The economics of car buying - long term loans/low monthly payments
You want the low monthly payment and the dealership can give it to you.
What they aren't explaining to you well enough is that the longer the term on the loan, the less is being paid into the principal and more is being paid into the interest ($$$ for the lender and dealership)
A great
article at the LA Times about the repercussions of this kind of deal:
New cars that are fully loaded � with debt
When Jennifer and Bobby Post traded in their 2001 Chevy Suburban last year for a shiny new Ford F-350 turbo diesel with an extended cab, it seemed like a great deal. Even though they still owed $9,500 on their SUV after the trade-in value, they didn't have to put a penny down.
The dealership, near the Posts' home in Victorville, made it easy; it just added the old debt to the price of the new truck and gave the couple a seven-year, $44,276 loan.
The Posts were a little worried about taking on such a long obligation, but they couldn't pass up a monthly payment under $700. Now they're having regrets.
"I didn't realize how much debt was in it," said Jennifer Post, who has since moved with her family to Iowa. Now, she'd like to get rid of the truck but can't, because there's so much debt that she'd literally have to pay someone to take it off her hands.
One of the things that I liked about Jen when we were dating was that she was very careful with money. I am too -- we own a 2002 Subaru that is paid for. I have an 1998 Dodge truck that is paid for. We don't get the latest and greatest of things but our house is paid for. We have credit cards but use them only when needed (buying airplane tickets, etc... and when a measure of protection is needed (buying from an overseas vendor)) and then, they are paid off that next month if possible, next few months if not.
A bit more from the article:
Americans haven't just been taking out risky mortgages for homes in the last few years; they've also been signing larger automobile loans for significantly longer terms than they used to.
As a result, people are slipping into a perpetual cycle of automobile debt that experts think could lead to a new credit crunch extending from dealerships to driveways and all the way to Wall Street.
More:
At the same time, the amount of money drivers owe on their cars is soaring. In October, the average amount financed hit $30,738, up $3,500 in just a year and nearly 40% in the last decade, according to the Fed. More troubling, today's average car owner owes $4,221 more than the vehicle is worth at the time it's sold -- up from $3,529 in 2002, according to industry analyst Edmunds.
One more:
Cindy Gerhardt has rolled over so much debt on successive vehicle purchases -- five in three years -- that she now owes almost $43,000 on two trucks worth no more than $29,000 and, she says, perhaps as little as $22,000.
Faced with car payments that exceed her monthly mortgage, she tried to trade in the pair for a single vehicle. But with so much unpaid principal on the vehicle loans, the only offer she got from the dealer was to trade in one truck on yet another new vehicle -- and increase her debt by another $25,000.
"It's our own fault that we traded in vehicles so many times, but we never thought it would get to this," said Gerhardt, a secretary who lives with her husband and two children in Clinton, Okla. She recently tried to refinance her mortgage, she said, but was declined because her car payments were too high. "Not one dealer ever said this was a problem. Ever. I never had a dealership say no."
Are people just getting more and more stupid about money and personal responsibility these days or is there something else at work here?
My vote is with stupidity...
Posted by DaveH at December 30, 2007 8:40 PM