C&D: Auto loans

[kevm14]

https://www.caranddriver.com/news/a2933 ... 820&src=nl

The Consumer Financial Protection Bureau estimated that 42 percent of all car loans made in 2017 were 72 months or longer. Now, the average loan length for new cars is 69 months, and loans of 85 months or more represented 1.5 percent of all new-car loans, according to the Wall Street Journal. With average interest rates at 6 percent for new cars and 10 percent for used cars—a big uptick in the years after the 2009 recession when credit began flowing following billions in government bailouts to automakers and banks—there's a high likelihood that car owners, like students, won't pay off their loans. A third of car owners roll over their debt into new loans, compared to about a quarter before the recession, according to the WSJ story.

And then all of this especially the part I emphasized:

Extremely long loan terms surfaced in 2014, when new car loans between 73 and 84 months surged by 24 percent over the previous year. Before that, no one ever thought car loans would stretch that far. But dealers, automakers, and banks have made a brisk business with this country's $1.2 billion in outstanding auto debt—and more are likely to lock you into a long-term loan that could ensure a perpetuity of debt.

The solution for the consumer is simple. Don't look at monthly payments (now at an average of $550 and $392 for new and used loans, respectively). Look at the total payment, including interest, for the entirety of the loan, with all applicable taxes and fees, and ask yourself whether you’d be better off spending less on a car and saving or investing the difference. Shop around for your loan, and know that dealers can legally tack on a couple of percentage points to inflate the quote without telling you what they'll pocket.

And if you think you need a brand-new car but can't afford one, you probably don't. The glut of late-model used vehicles on the market means that good deals are prevalent in nearly every vehicle segment. Most vehicles in the six-to-12-year-old range—what Experian calls the sweet spot—are reliable enough without a warranty and significantly cheaper to own than a new car. No matter how great new cars are, they're never worth losing your sleep—or your financial security.

Yeah, duh. And let me just nip this one in the bud. It's the consumer's fault. If you want to know why those loans exist it is for the very simple reason that there is a demand for them - if a buyer is willing to borrow and a bank is willing to lend, you have yourself a contract. A 72 month loan allows someone to afford the payments on something that is otherwise unaffordable. Of course, I'd say if you need a 72 month loan, its not affordable, period. But the point is, lenders said, hey, I think we could address additional market areas by offering these terms and loan products. I am fine with enough regulation so it is clear to people what they are getting into (it's akin to putting cancer risk labels on cigarettes - people buy them anyway but hey, we can check that box I guess). After that, it's all on you, the consumer.

[bill25]

perpetuity of debt.

I kind of think that most people have accepted this a long time ago. Not saying it is good, but almost nobody had been able to buy a new car outright without a loan, and most people don't want the same car for more than 5 years. Things get better, safety gets better, etc. So yeah, people have accepted that payments are a part of life.

I mean, there has been 7 to 8 year loans for a while too, just not advertised that way. What else would you call a brand new lease that is paid for three years and then sold with a 5 year loan payment? It is very easy for a 3 year old vehicle to still be 20+K. I am not seeing a ton of people dropping off 25K checks.

I would argue that car reliability has also driven this. 25 years ago a bank wouldn't write a loan for that long because the cars back then didn't last that long, and there was no collateral to repo when the customer stopped paying. Don't forget, the banks aren't excited to loan money for something that isn't worth it.

Also, you can't trash them too much because if it weren't for them you wouldn't have used cars to buy.

A last note, the total cost of the car is not the total picture. If you buy a car at 40K, drive it for 5 years and it is worth 20K when you sell it, you spent 4K a year driving a car that was pretty good new, should be totally reliable for 5 years and are about to get another car with all new equipment. If you are ok with paying 4K a year, what is the problem?

I mean if you are a normal person that doesn't work on cars you could buy a 10K car, and easily spend a couple thousand a year keeping it going, so if you have the 10K car, for 5 years and spend 2K a year in maintenance, you broke even with the new car guy, except the new car guy paid a little more in car tax and interest. To drive something brand new instead of 10 years old.


At the end of the day, it is all in what you want to do.

[kevm14]

viewtopic.php?f=37&t=2790

Blanket statement alert: I don't think new car depreciation is EVER a better deal than used car maintenance costs. It seems like IF you decide to buy a new car your best bet is keep it as long as possible, like to the 15-20 year mark.

$4k a year is way too much for out of warranty maintenance at the 5 year mark. That is the single most expensive way to own a car according to that article you posted (link above).

[kevm14]

The buy 10 year old car, drive 5 years, repeat thing means your car is always between 10 and 15 years old. I guess this means it averages 12.5 years old? Dark green, cheapest all the time.

The buy 8 year old car, drive for 8 years, repeat thing means your car is always between 8 and 16 years old. And I guess this means it averages 12 years old? Light green, second cheapest all the time.

Buy 3 years old, keep for 15 years. Averages 10.5 years old. Orange, third cheapest 19 out of 20 years.

New, keep 20 years. Averages 10 years old. Yellow, 4th cheapest.

New, keep 10 years. Averages 5 years old. Blue, second most expensive.

New, keep 5 years. Averages 2.5 years old. Red, most expensive.

That model at least backs my point. Buy new, sell at 5 years. Most expensive thing you could do other than perhaps sell even earlier...and that's my problem with leasing. It locks you into that economic model. Also, even if you buy new and keep 20 years, the used car model is still cheaper. Even a 3 year old car which is fairly new. And I actually don't like the idea of buying a new car and keeping it for 20 years, which works out for me because the way I do it is cheaper anyway...

It also backs the point that the newer the car is, the more it is going to cost you (because depreciation drives the ownership cost, at least in that model). Now not all situations/cars are the same. There can be good lease deals out there. Some cars make more sense to buy new than others. But universally speaking, buying new is not financially justifiable.

[bill25]

I think that you are looking at only one variable. Cost. That does not support statements like:

buying new is not financially justifiable.

This model shows things based solely on cost, it doesn't measure reliability, technology, safety, time taken out to do the repair, etc.

If you are willing to pay for a new car, knowing the price, and the resale value, and can make the payments, I don't see the issue. It costs more, but you are getting more. What is wrong with that?

[kevm14]

Of course I am looking at one variable. That's why I said "financially" justifiable.

That model from that article took into account other operational costs as the car ages.

I'm not saying people shouldn't buy new cars (even though I kind of am). What I am really saying is, people shouldn't rationalize a new car purchase with some kind of financial analysis because it's almost never going to beat a model where you buy something used, except in some very isolated instances. I just find it too easy because it can be veiled in this somewhat dishonest approach where you're like "well I need a car, so here's one, and I can afford it, so there's nothing wrong with my decision." If money is no object, go nuts. But these arguments always seem to come from people who are less financially literate and less financially endowed. That's why those people always seem to have lingering debt problems because that logic isn't the best way to run your bank account.

The bottom line, and back to your point, I don't think there are many circumstances where your scenario makes good sense (buy $40k new car, sell in 5 years). Again, according to the model, it was the single most expensive thing you could do out of all the ways they looked at owning vehicles. You are pretty much guaranteed better options of A) Spend $40k on a used car, perhaps certified, and get more car for the money, and also have a car that already rode the steepest part of its depreciation curve or B) Spend less than $40k on a similar vehicle, but used (the model presented several scenarios for this which were ALL better long term values than any new car purchase, even if you keep it for 15 years!!).

The very idea that someone would divide $20k of depreciation into 5 years, and then claim that it is affordable and thus arbitrarily acceptable is the definition of being a very unsavvy/unwise consumer. And all I'm saying is, if the rationale is "I don't care, I like this car, stay out of my business" then great! Good luck with everything. But if the rationale is "I think this is a financially optimized path" then I have many issues, because it demonstrably is not.

Just because you can talk yourself into it does not mean that it is a good idea. My minimum requirement is intellectual honesty. Having an innate ability to turn something fundamentally irrational (or god forbid immoral) into something rational is quite dangerous - I get it, I do it, too, but at least it is a standard I am trying to live up to. Far fewer people would be broke or in debt if they lived by this stuff. Everyone is quick to blame external factors but no one ever wants to own their own decisions. Very frustrating. /LibertarianRant

[bill25]

I don't think it is financially optimized, but probably the route of least maintenance, and reliability issues and it might be worth it to pay a little extra for that.

I am just saying there are tradeoffs.

[kevm14]

I agree - but at least in that generalized model, the costs of reliability issues are already accounted for. You are essentially paying a large premium (not a small premium) for some kind of diminished hassle. If the car payment is a small enough part of your budget, this doesn't matter and is probably worth it to you, in the same way that "rich people" pay way too much for stuff, in my opinion, but because it makes their lives easier, and it is a drop in the bucket, they don't care. In my own socio-economic domain, I understand this logic, but I do not think a car loan is the right approach to enabling this concept. That is the crux of our disagreement.

There are too many accepted debt practices that are just not smart (like recurring credit card debt). The behavior tends to bleed over into other areas and overall can lead to more misery, not less. I think that is important to understand. I say question ALL recurring debt - get rid of it or shrink it. Always. All the time.

Wanna know why cars seem more expensive than they should be? The availability of credit allows people greater buying power (this can be used for good or bad purposes, that is the power of freedom). I will spell this out...if everyone only paid cash for cars, they'd be cheaper. They'd also be worse so pick your poison. Same for real estate (gov't backed mortgages). Same for college education. Loans are not inherently bad, or good. They are just loans. But when businesses borrow, which is a critical economic function, they are doing it with the idea of performing a capital investment or other means to enhance/run their business. Borrowing for a rapidly depreciating asset isn't nearly the same thing. Remember that I'm not anti-mortgage. But the house doesn't lose 50% of its value in 5 years. Or ever.

I will maintain, and this is of course my opinion, that if you don't feel comfortable paying cash for the car, you are buying more car than you should (new OR used). If the idea of draining your savings account of $40k seems like a totally ludicrous prospect, that is a good sign you shouldn't get a loan on that $40k car, either. Restated, if the appeal of signing up for a $40k car loan is much higher than plunking down $40k of your hard earned cash, that is the entire point. If you don't have $40k of cash, but have enough income to pay that car payment, then I'd say you are one $40k car ahead of where you should be (drive something cheaper until you can actually save up).

And just a side note...when $24k buys cars like a low mile Camaro SS 1LE or Cadillac CTS V-sport, I see no need to spend $40k on a car in the first place. If you can find something cool for that price, you can certainly find something reliable and boring, too.

[kevm14]

This is a slight deviation from the topic area but it may be useful to post some specific examples of vehicles that are bad values as lightly used cars and where buying new may make more sense. We can discuss those specific cases.

I can envision a list of Toyota products, oddly enough. Bill mentioned the 4Runner (which seems like a dumb family vehicle but hey, what do I know), obviously there is the Tacoma, I think Bob's Prius fell into this category as did his Mini once upon a time. Conclusion....don't buy a lightly used Toyota? Buy a very used one or a new one?

This is definitely off topic but I have a fundamental logic gap with the ridiculous resale on these vehicles. I mean, Bill is talking about 3 year old 4Runners for only a few thousand off what a new one costs. OK, so that's the market, but is the high resale because the thing is going to last forever? If that's true, why not get one that's even older and with higher miles? If they don't last forever, why are they so expensive? It may be that these kinds of vehicles are pretty much never good used car values because they are always more expensive than what they offer. I don't really see the solution as buy a new one because there are a lot of options out there.

[Bob]

One other example I found recently: a new 2019 Dodge Charger Scat Pack marked down $34,999 with no dealer fees. Even a 3-4 year old one with 40k miles is still going to be like high 20s at the lowest, so I think this is another case where buying new makes sense. Also, since it's made by FCA, having a new car warranty has some value.

Also, the Civic Type R. Used 2017s are still selling at or above original MSRP. If you could have somehow swung a deal for MSRP or even a few thousand above, this would be a fine example of when buying new makes sense.

I agree that these new car values are isolated and most of the time it makes much more financial sense to buy a moderately used car.