Heard on Marketplace Money

[frugalecon]

This is a personal finance podcast I listen to occasionally. A 30 year old guy called in, wanting advice on whether to pay off a $4000 credit card balance (he has the liquid funds) or roll it over to a new zero interest card with a 3% transfer fee. The hosts asked him some questions, and it came out that he had a salary of $55k, no retirement savings, and a $600/month car payment. He had bought a $39,000 loaded VW Passat! Financed for 6 years! Oy. But he said that the gas savings were so great that they offset a lot of the car payment. The hosts gently chastised him...when he needed a whale of a Facepunch.

[Threshkin]

There should never be a debt to income ration for purchasing a car.  Always pay cash.  If you don't have much cash, buy a cheap car if you have to or better yet walk, bike or longboard.

[frugalecon]

There should never be a debt to income ration for purchasing a car.  Always pay cash.  If you don't have much cash, buy a cheap car if you have to or better yet walk, bike or longboard.

I once said "car loans are for suckers" to a friend and was told that I didn't understand what I was talking about.

[Recon]

Marketplace Money has a lot of facepunch-worthy case studies, but that one was pretty bad.  When he said he had "run the numbers" and the MPG savings somehow made that obscene car payment reasonable, I just felt bad for his math skills.  Even if he was switching from a Hummer to a Prius, he would have to drive a hell of a lot of miles to justify a $40K 6-year loan.  And that's not even beginning to account for the German Car Depreciation Cliff.

[paddedhat]

I accidentally caught the same piece while changing stations. In their defense, the hosts make a clearly audible gasp when he dropped the bomb about having a $600 MORTGAGE on a fekin' VW. Obviously, they were, by our standards here, WAY too soft on him, but you get the feeling that  they waited till the next break and said, off air, "can you believe that that moron tried to sell us on the wonderful savings of pissing away $600 a month on a car, LOL"

On a related note, as a prior owner of a Passat, all I can say is WOW. Paying 39K for an unreliable, over-engineered, underbuilt, fragile piece of VW shit, well.......good luck with that, and make sure you extend the warranty to the end of the payment book, since you're going to need it.

[Gin1984]

There should never be a debt to income ration for purchasing a car.  Always pay cash.  If you don't have much cash, buy a cheap car if you have to or better yet walk, bike or longboard.

If the rate is 0%, why not get the loan?  Personally if the loan rate is lower than the other rates for debt, I don't see a problem.  Many graduates have student loan debt, get a decent job but need a vehicle.  Why save up and pay cash when you can get a loan at a rate lower than your student loans and pay down the student loans faster?   

[frugalecon]

There should never be a debt to income ration for purchasing a car.  Always pay cash.  If you don't have much cash, buy a cheap car if you have to or better yet walk, bike or longboard.

If the rate is 0%, why not get the loan?  Personally if the loan rate is lower than the other rates for debt, I don't see a problem.  Many graduates have student loan debt, get a decent job but need a vehicle.  Why save up and pay cash when you can get a loan at a rate lower than your student loans and pay down the student loans faster?   

A low-mileage used car for cash is generally a better deal than a new car at 0%. Plus, you seem to be assuming that the purchase price is the same when you take the financing deal vs. paying cash. When I have bought a new vehicle, I put out a call for bids for a bunch of dealers, to find the best all-cash offer.

[odput]

http://www.mrmoneymustache.com/2011/11/28/new-cars-and-auto-financing-stupid-or-sensible/

[Vorpal]

There should never be a debt to income ration for purchasing a car.  Always pay cash.  If you don't have much cash, buy a cheap car if you have to or better yet walk, bike or longboard.

If the rate is 0%, why not get the loan?  Personally if the loan rate is lower than the other rates for debt, I don't see a problem.  Many graduates have student loan debt, get a decent job but need a vehicle.  Why save up and pay cash when you can get a loan at a rate lower than your student loans and pay down the student loans faster?   

A low-mileage used car for cash is generally a better deal than a new car at 0%.

And sometimes the best deal is in between... a low-mileage, mustachian used car financed at a very low interest rate. I'm currently making payments on a '12 Mazda2 that I bought (financed) lightly used (16k miles) last September for $11,750 at 1.9%. I figured that I could do better than 1.9% in the markets, and so when I had (very nearly) the payoff amount in the bank last month, I shipped it to my brokerage account instead of the lienholder. So far it's working out; I've already made more than the interest I'll pay over the remainder of the auto loan.

[Gin1984]

There should never be a debt to income ration for purchasing a car.  Always pay cash.  If you don't have much cash, buy a cheap car if you have to or better yet walk, bike or longboard.

If the rate is 0%, why not get the loan?  Personally if the loan rate is lower than the other rates for debt, I don't see a problem.  Many graduates have student loan debt, get a decent job but need a vehicle.  Why save up and pay cash when you can get a loan at a rate lower than your student loans and pay down the student loans faster?   

A low-mileage used car for cash is generally a better deal than a new car at 0%. Plus, you seem to be assuming that the purchase price is the same when you take the financing deal vs. paying cash. When I have bought a new vehicle, I put out a call for bids for a bunch of dealers, to find the best all-cash offer.

I have always been told you never discuss financing prior to deciding on the price, all-cash offers are normally higher because they don't make money on them.   I was not saying to buy a more expensive car than you could afford, I meant buy the cheapest car with what you need, but if a car loan is cheaper than your student loans (right now my credit union is offering 2.9 for used and my student loan is 5.75-6.8%), consider the rates before you decide to buy in cash.

[paddedhat]

I have always been told you never discuss financing prior to deciding on the price, all-cash offers are normally higher because they don't make money on them. 

No offense, but I don't get the logic of some folks when to comes to new cars? I'm done with new stuff, but I have yet to do any worse than dealer invoice minus the rebates. The wife had a newer CRV that she lost to a deer collision. Since you would have to be an idiot to buy a slightly used one ( three years old, 30-40K miles, and $3000 less than new? I think not.) So, we head to the dealer for a replacement, and they are at $800 over invoice. I tell the sales guy that we paid $500 under invoice for the last one, and that's what we expect to pay for this one. He says "I don't think the manager will EVER go for that deal". I tell him, no worries, we have a few other vehicles to test drive before we pull the trigger anyway.  A few minutes later we left a deposit for a new one at $500 under, then returned with a check when it was ready for delivery.
     No doubt that dealers can make a really nice chunk when you let them fleece you with financing, but it only effects your purchase price if you decide to allow it to. It's amazing how people can get themselves so twisted over things like trades and financing. One of my favorites is, "keep the trade out of the deal, then spring it on them at the last minute" What?  IF you are buying a new car, have a car you need to trade/sell, and need financing, you have THREE different transactions to deal with. They all need to be done in a manner that provides you with the maximum return, and they can all be done independently from each other.  As in, the old car gets craigslisted and sold, the financing  from the credit union, and the car is bought at no more than invoice less any available rebates. Doing it any other way can leave thousands in the wrong pocket.

[Forcus]

All cash offers being higher vs. financing is not untrue, I got a peak at a financing sheet and banks "bid" for the honor of carrying the loan, to the tune of $1k or more. The higher the interest rate, the more the bank makes (and the more they offer to the dealer), so if the dealer can lock you in at a low price they can make it up on the back end if they tell you you have bad credit and push a high interest rate on you. So I would lock in a price and then discuss financing (if even needed).

Even "x amount below invoice" is not always accurate because of under the table discounts between manufacturers and dealers (legal, but not published). So that can backfire especially since invoice is not necessarily invoice.

Even better than all that are some dealers who pile on every discount (disabled veteran minority widow recent college graduate...  ha) and publish the price, which is legal. Sometimes they do not publish destination on their pricing, which if not outright illegal seems morally corrupt. Another dealer I was considering but ended up rebuffing supposedly charges you for mandatory window etching for the VIN number. Which of course they make tons of money on. Seems illegal but this state has bigger fish to fry so they will probably carry on with the uninformed.

Bottom line it is still a game and unfortunately you need to get a heck of a lot of info before even showing up at the dealer. I go in with the parameters that must be met but I will not spend 2 hours arguing over a hundred bucks.. You can get 95% of what you want fairly quickly but they will game you for the last dime up til the very end.

[paddedhat]

Even "x amount below invoice" is not always accurate because of under the table discounts between manufacturers and dealers (legal, but not published). So that can backfire especially since invoice is not necessarily invoice.

You are correct that there are floor plan return percentages, and incentives that do not appear on an invoice, but claiming that paying the actual invoice on a vehicle, less applicable rebates is likely to backfire, is a stretch. The last truck I bought showed a different invoice figure online that the sheet that the dealer handed to me. The discrepancy reflected a few regional co-op marketing charges that the manufacturer tacks on. When I question this, the management handed me the lending agreement from their lender, and they had borrowed 100% of the invoice figure, with the proceeds ending up in GM's hands within a day of the dealer taking delivery on the truck. Bottom line is that, in this case, the dealer was upside down on this truck until the "hidden incentives" arrived from the manufacturer, having spent several months paying interest, overhead and commissions on the deal.
OTOH, stumbling into the local dirtbag Kia dealership during their "invoice plus and additional $4500 over book for your trade" sale is probably going to end up getting you a good screwing.

[frugalecon]

There should never be a debt to income ration for purchasing a car.  Always pay cash.  If you don't have much cash, buy a cheap car if you have to or better yet walk, bike or longboard.

All fair points.   I could have phrased it better.   There's clear guidance in identifying the right price range for a home.  But there's none I've seen for a car.  There is plenty of personal finance and consumer advice on deal making, paying cash etc, but nothing that says "you can spend X" on a set of wheels or "you should be shopping over there instead".

My mid 80s relative needed to replace her minivan, would be paying cash, and while she lives modestly,  could afford anything.   Conceivably,  this would be her last purchase ever.  What price range is appropriate?   

I get the "buy cheapest thing that runs or walk" mantra.  It has as its place, and that's not here   I'll soon find myself in the same boat as my elderly relative's situation.   My vehicle is almost15 years old and the day of reckoning will be here evetually.   It's doubtful I'll find another idiot who tired of a perfectly good Lexus and sold it for a fraction of its value.   Even if I can pay cash, do I have the net worth that makes a new one reasonable purchase ....or are they all insane and no one should be buying a $40k car?

In the case of my relative,  she bought a new vehicle for under $20k and doesn't like it.  A different (and more expensive vehicle) would have been more comfortable for her, but replacing it now is an even bigger expenditure of money and time.

My point is, there was nothing telling that caller that earning 55k per year suggests you can spend, for example,  $5500 on a car.  The only limit on the purchase price is what you have, what they'll lend you and what you want.   That limit makes a mess of financing a house or college education,  and apparently cars, too.

I personally think that the most important thing is to have safe, reliable, comfortable, fuel-efficient car transportation, if one can't rely on public transport or walking or biking. That is how to approach it if one hasn't taken care of the retirement piece yet. If the rest of one's finances are in good shape, then one can think about allocating some savings to a snazzier ride. I personally like heated seats and a sun roof. Do I need them? No, but I splurge a little because my savings are in good order. And I paid cash for the car. It boggles my mind for someone to have $7200/ year in car payments with $55k in income.

[Gin1984]

There should never be a debt to income ration for purchasing a car.  Always pay cash.  If you don't have much cash, buy a cheap car if you have to or better yet walk, bike or longboard.

All fair points.   I could have phrased it better.   There's clear guidance in identifying the right price range for a home.  But there's none I've seen for a car.  There is plenty of personal finance and consumer advice on deal making, paying cash etc, but nothing that says "you can spend X" on a set of wheels or "you should be shopping over there instead".

My mid 80s relative needed to replace her minivan, would be paying cash, and while she lives modestly,  could afford anything.   Conceivably,  this would be her last purchase ever.  What price range is appropriate?   

I get the "buy cheapest thing that runs or walk" mantra.  It has as its place, and that's not here   I'll soon find myself in the same boat as my elderly relative's situation.   My vehicle is almost15 years old and the day of reckoning will be here evetually.   It's doubtful I'll find another idiot who tired of a perfectly good Lexus and sold it for a fraction of its value.   Even if I can pay cash, do I have the net worth that makes a new one reasonable purchase ....or are they all insane and no one should be buying a $40k car?

In the case of my relative,  she bought a new vehicle for under $20k and doesn't like it.  A different (and more expensive vehicle) would have been more comfortable for her, but replacing it now is an even bigger expenditure of money and time.

My point is, there was nothing telling that caller that earning 55k per year suggests you can spend, for example,  $5500 on a car.  The only limit on the purchase price is what you have, what they'll lend you and what you want.   That limit makes a mess of financing a house or college education,  and apparently cars, too.

The personal finance advice about cars, that I have read, has said all transportation expenses (gas, insurance, loan etc) should be no more than 10% gross.

[oldtoyota]

I think people get taken on cars at any price.

How much does it cost to make a car? The answer is a closely guarded secret.

Someone just told me that they got a great deal b/c they got $9K on a trade in and then $1500 "off" the new car because there was a "sale."

The trade in could have fetched more on ebay...

For a car that doesn't have a sticker price listed on it, it's easy to give $1500 "off." Just add $1500 and then subtract it and call it a sale price!

--shakes head--