well.
> The reason the OEMs won't build wagons en-mass seems to be emissions classifications.
This. I can respect the intent of CAFE, but at this point it’s providing a ceiling, not a floor. We should accept that CAFE got us over the oil crisis hump and that it’s not the right law for us now.
You could probably just let the states decide. CA and some east coast states will immediately do just what you're suggesting and/or as the technology becomes better and more mature more states will do the same or it will just organically happen because EVs are likely to reach a point where they're are the obvious choice for a larger and larger share of users and you won't need to ban anything.
This is true, and the most likely outcome considering federal gridlock. The boondocks will be the last to come along, and its going to be relatively straightforward to get enough states in a coalition to force automakers towards EVs.
When I was in college, I needed a car to get to work (server at a restaurant), and to school. I spent $1600 on a 10 year old Volvo. For two years I did a fairly brutal commute between home/work/school, and drove for close to 3 hours a day. Wasn't great on gas, but it worked just fine. At some point it failed a state inspection and needed a new exhaust and new brake pads and rotors. Shop wanted around $5k. I shopped around and got a (cat-back) exhaust done for < $300 from a local shop, since it's just not something I could do myself. Bought rotors and pads for < $100, and spent some quality time in a parking lot with YouTube videos and a few wrenches.
Heck, I make substantially more money now, and still have a pretty long 45-minute each way commute, with a lot of traffic. My primary vehicle is a $1600 motorcycle, and I _just_ added a truck as a backup (and to tow a track car). Spent $17k on the truck, it's perfectly fine, even looks good. Most I've ever spent on a vehicle by far, and I assume I'll have it for the next decade, at least. I'm driving it 4 hours out into the middle of the desert later today, and I have no worries about reliability.
Bought the truck and every other vehicle I've ever owned in cash. I think that's the big difference between some others and myself. When I could afford only a few grand cash, that's the kind of car I bought.
Honestly hard to feel too sorry for people that "need" a $30k+ car/truck/suv. I think these articles will always ring hollow for anyone that's been in the same situation and opted for a cheap car. Why on earth would you take out that long of a loan on a car that costs you a full year's salary or more?
That's partly how I feel too. I bought a car out of college and took out a loan for it, and my goal with that car was to be able to pay off the loan AND save up enough money that I could buy my next car in cash. I have achieved that goal, but my original car still runs fine after 10 years, and most people are incredibly surprised when I tell them the age and the mileage. I really feel no need to buy a new car, but I am happy to know I am able to buy a car in cash when the time comes.
The difference between 0% (paying cash) or 0.9% (mfr incentive rate) or %3 (preferred rate) isn't that significant on a sub-$50K vehicle over 5-7 years. When the vehicle goes back to the used car lot, there will be a hit taken and you either absorbed it upfront (by paying cash) or will absorb it at the end (by being upside down on the loan) or some combination so that it balances out. As far as driving your next car for 10+ years, the vehicles being manufactured today are almost designed not to last (because the auto industry fell on hard times a while back and vowed never again).
Yup. My "daily driver" (I work from home) is a 1999 Suburban with a 454. It gets absolutely abysmal fuel economy, but for the < 10k miles per year and only $4500 I paid to purchase it six years ago, the math simply doesn't add up to replace it with a new $60k truck or even a $25k sedan.
> Honestly hard to feel too sorry for people that "need" a $30k+ car/truck/suv.
Your $1600 car was once someone's new car. Without people buying new cars, you wouldn't have used cars to purchase.
Does a server at a restaurant need a new car? That depends on a number of factors including salary and budget. But to say no one needs a new car is bs.
You need someone else to buy a new car so that you can buy a used car.
As the used car market dries up, the price of used cars goes up. This increases the resale value of new cars, which lowers the net cost of buying a new car (because you will get more when you resell it). And the reality is, there's no shortage of used cars in America.
Which is interesting because US automakers pushed planned obsolescence as a way to reduce the used car market to lower the net cost of buying a new car.
You were doin' good there until "My primary vehicle is a $1600 motorcycle,". I wont hire anyone who drives a motorcycle --it's something you can get out of your system in your late teens and if you survive you can join the world of responsibility, but as far as grown men riding them around what with the statistics being as they are (not to mention the cost burden to society when they are not fully killed while commuting), it sends a real signal to steer clear.
I kinda feel like an idiot... I buy a new car every 4 years. The last one I bought cost just above $68k... At least it's a relatively fuel efficient SUV. You can also end up buying a cheaper car that burns the extra payments in gas and upgrades/repairs though to be fair, though not as much as $60k I know...
Just calculate the TCO. Check out how much you payed for the car + gas + repairs + insurance + everything else. Then check how much you can get when you sell it after the 4 years. The difference is the TCO. You can be surprised how cheaper a used 4 year old car can be, compared to yours new one. It's not just the fuel efficiency.
Honestly, if they're managing to buy new $60k+ cars every 4 years, either their financial status is such that it's not a real concern, or they need much more financial help than is available on an internet message board.
I buy new cars far more often than I should, however my model 3 may end up getting a lot older than my previous cars. I am in the group of acknowledging I buy more because I want it than I need it and am willing to state it. I don't need an excuse, I did not buy my 3 to save the world or any other sanctimonious reasons. I bought it because I thought it was cool and I had the means and desire.
Far too often many buyers justify their purchase AFTER signing on the dotted line. The number of people who have a litany of excuses for buying something more affordable is endless, sadly. We live in a society where we are bombarded not just by advertisements but also endless shows which show a life people in general cannot afford. From buying flashy bling, to cars, homes, and hell based on dating shows, buying a pretty mate. Then top it off with politicians telling people how they deserve stuff for free and insinuating many who have stuff did not get it honestly and you end up with a society always in debt.
It's true that you can buy a cheaper car that is less efficient. However as a general rule cheaper cars are more efficient. Your $68k SUV is never going to touch the efficiency of a $20k Corolla, unless it's electric.
Cars are one of those interesting goods where the more expensive they get the less effective they are at their core competency (safely and efficiently travelling from point A to point B). Watches are another example. You can buy a watch for $100 that you never have to wind or change the batteries on, and moreover gets its time from the atomic clocks in various parts of the world, so you'll never have to set it. Or you can buy a mechanical watch that gains or loses time which you have to wind for $10k. (I'm aware that there are reasons for buying a watch other than keeping the time but I just find the efficiency-price inversion interesting.)
My husband, a rather fiscally cautious German, has been the main modifier of my behavior: I went from nearly-new loaded Volvo S40 100% financed right as I got my first post-college paycheck, to a 3 yr old well-equipped Ford Focus wagon paid for in cash, to a Nuremberg city transit pass and dibs on the 2008 Ford Fiesta we still have :)
So everybody deserves to drive a brand new car right off the lot? I don't think so. It is exceptionally stupid to take any loan on a rapidly depreciating asset, let alone a 7 year loan on a car. Give me a break. Dave Ramsey is flipping his lid right now.
I like Ramsey's suggestion of a "car ladder" where you purchase a $5,000 car in cash, make payment to yourself for a year and then sell the $5,000 + the cash you saved to move up to a $10,000 car. Repeat in a loop until you're at the vehicle class you desire.
The drop off in vehicle value over one year is very small at low prices. When you get to more expensive cars, the drop in value is more significant in a year.
He's not usually right, but he's usually right enough AND he's simple enough that listening to him for most people is a net benefit.
His anti-debt/anti-borrowing views work really well for his audience of those that are struggling to live within their means, but are not optimal strategies for those who can use debt/credit without getting themselves in trouble.
Agreed that his math doesn't always work out but you're correct that for an audience that is struggling with behavior more than math, his advice is usually on the right track. If you're responsible with debt, it can be leverage to accelerate wealth in certain situations as long as you are aware of the risk involved.
This works find assuming the cheap car you bought in the first place doesn't blow an engine mid-year requiring everything you've saved in order to repair it. This happens more often than you (or Dave Ramsey) would imagine.
There is no data to back that up. I won’t suggest that it can’t happen, but if it were as common of an occurrence as you suggest there would be no used cars to drive. They would all be at a junkyard. If you exercise caution and due diligence you can score a decent used car that will last you more than a few years.
When was the last time you toured a junk yard? They're absolutely littered with Eagle Visions, Pontiac Grand Ams, Chevy Metros, and Saturn LS's; all kinda trash from the 80's and 90's - you know, those $5k Dave Ramsey specials that don't actually make financial sense to fix? I was being slightly hyperbolic, but Ramsey's way short-sighted when it comes to car maintenance/running costs of cars that cheap.
> He found himself unprepared for the hard sell from the finance manager. The add-ons brought his payment to $448 a month, nearly $100 more than he had expected to pay
Given the reputation of car dealerships, I'm surprised there's not a cooling off period for transactions like this.
I bought a Tesla last year, and a Chrysler plugin hybrid. Both were eligible for $7,500 back from the US government, and another $2,500 back from my state. In both cases, the dealer offered a 6 year loan with the understanding that I could put $10,000 back into the principle once I got my refunds.
Buyers think in terms of monthly payments; sellers try to lower those monthly costs by stretching out the term. Buyers need to think of the price of the car first, and the amount of interest paid second.
But most people are not savvy and don't have pre approved loans, so they get stuck with shitty financing that the dealers make a killing on.
I dont know the situation of everyone. I know what we've always done that works for us. We each have a 45 min commute. We buy the base version of a reliable car (A mazda 3 for example for $18k) with a 5 year loan. Then we drive each car for 10 years. This makes sure we never have more than 1 car loan at a time and the monthly bills are affordable.
If you value money, then the optimal strategy is to always buy a new reputable car, and drive the ones you own into the ground. As long as you have at least 1 person in the household who doesn’t NEED a car every single day, then if the old one breaks down and needs to be trashed, you have time to shop for a new one.
Works out well if you have kids and a set of grandparents living with or near you, as the in laws are retired and they can serve as a redundancy for vehicles, babysitting, and if they have a separate home nearby, a spare home for emergencies.
> Just 18% of U.S. households had enough liquid assets to cover the cost of a new car, according to a Wall Street Journal analysis of 2016 data from the Fed’s triennial Survey of Consumer Finances, a proportion that hasn’t changed much in recent years.
The surprising thing about being poor is how expensive it is!
Those taking out the car loans are paying more than the people who pay cash. It's a kind of quicksand that lulls its victim into a false sense of financial security.
All the while, debt begets higher expenses, which begets more debt. Suddenly, out of nowhere it seems - comes calamity.
This describes both the American consumer, and the US government.
Why would you have that many liquid assets? Most of my investment is in my retirement accounts which can't be touched. My house ties up a lot of my net worth. I do have some stock investments, but they are long term investments and I don't consider them liquid (I'm sure this report would, but they shouldn't as the stock market is too volatile to count on for any short term purchase)
In the UK, new cars typically get a 3- or 4-year finance deal, with an additional lump sum payable at the end if you want to keep the car. This arrangement is clearly designed to encourage you to get a new car every 3 or 4 years.
I bought a car that I expect to keep at least 5 years (and paid a bit extra for the peace of mind of a 5-year warranty).
To finance this, I specifically sought out a 7-year bank loan. The value of the car at 5 years should exceed the balance of the loan at 5 years, at which point I will probably sell the car, pay off the loan (with some left over), and repeat the process. This works out as a kind of hire-purchase plus minor incidental savings scheme.
I'm an economist. The car was good value and I got a good loan rate. But according to the WSJ (and several comments in this thread) this means I can't afford my car. WTF?
I think by definition if you have to take a loan out to buy your car then you can't afford it. The only reason I would ever take a loan out on a car would be if it were at 0% interest and even then it would be such a small amount of gain as to not be worth the mental effort.
We bought a van a few years back, and the total interest paid came out to $700 total. That was worth the credit build to us. And in our minds that was what we purchased: low interest for an asset we needed and one we earned many multiples in interest because we held a large portion of the principal.
0% is the wrong number. You should take the loan if the rate is less than your expected rate of return on parking the cash in an investment vehicle that matches your expected rate of return. That is certainly higher than 0%.
> The value of the car at 5 years should exceed the balance of the loan at 5 years, at which point I will probably sell the car, pay off the loan (with some left over), and repeat the process.
Why not pay off the loan and keep the car as long as you can?
Cars are more reliable. Federal law mandates a seven year manufacturer's warranty on the emissions system. That's why banks are willing to make loans that long...it matches the minimum expected life of the vehicle.
The longer loan period is just another financial option. Attention to cash flow and use of leverage are not moral failings. Sure, people can make dumb choices when taking out a new car loan. People make dumb choices paying cash for a new car. People make dumb choices buying late model used cars.
A lot of this has to do with obscenely low interest rates. I have a 6-year car loan simply because the interest rate on it (under 2%) is lower than what I'm getting on a (by today's standards) high-yield savings account. I could have bought the car outright, or gotten a shorter-term loan, but why bother when you're paying effectively no interest rate?
If you have good credit is the US, you can basically borrow money for free to buy a car.
At least in the UK, third-party-only cover can be more expensive than fully-comprehensive. Because "what level of cover are you asking for?" is one of the inputs into the actuarial tables, and apparently people who ask for third-party-only are a higher risk.
There is a lot of hand-wringing over consumer behavior here in the comments, but nobody is pointing out the extent that Wall Street is involved much like they were in the Mortgage Crisis of 2008.
> Yet for the auto industry, there was a silver lining: Interest rates had fallen to practically zero. Suddenly, it was much cheaper to finance a car. Loans made to buyers were snapped up by Wall Street investors looking for returns as income from supersafe Treasurys drifted toward zero.
> The combination of rock-bottom rates and yield-hungry investors helped bring the U.S. auto industry back to life. By 2015, auto sales had reached records.
> Low rates, in effect, served as a bailout for the entire auto industry. Last year, investors bought a record $107 billion of bonds backed by cars, according to the Securities Industry and Financial Markets Association, a trade group. That is the first issuance record since 2005 and nearly triple the amount two decades earlier. The outstanding pile of auto bonds swelled to a record $264 billion.
> So far this year, dealerships made an average of $982 per new vehicle on finance and insurance versus $381 on the actual sale, according to J.D. Power, a data and analytics company. A decade earlier, financing brought in $516 per car and the sale made dealers $837.
> Finance managers at dealerships typically use an electronic portal to hash out the terms of the loans. On the other end are various financial institutions that buy up the loan pretty much as soon as the dealer closes the deal.
So the entire incentive structure flipped to reward financing rather than purchase in the last decade. It's no wonder that dealerships are increasing the terms of loans. Banks are snatching them up and putting them into securities practically sight unseen while the debt just keeps piling on.
We can talk about consumer behavior all day, but did behavior really change over the last several decades (specifically since the 2008 Crash) or are other factors driving this like Wall Street types starving for yield? Looks like we're watching the highly anticipated sequel.
I would say it's quite apparent that consumer behavior did change. Consumers could have taken cheap money and continued buying cheap cars... but they did not.
But you can't blame Wall St for this. This debacle is squarely on the fed.
It is the move to crossover type vehicles and SUVs which are almost all over $30k. People think they need something "good in the snow" and that can carry a lot of cargo. Both things that most rarely need. Even in very snowy and cold areas like Vermont, I see people come up in their CUV with "all season" tires and slide off the road while there's locals ripping around in a Civic with winter tires. If they want something good in the snow, winter tires are a lot cheaper and will outperform a CUV on all seasons.
But yes you can buy reasonably nice cars for ~25k. The truck market is driving up the prices.
There's a lot of talk about fiscal responsibility in this thread, and I might have a unique perspective on it, living in a small-to-midsized town and being intimately familiar with a lot of people's finances who live there. I have wanted to write about this for a while, so this is a good excuse.
I serve low-income people as part of my job, and I make $49,000/year gross. But my expenses are about half that. I spend $742 on housing and utilities, including phone and internet (remember: small-to-midsized town!). My food budget is $400, thought I haven't spent that much yet. I have (or had) a $253 car payment. And so, I consume about half of my post-tax income and can save the other half. If I were co-habitating, I'd be able to spend even less on housing. Living alone is a luxury.
So why are all of my clients in miserable living situations? (I frankly don't know how to make ends meet at less than 175% of the federal poverty line without going the rice-and-beans route, so let's set those households aside.) Part of it is due to issues highlighted by this article--why do my clients need a $22,000 sedan when I bought mine for $14,000? Part of it is due to the "cycle of poverty"--once you are poor, you can easily get trapped in poverty until you learn some life lessons the hard way (read up on "flex loans" in the state of Tennessee if you want to see some stuff that my clients have to deal with). Part of it is health care, where costs are unforeseeable, and when they arrive they are quite high, throwing a wrench in the plans/lives of budgeters who aren't extremely careful. And part of it is substance abuse--not the illegal stuff, but the legal stuff: tobacco and alcohol.
In the end, I have gone through a lot of clients' files, and buying a car that's too expensive or living in a place that's too fancy is rarely the primary reason for their troubles. Why am I in such a good financial position where I'd be able to make ends meet even if I made half as much? Well, it's because I live in a cheap area, don't have any substance addictions, am extraordinarily financially educated, have enough savings to buy things like smartphones up front, know how to fight tooth and nail for the cheapest possible option when it comes to big life expenses, and am fit as a fiddle. Oh, and though I am fully on my own now, my parents helped me start my financial life with a good credit score. It's hard for people to check all those boxes, and some are out of their control.
So eliminating paycheck-to-paycheck living is a multi-faceted problem, with solutions as varied as better financial education, moving to single-payer so that unexpected, burdensome health care costs aren't a thing, having robust anti-substance-abuse programs, outlawing 270% APR loans (yes, that's what flex loans are...), etc. There's a strange dichotomy: it's important to have the personal mentality that you are responsible for your own finances, and that the government can't and won't save you. That's how financially successful people think, no matter what their income level. But it's also important to realize that there are ways that the deck is stacked against people.
I'd add the old adage that it is expensive to be poor.
What does that mean? The price for consumer goods generally cluster around low, mid and high prices. This includes cars, phones, computers, shoes, appliance, tools and virtually anything you buy. The low priced items are usually the worst value because they are shoddily built and don't last and have no warranty. The mid-priced items are the best value because they are well-built and will last a long time and usually are backed by a good company. The high priced items are well-built and will last but you pay for fancy extras or the name brand/prestige or service, etc.
So the trap is that if you are poor you end up having to buy at the low end of the market and you are on a treadmill of replacement. I once had a pair of good quality hiking boots that lasted +20 years that had finally worn out. I don't really hike that much and was in a rush to replace and didn't want to spend time researching all the choices (another thing lacking when you are poor, your time). So I bought a cheap pair and they lasted a little over a year. I was shocked at the difference and realized that I should have stuck to the rule to buy the mid-priced products to get the best value for my dollar.
Unfortunately if you need work boots and don't have the money you are just going to get the cheap ones and have to replace them in a year or two versus getting years of use out of the more expensive ones. The same idea applies to cars, phone, computers, tools, appliances, etc. and is a real problem for people trapped in this cycle.
I am lucky to live in an area where I don't need a car. Sold my car last year. It was a great decision. Not just monetary but stress and health as well.
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[ 0.17 ms ] story [ 267 ms ] threadAll those extras do two things:
Drive up ave selling price and added complexity (meaning more maintenance).
It’s probably near impossible to get manual windows in any trim level.
They also tell customers “hey you can wait 10,000mi before changing oil”. That kills engine life, and they know it.
I’d really like to see how these services compare with the costs of running a cheap used vehicle in the majority of the US.
So if 80% of people want automatic windows and 15% of the remaining don’t care one way or the other it makes sense for a carmaker to deprecate manual windows to remove a part set.
Similarly I don’t want a fancy av system in my car, but the law requires a backup camera so standardizing on a single screen powered by ever more complex av software only makes sense for the car maker.
Options add value, in luxury cars, a sunroof and alloy wheels are pretty much essential, not getting one means negative value on resale.
The dealerships often mark up prices on cars just because... It always amazes me how many people think sticker prices are firm and fixed. I have never purchased a car in my life without getting at least $7k off the sticker price.
There are many walks of life. A self employed realtor, for example, can write off a car lease, and may need to regularly carry clients, so an expensive sedan or big SUV ends up helping them more. People are so used to projecting their own circumstances on evaluating everyone else when it comes to economics, benefits of financial decisions are always subjective.
This isn’t going to happen with high demand cars from Toyota or Honda or even F150s.
I was pretty much laughed out of two dealerships for trying to get $2k off sticker and they refused to negotiate much.
When I bought a car in 2010 I had no problem finding a small car (industry reeling from 2008.)
In 2018 I went car shopping and found that both Asian and American car dealers had no small cars in stock (the usual state w/ American car dealers) and all sorts of excuses why they didn't.
Right after that they will point you a whole bunch of trucks and SUVs all in a row, all with deep discounts.
Looking at this, I'd conclude that car dealers want to sell big cars, not that people want to buy them.
(A retired ag economics professor I knew bought the $70k corvette that the chevy dealer had for show for $35k at the peak of the 2008 crisis.)
Completely incorrect. The market demand for gigantic cars in the US is virtually insatiable. And will remain so as long as the price of gasoline stays around $2-3 per gallon. Once we see ~$6/gallon like what's common in UK for instance, cars will start to shrink again.
I remember a childless couple that went to a car dealer and got talked into a Chrysler Pacifica (monster minivan) at the steal price of $22,000.
I rode in it and it was the worst hunk of junk, the only car I've gotten seasick in. That car contributed to the implosion of their marriage.
American car makers have a huge incentive to sell 'trucks' because of this old protectionist law:
https://en.wikipedia.org/wiki/Chicken_tax
They make a bigger profit on 'trucks', so they can pay you discounts out of the premium they get.
My brother-in-law has a big-ass pickup truck with a plow attached and he takes a chunk out his big-ass payment by plowing driveways in the winter. He has worked his way up building roads and really does use his 'truck' like a truck.
> I have never purchased a car in my life without getting at least $7k off the sticker price.
What’s the mean and median price you’re paying? I assume for new cars?
I’ve never gotten more than that off anything under $35k sticker new.
I have seen a LOT more come off trucks that are stickers at $60k and sell for ~$45k which blows my mind they have that much markup.
I've heard the opposite, that options don't retain their value as much as the core of the car itself. It probably depends on the timeframe though.
I bought a 2011 Volvo C30 brand-new, with absolutely zero options. It was the cheapest car Volvo made that year - manual transmission, no extra-cost paint, nothing. I sold it last year and, looking at price guides, those nice options would have gotten me maybe an extra $1-2k. So sure, I could have spent an extra $5-7k to get a nicely equipped model, but there is no way I would have gotten an extra $5k back when I sold the car.
I'd concede that if you trade cars in while they're still quite fresh there might be some truth to this. If you have a really oddly configured 2-year-old luxury car, maybe it'd be "lot poison" without leather and a sunroof.
The cars here in ads are shown as very cheap (but zero extras). Want cruise control? 300eur. Want powered back windows? 200eur. This? 500eur. That? 300eur.
So a car with a price of 12.000eur is 15.000 just after the basic necessities for a comfortable ride (without heated seats, adaptive cruise control, sunroof etc). Automatic transmissions are usually the most expensive 'extra' here.
All those things are usually covered by warranty (~5years for most).
And most cars here need oil replacement ("service done") every 15.000, 20.000 or even 30.000 kilometers (a bit under 10k miles a bit under 20k miles). I dont't know why americans like changing oil so much. I had an old hyundai last 320.000km that way (service every 20.000), until it was too rusty to fix (engine running without issues).
The oil change industry wants you to think otherwise because they make a lot of money selling needless oil changes. Much better to put in a good oil and a good filter, great oil might be more expensive but the engine will last longer.
But engines are very different today than they were 15-20 years ago. They are machined with blueprint accuracy such that clearances are very fine and the resulting break-in period is very short if its needed at all. Additionally, most new vehicles use synthetic or synthetic blend motor oil which is much more durable and retains detergents for much longer service intervals.
I use the best oil I can find and do two oil changes a year unless there's a more driving than usual during a period. Generally, the service interval on my car is ~ 7500 miles, though 10k would not be a problem.
> They also tell customers “hey you can wait 10,000mi before changing oil”. That kills engine life, and they know it.
Depends. Some MFGs are still very strict about oil changes.
You're right that the trim 'bundling' is to drive up price though. Nowadays you can't get 'just' a sunroof if you want one, you need to pay for -all- the other stuff.
I get that simple cars are cheaper but I'm real disappointed that such a new car, top trim, is lacking such a basic feature (at least to me) from a car built almost 20 years ago.
I bought the cheapest house within commuting distance of where I work (in London) and am still trying to figure out how the hell to get out of that mortgage sooner than the final term. My car was bought outright as was my campervan.
I don't know how the people who drop half a million on a house and 50k on a Chelsea tractor, earning the same wage as me, sleep at night.
At least with T-mobile. Even if you have horrible credit as long as you pay your bill on time with them for 12 months, you are eligible for a no interest phone loan.
This doesn't mean they are rock-headed. Like all of us, they could have a blind-spot where a decisions made may not be in our long term economic interests.
It’s much easier to get a car with a $350/month car note where you won’t have unexpected repair expenses than getting a $200/month car note on a car without a warranty and then have an unexpected expense.
Now we have a credit card with the car shop we used that has a six months/no interest program. I use that even if I do have the money. But if we had bad credit, we could get a car loan much easier than an unsecured credit card.
I am at a point in life now where I can afford an expensive car repair bill and it just stings a little bit. When I was first starting out decades ago working at night as a computer operator while I was in graduate school during the day, any unexpected expense meant a call to my parents. Many people don’t have that luxury.
It can be rationalized with emotions, but not financial sense.
As far as four vs seven years. You’re hoping that you can figure something out in four years.
Whether this is good or not is completely dependent on the loan interest rate, a person's cash flow situation, and what they will do with the free cash flow otherwise..
$50-100/mo saved due to lower 7y payments reinvested elsewhere could quite feasibly offset the higher cost associated with the (assumed) higher interest rate of the 7y loan.
And, according to the assumptions in financial/economic theory anyway, if you can get a loan at or below inflation rates, you're getting a 'discount' on the total price w/r/t paying 100% cash now
But yes, this should be made as a 'financing' decision, not an 'affordability' decision - if you can only afford the vehicle with 7y loan at all, and aren't taking the longer loan as an savings/investment decision among weighing the TCO you probably should be buying a cheaper one.
You are still losing maybe 50% in the first year in depreciation. If you are paying it over 7 years then you are under water on the car from the minute you pick it up until it's paid off in full.
If you can finance at an interest rate below what you are earning in the market then you are better off financing. People who pay in cash are leaving money on the table for non-financial reasons.
I'm saying that financing can easily make sense with low interest rates. Nothing in my comment nor criklis has anything to do with buying a used vs new car as the same logic applies to both.
Mathematically, it makes a lot more sense for us to refinance to another 30 year loan (to get rid of PMI) and invest the difference but I am planning on refinancing to a 15 year.
Consider a $30,000 vehicle. I can finance it at 1.9% for 48 months or 84 months. The payment on the 48 month loan is $650/month (scenario 1) and the payment on the 84 month loan is $380/month (scenario 2).
In scenario 1 I invest $0/month for 48 months and then $650/month for 36 months. After 7 years I paid $31,178 for the car and earned ~$26,000 from investing (at 8%).
In scenario 2 I invest $270/month for 84 months. After 7 years I paid $32,062 for the car and earned ~$30,000 from investing (at 8%).
In scenario 2 I paid $884 more in interest but earned an extra $4,000 from investing.
There is a lot more that goes into this type of calculation but it is not nearly as cut and dry as "you're an idiot if you financed a car for 84 months."
But financing doesn’t make you an idiot.
Besides, as I've mentioned elsewhere, anyone offering a loan at 1.9% is aware that they are subsidising your purchase. You should be able to negotiate most of the difference into a decent cash deal.
Not to mention the non-trivial risk of being involved in an accident in a car which is worth less than is outstanding on it (which for a 7 year loan is probably 6+ years).
Your financing argument is actually flipped. You will get a better cash price if you finance because that is where dealers make money. Your best strategy if you want to pay cash is to finance the car and then pay off the loan immediately.
As far as being underwater is concerned... most dealers throw in GAP insurance these days. Removing GAP to lower the cost is counterproductive because the banks buying your loan want you to have GAP.
There really are just very few scenarios where paying cash at the dealer makes the most financial sense.
But yes most people don’t treat money this way.
Denying this reality will lower your risk profile but also lower your potential rewards. If you can’t control your spending and investing then don’t finance a car for 7 years.
But don’t pretend that economics and math are wrong.
The recognition that something -- like your case -- is an extreme exception proves the general validity of the rule. (Yes, I know there's a frequently misused version of the quote, but I use this modified, correct version.)
>That’s only true if you are already bad at personal finance.
That's kind of the point: you can't just assume away the case of "people making bad financial decisions", and that might be -- and probably is here -- the reason for the trend.
Nitpicking, but you didn't earn $30k from investing. You contributed $22,680, and ended up with $28,910, assuming dollar-cost averaging contributions monthly (bulk contributions at the beginning of the year would get you $31,223). So your total return, assuming 8% annual growth, is $6,230.
I didn’t even get into down payment or cash opportunity cost because just generally don’t even believe the basic examples.
https://www.carvana.com/faq
They're under no legal obligation to cancel the transaction if your post-purchase inspection turns up something. In almost every state, used cars are sold AS-IS. It's entirely a 'good will' policy and from this video it sounds like they won't give you money back, but instead allow you to swap with another vehicle in their inventory.
Six months later, a major electrical issue damaged a significant portion of the internal computer system, which cost almost as much to fix as the car was worth.
Almost $8k down the drain in 6 months. You’re always rolling the dice on an old car, no matter how much research and prep you do.
For most people, over a lifetime of buying cars (say 60 years) buying the $15k car (at today's prices) every 5 years vs $30k new car every 5 years will save them $180k. You can replace a lot of computer systems with the savings (ignoring even more savings with insurance, etc.)
If new cars cost $30k and last 10 years, and used cars cost $15k and last 5 years, you break even.
Alternately if you always trade-in your car after 5 years to buy a new car, you'll end up paying a lot less than $30k each time.
Of course, lots of people make better (in my opinion) decisions than that. But then they aren't the ones that need to understand where rationalizing spending money isn't actual logical.
You buy a reliable used car with ~30k miles for half of the cost of buying new and then drive it until you hit 150k+ miles.
Where are you buying cars where you're only getting a 50% discount from new with half of the cars useful life spent?
Without concrete data to support this, it's absurd to suggest that any vehicle has a mean failure rate of just 1-2% after 10 years on the road. Years of being subjected to the elements (extreme elements in certain parts of the country), normal wear, etc. constantly cause failures in older vehicles.
First, of course without data it's anecdotal at best, and feelings at worst! I certainly feel like Toyotas last forever. That is, of course, variable on a lot of factors. I've seen average miles per year range from 10,000 to 15,000. Assuming the high end, 10 years would take us to 150,000 miles. Well-maintained models would likely still be running, but maintenance would have increased beyond brakes, spark plugs, etc. to alternators, timing belts/chains, water pumps, exhaust, radiators... they add up.
But more to my point, second - I'm talking about Big Failures like a very expensive CPU system or an engine or transmission. Those aren't likely to die before 150,000 in a reliable vehicle, and the Camry is one of the best.
It's just beyond me why people would buy a brand new car on loan. Only if you're poor/living from paycheck to paycheck and absolutely rely on a car to get to your job I understand why it would make sense on some level to get a car loan.
Taking a loan out for the car means I'm buying a 20k car for 18k, being able to return 10% a year on the money I borrowed, with the ability to pay off the car anytime I want.
Buying a car in cash is for those who can't get a low APR loan and/or are too risk averse to use debt properly.
That's why I like certified pre-owned. It's the sweet spot between new and used IMO. Get a car that is just a couple years old (often from a trade or a lease), an extended manufacturer's warrenty, and let the original owner take the major hit on depreciation.
I got the impression they list everything as pre-owned certified on the website and then try to up-charge people for it in person, without actually doing any of the supposed checks. On the other hand, if you can get it the warranty should help with any gremlins in the first few years.
Certified used vehicles are also significantly more expensive than a used vehicle and a warranty, and Consumer Reports recommends the latter.
You know, economists tell us that your automobile should not cost more than half of your annual income. So if you make an income of five thousand dollars, your car shouldn't cost more than about twenty-five hundred. That's just good economics. And if it's a family of two, and both members of the family make ten thousand dollars, they would have to make out with one car. That would be good economics, although it's often inconvenient. But so often, haven't you seen people making five thousand dollars a year and driving a car that costs six thousand? And they wonder why their ends never meet. [laughter] That's a fact.
Martin Luther King Jr., 1968 https://kinginstitute.stanford.edu/king-papers/documents/dru...
- If it was common to make references like that in Germany to Jewish institutions, groups, or tribes, ambiguously "honoring" them, would that be a bad thing? Would it be gloating over victimizing them, or commemorating their bravery?
- Given that (my impression is) they don't, what does the cultural difference really signify? Are Germans entitled to feel superior for it?
Like, I can imagine a world where there were sports teams called the "Maccabees" or the "Ghetto Fighters". I think that German cars do make reference to groups in ways that surely someone could find offensive, like the VW Touareg. Is this better/worse/as bad as using "Cherokee" as a name?
[0] https://oppositelock.kinja.com/i-used-to-take-it-as-a-given-...
A 2020 yaris starts at 15,650. With fees, should be around that mark.
The problem is, the median US household does not buy a Yaris. They spend more like double that. So 30-40k PER car, two cars per household.
And it seems obviously extravagant to me for a middle class family to have two new cars. One maybe, but two? But even so, by the formula, the family can afford two $30K cars.
Such a family would not want to spend more than 49K total on their cars. so that is 1 car for 49K or 2 for 24K
and that IMO should be the extreme absolute limit
Isn't that pretty good? 1.9% is at inflation, so it's almost a free loan.
Did he finance amount due on the trade? Oooh, that's a huge no-no.
(I didn't go past the paywall.)
Dumb stuff like this happens across the country, at a wide range on incomes, and on more than just cars. It really is a problem with education - people simply don't understand interest rates, loans, or general financial planning/budgeting.
Yes, the $9k excess was from previous vehicles (the article says he had two previously).
Who should be held responsible for a bunch of molecules in your brain making you feel good about buying something you shouldn’t have? Who’s to say what you should and shouldn’t have bought?
I honestly don't care what people spend their money on. I may think it's a bad idea, or it's even stupid, but I'm far from arrogant enough to think that I should in some way, work to "protect them from themselves."
From my understanding, what is used is called an "opportunity cost". Meaning, if I took this loan rather than pay off the car, I now have $36,000 in my possession that I would not have otherwise. I have to be able to make more than %1.9 off the money I spent over seven years for that loan to have been worth it.
So let's say I just store $36,000 in a savings account that had a yield of less than %1.9 and used that to pay off the loan. I am still losing money on the deal. If I put it into some sort of investment that made more than %1.9, then I make more money than if I spent it entirely on the car.
This is at least my understanding of how it works out. I welcome other's thoughts if I am wrong.
I am trying to answer the question posed, which was "is this a really good loan?" I took that to mean "If I have the money to buy the car, is this advantageous enough to take a loan anyways?"
In short, the loan is a great deal if the terms of the loan did not affect they buyer's willingness to pay more for the car.
a) You have that sort of cash on hand. b) You do NOT miss payments.
If you miss payments, they typically have late/collection fees against you (I don't know how bad they are) or repossess your car depending on the situation. I assume both are structured to be advantageous to the dealer (I don't know specifics).
Also, it is in the dealer's interest to make the loan as long as possible, as this makes the advertised monthly payment as low as possible.
In addition, making the loan payments as low as possible helps decouple the true cost of the car from the buyer. This encourages more spending that otherwise would not happen.
Automakers are having trouble selling affordable and reasonably priced new cars causing them to drop them for pricier SUVs. Consumer behavior is driving these trends.
I’ve seen plenty of friends buy a new car that costs what they make per year. The only way to get by is to have 5-7 year financing or they’d be left with nothing after payments and insurance.
Google a ‘34 Ford and a ‘34 Chevy and tell me if you’d know the difference, same with 80s car or pick a generation.
My much higher concern is that the reason people take a seven year auto loan, as it is the default option given to them and see a lower monthly payment. By doing that, one can think they can afford the $40k or $50k car, not realizing that the total cost of ownership (i.e. maintenance, gas bill, etc.) also just rose, and the money they are paying in interest is also much higher now.
Not really a new thing. Ads and dealers have played the "low low monthly payment with zero down" (or whatever) forever.
https://www.calculator.net/lease-calculator.html?ctype=fixpa...
A $20,000 car leased over three years for $400 a month that depreciates to $10,000 at the end of the term has an effective interest rate of 9.539%
Worker productivity in the US has risen while wages have remained flat and expenses for healthcare and education have gone up. People really can't afford their cars any longer.
Besides, if you have a 90-minute megacommute a nice car is no longer a luxury, it's a necessity.
I used to commute 90 minutes on the bus and rail on a daily basis. I assure you, even at 90 minutes, a nice car is _still_ absolutely just a luxury. A dependable car may be required, but not a fancy one.
My impression also is that many of the most dependable cars are inexpensive. I've been so amazed at the reliability of the Honda Fit (it required no major repairs until it got totaled around 120k; my main beefs were with the hatchback which needed to be oiled quite often, and the tire pressure sensors that seemed to fail around once a year or so) I was amazed enough that I bought another one (with a three year payment)
I like Hondas, I like the Chevy Sonic, I like the Nissan Altima. I think the Nissan Sentra has dangerously little purchase on the road, and can't stand the drivability of either the Toyota Corolla (almost crazy optimization of gas car for high m.p.g.) or the Camry.
I think the roar of the engine and the sounds outside are an important sensory channel in driving, so "super quiet" doesn't matter for me.
I'd still rather take the bus and train than drive.
Even when I lived in a smaller city where the route would have allowed for such a thing, it isn't necessarily an option, because bus service often starts too late in the morning. Or there's my parents' house - they live in a moderate-size American city of about 250,000 inhabitants, but the nearest bus stop is half a mile away, along a road that lacks sidewalks. That walk would have barely been possible, let alone reasonable, many days of the year.
And yeah, all of that does imply that modern urban planning may be something of an own goal in the proverbial class war, but, nonetheless, that's the situation.
If you have a mega-commute, you should be buying the cheapest efficient, reliable car possible. You do not need a $30k+ car; you need a car that gets good gas mileage. Buy a Honda Fit and you'll get configurable storage and fun handling as a free bonus. Worst case scenario, you buy a ~$20k Corolla/Civic/Mazda 3. (The horror!)
EDIT: OK I just looked at the 2020 Honda Fit. Don't buy that. It's just too ugly.
When our 2008 Fiesta ceases to be economical to keep using, it’s at the top of our list for a replacement, especially as it’s available in Germany as a station wagon with enough towing capacity for my husband’s glider. Impressive little car.
What's wrong with a 90 minute commute in an old Corolla?
If you have to spend more than 100% of your total yearly income on an item that rapidly depreciates in value then yes it's not affordable.
People scoff at multi millionaires spending hundreds of thousands or a million dollars for a sports car. But that's a small amount of their total net worth or even their yearly salary.
Cars are so expensive to own too. I don't think people realize how much it costs to operate a vehicle let alone but it. The AAA says it costs about $7,000 per year in expenses; gas, maintenance, insurance, depreciation.
The question isn't why do people choose to buy luxury items but why debt is so easily accessible for the purchase. That's much more troubling.
I guess you could assume that the current taxes are precisely applied to externalities other than CO2, but given the large differences in taxation due to jurisdiction, I don't see how they could broadly match up. And requirements for them to do so surely aren't strict or universal.
In theory, you could tax gasoline to the level of true removal cost, but unless a market exists to actually remove the carbon it’s moot since the mechanism to clear the damage can’t exist without a functional market on carbon.
Thus, when you burn gasoline you are externalizing. As a result I cannot understand the desire to needlessly do this just so you can drive a superduty to your office job.
Trucks are for towing / hauling loads. If you're not towing or hauling a load then you're doing it wrong.
Rent a truck for 30$ the two days a year that you need it. You can put your sweatshirt and your backpack in the trunk of a correctly purposed vehicle for the other 363 days. I think you'll enjoy having an automobile that performs well.
This. I can respect the intent of CAFE, but at this point it’s providing a ceiling, not a floor. We should accept that CAFE got us over the oil crisis hump and that it’s not the right law for us now.
https://en.wikipedia.org/wiki/Phase-out_of_fossil_fuel_vehic... (Jurisdictions with planned fossil-fuel vehicle bans)
https://www.commondreams.org/news/2018/05/01/states-represen... (States Representing 44% of US Population Sue Trump's EPA for Blocking Auto Emissions Standards)
Heck, I make substantially more money now, and still have a pretty long 45-minute each way commute, with a lot of traffic. My primary vehicle is a $1600 motorcycle, and I _just_ added a truck as a backup (and to tow a track car). Spent $17k on the truck, it's perfectly fine, even looks good. Most I've ever spent on a vehicle by far, and I assume I'll have it for the next decade, at least. I'm driving it 4 hours out into the middle of the desert later today, and I have no worries about reliability.
Bought the truck and every other vehicle I've ever owned in cash. I think that's the big difference between some others and myself. When I could afford only a few grand cash, that's the kind of car I bought.
Honestly hard to feel too sorry for people that "need" a $30k+ car/truck/suv. I think these articles will always ring hollow for anyone that's been in the same situation and opted for a cheap car. Why on earth would you take out that long of a loan on a car that costs you a full year's salary or more?
Your $1600 car was once someone's new car. Without people buying new cars, you wouldn't have used cars to purchase.
Does a server at a restaurant need a new car? That depends on a number of factors including salary and budget. But to say no one needs a new car is bs.
You need someone else to buy a new car so that you can buy a used car.
> 'it sends a real signal to steer clear.'
I'm sure the feeling is mutual. Or at least I hope that it is.
I have no wife to reprimand me. :/
If you’re going to continue that madness you could at least save yourself some depreciation buying 1-2 year old models.
Far too often many buyers justify their purchase AFTER signing on the dotted line. The number of people who have a litany of excuses for buying something more affordable is endless, sadly. We live in a society where we are bombarded not just by advertisements but also endless shows which show a life people in general cannot afford. From buying flashy bling, to cars, homes, and hell based on dating shows, buying a pretty mate. Then top it off with politicians telling people how they deserve stuff for free and insinuating many who have stuff did not get it honestly and you end up with a society always in debt.
Cars are one of those interesting goods where the more expensive they get the less effective they are at their core competency (safely and efficiently travelling from point A to point B). Watches are another example. You can buy a watch for $100 that you never have to wind or change the batteries on, and moreover gets its time from the atomic clocks in various parts of the world, so you'll never have to set it. Or you can buy a mechanical watch that gains or loses time which you have to wind for $10k. (I'm aware that there are reasons for buying a watch other than keeping the time but I just find the efficiency-price inversion interesting.)
The drop off in vehicle value over one year is very small at low prices. When you get to more expensive cars, the drop in value is more significant in a year.
His anti-debt/anti-borrowing views work really well for his audience of those that are struggling to live within their means, but are not optimal strategies for those who can use debt/credit without getting themselves in trouble.
Given the reputation of car dealerships, I'm surprised there's not a cooling off period for transactions like this.
I bought a Tesla last year, and a Chrysler plugin hybrid. Both were eligible for $7,500 back from the US government, and another $2,500 back from my state. In both cases, the dealer offered a 6 year loan with the understanding that I could put $10,000 back into the principle once I got my refunds.
But most people are not savvy and don't have pre approved loans, so they get stuck with shitty financing that the dealers make a killing on.
Works out well if you have kids and a set of grandparents living with or near you, as the in laws are retired and they can serve as a redundancy for vehicles, babysitting, and if they have a separate home nearby, a spare home for emergencies.
The surprising thing about being poor is how expensive it is!
Those taking out the car loans are paying more than the people who pay cash. It's a kind of quicksand that lulls its victim into a false sense of financial security.
All the while, debt begets higher expenses, which begets more debt. Suddenly, out of nowhere it seems - comes calamity.
This describes both the American consumer, and the US government.
I bought a car that I expect to keep at least 5 years (and paid a bit extra for the peace of mind of a 5-year warranty).
To finance this, I specifically sought out a 7-year bank loan. The value of the car at 5 years should exceed the balance of the loan at 5 years, at which point I will probably sell the car, pay off the loan (with some left over), and repeat the process. This works out as a kind of hire-purchase plus minor incidental savings scheme.
I'm an economist. The car was good value and I got a good loan rate. But according to the WSJ (and several comments in this thread) this means I can't afford my car. WTF?
Why not pay off the loan and keep the car as long as you can?
The longer loan period is just another financial option. Attention to cash flow and use of leverage are not moral failings. Sure, people can make dumb choices when taking out a new car loan. People make dumb choices paying cash for a new car. People make dumb choices buying late model used cars.
If you have good credit is the US, you can basically borrow money for free to buy a car.
Drop collision coverage. Only carry liability insurance.
Feel liberated.
And alive.
> Yet for the auto industry, there was a silver lining: Interest rates had fallen to practically zero. Suddenly, it was much cheaper to finance a car. Loans made to buyers were snapped up by Wall Street investors looking for returns as income from supersafe Treasurys drifted toward zero.
> The combination of rock-bottom rates and yield-hungry investors helped bring the U.S. auto industry back to life. By 2015, auto sales had reached records.
> Low rates, in effect, served as a bailout for the entire auto industry. Last year, investors bought a record $107 billion of bonds backed by cars, according to the Securities Industry and Financial Markets Association, a trade group. That is the first issuance record since 2005 and nearly triple the amount two decades earlier. The outstanding pile of auto bonds swelled to a record $264 billion.
> So far this year, dealerships made an average of $982 per new vehicle on finance and insurance versus $381 on the actual sale, according to J.D. Power, a data and analytics company. A decade earlier, financing brought in $516 per car and the sale made dealers $837.
> Finance managers at dealerships typically use an electronic portal to hash out the terms of the loans. On the other end are various financial institutions that buy up the loan pretty much as soon as the dealer closes the deal.
So the entire incentive structure flipped to reward financing rather than purchase in the last decade. It's no wonder that dealerships are increasing the terms of loans. Banks are snatching them up and putting them into securities practically sight unseen while the debt just keeps piling on.
We can talk about consumer behavior all day, but did behavior really change over the last several decades (specifically since the 2008 Crash) or are other factors driving this like Wall Street types starving for yield? Looks like we're watching the highly anticipated sequel.
But you can't blame Wall St for this. This debacle is squarely on the fed.
But yes you can buy reasonably nice cars for ~25k. The truck market is driving up the prices.
I serve low-income people as part of my job, and I make $49,000/year gross. But my expenses are about half that. I spend $742 on housing and utilities, including phone and internet (remember: small-to-midsized town!). My food budget is $400, thought I haven't spent that much yet. I have (or had) a $253 car payment. And so, I consume about half of my post-tax income and can save the other half. If I were co-habitating, I'd be able to spend even less on housing. Living alone is a luxury.
So why are all of my clients in miserable living situations? (I frankly don't know how to make ends meet at less than 175% of the federal poverty line without going the rice-and-beans route, so let's set those households aside.) Part of it is due to issues highlighted by this article--why do my clients need a $22,000 sedan when I bought mine for $14,000? Part of it is due to the "cycle of poverty"--once you are poor, you can easily get trapped in poverty until you learn some life lessons the hard way (read up on "flex loans" in the state of Tennessee if you want to see some stuff that my clients have to deal with). Part of it is health care, where costs are unforeseeable, and when they arrive they are quite high, throwing a wrench in the plans/lives of budgeters who aren't extremely careful. And part of it is substance abuse--not the illegal stuff, but the legal stuff: tobacco and alcohol.
In the end, I have gone through a lot of clients' files, and buying a car that's too expensive or living in a place that's too fancy is rarely the primary reason for their troubles. Why am I in such a good financial position where I'd be able to make ends meet even if I made half as much? Well, it's because I live in a cheap area, don't have any substance addictions, am extraordinarily financially educated, have enough savings to buy things like smartphones up front, know how to fight tooth and nail for the cheapest possible option when it comes to big life expenses, and am fit as a fiddle. Oh, and though I am fully on my own now, my parents helped me start my financial life with a good credit score. It's hard for people to check all those boxes, and some are out of their control.
So eliminating paycheck-to-paycheck living is a multi-faceted problem, with solutions as varied as better financial education, moving to single-payer so that unexpected, burdensome health care costs aren't a thing, having robust anti-substance-abuse programs, outlawing 270% APR loans (yes, that's what flex loans are...), etc. There's a strange dichotomy: it's important to have the personal mentality that you are responsible for your own finances, and that the government can't and won't save you. That's how financially successful people think, no matter what their income level. But it's also important to realize that there are ways that the deck is stacked against people.
What does that mean? The price for consumer goods generally cluster around low, mid and high prices. This includes cars, phones, computers, shoes, appliance, tools and virtually anything you buy. The low priced items are usually the worst value because they are shoddily built and don't last and have no warranty. The mid-priced items are the best value because they are well-built and will last a long time and usually are backed by a good company. The high priced items are well-built and will last but you pay for fancy extras or the name brand/prestige or service, etc.
So the trap is that if you are poor you end up having to buy at the low end of the market and you are on a treadmill of replacement. I once had a pair of good quality hiking boots that lasted +20 years that had finally worn out. I don't really hike that much and was in a rush to replace and didn't want to spend time researching all the choices (another thing lacking when you are poor, your time). So I bought a cheap pair and they lasted a little over a year. I was shocked at the difference and realized that I should have stuck to the rule to buy the mid-priced products to get the best value for my dollar.
Unfortunately if you need work boots and don't have the money you are just going to get the cheap ones and have to replace them in a year or two versus getting years of use out of the more expensive ones. The same idea applies to cars, phone, computers, tools, appliances, etc. and is a real problem for people trapped in this cycle.