Author Topic: Wow- eight year car loans?  (Read 8587 times)

Barbarossa

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Wow- eight year car loans?
« on: September 23, 2015, 05:09:17 PM »
TIME magazine has an interesting article in the Sept 28 issue, page 20.  Average price of a new car is now $33,453 so loans have slid out to eight years to "keep the monthly payment low."  So now, towards the end of the loan, the owner (or sucker) will be underwater, as the car depreciates faster than the loan is paid down.  Underwater, on an eight year old car.  To add insult to injury, one reason the price of a new car has gone up is because people are buying luxury trucks in larger numbers, now that gas is down. 

That's all so anti-mustachian as to give me the creeps!

PS.  Leaf's are selling for under ten grand right now, there's an over-supply of them and gas is cheap, both of which has pushed the demand down.  I'm looking for a blue one.

MgoSam

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Re: Wow- eight year car loans?
« Reply #1 on: September 23, 2015, 05:12:39 PM »

PS.  Leaf's are selling for under ten grand right now, there's an over-supply of them and gas is cheap, both of which has pushed the demand down.  I'm looking for a blue one.

Where are you seeing this?

Jeremy E.

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Re: Wow- eight year car loans?
« Reply #2 on: September 23, 2015, 05:14:27 PM »

PS.  Leaf's are selling for under ten grand right now, there's an over-supply of them and gas is cheap, both of which has pushed the demand down.  I'm looking for a blue one.

Where are you seeing this?
I think he's referring to used Leafs coming off their leases that can sometimes be found for under 10k. MMM even made a facebook post about it.

Sid Hoffman

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Re: Wow- eight year car loans?
« Reply #3 on: September 23, 2015, 05:16:21 PM »
This is what you get from keeping interest rates artificially low.  They are trying to hide the fact the economy is stalling out (again) and making the problem worse by getting people to overextend themselves with low interest loans on very long terms.

bagap

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Re: Wow- eight year car loans?
« Reply #4 on: September 23, 2015, 05:42:01 PM »
And they'll get tired of that car or truck in 5 years, buy a shiny new one with a shiny new 8 year term and roll the balance of the loan from the first car into the new loan.  Pretty soon that "low" car payment looks more like a mortgage.  Seen it happen in my own family :(

Paul der Krake

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Re: Wow- eight year car loans?
« Reply #5 on: September 23, 2015, 05:51:43 PM »
This is what you get from keeping interest rates artificially low.  They are trying to hide the fact the economy is stalling out (again) and making the problem worse by getting people to overextend themselves with low interest loans on very long terms.
What's the FED supposed to do, make decisions that take into account the feelings of idiots buying $33k vehicles over 8 years to commute 10 miles to an office park?

These loans exist because people sign them.

scottish

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Re: Wow- eight year car loans?
« Reply #6 on: September 23, 2015, 06:03:44 PM »
I hate nanny governments.   But it's stuff like this that makes me wonder.   Maybe many people really can't look after themselves financially.

Drew664

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Re: Wow- eight year car loans?
« Reply #7 on: September 23, 2015, 06:12:50 PM »
A family member got a 6 year car loan last year, and I had never heard of such. I really thought a 5 year was the max. 8 is crazy...

When I talked about my mortgage to my dad though,  he was unaware there were 30 year ones, as he was used to only seeing 15 year mortgages.

One Noisy Cat

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Re: Wow- eight year car loans?
« Reply #8 on: September 23, 2015, 08:05:09 PM »
In 1979 I bought a new Honda Civic with a 3 year loan.
In 1987 I bought a new Toyota Tercel with a 5 year loan. Stupid me didn't save the extra $127 a month after 1982. But with that I resolved to save the extra $190 a month and decided that Dear Old Dad was wrong for buying new cars (he did buy used second cars for Mom and did much of the maintenance work himself.

So I am not really surprised that car loans are 8 years now. The shame is nowadays you have much better access to repair records on used cars (flog me with a wet noodle if I ever say pre-owned) and easier ways to find them.

regulator

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Re: Wow- eight year car loans?
« Reply #9 on: September 23, 2015, 08:11:19 PM »
I think an 8 year car loan suggests you are buying too much car.  That said, it is pretty common for cars to keep running out to 15 years of age.  I guess it can't really be that much of an issue to spread out the financing over a longer time with an asset that lasts longer than it used to and while rates are low.

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Re: Wow- eight year car loans?
« Reply #10 on: September 23, 2015, 08:18:52 PM »
I hate nanny governments.   But it's stuff like this that makes me wonder.   Maybe many people really can't look after themselves financially.

You could also make the counter argument that all the protections put in place encourage people to do this. If there were no SS, no unemployment benefits, no bankruptcy laws, etc. would people be so unresponsible? Or would they save more and keep an emergency fund?

I'm not saying we should do away with any of these programs, but anytime you add social insurance or ways to escape responsibility you create moral hazard. Economists recognize this and adding in a government provided retirement/disability benefit is a great way to get people to spend more.

Example: If you HAD to pay back that car loan even if the truck broke down after 6 months... right after you lost your job... because you were disabled... by an injury during the fire that burned down your house... you have no income to speak of... and failure to pay back that loan meant you would never get another loan in your entire life and they would even garnish any future wages you did earn... or maybe even send you to a work camp to pay it back... would you take out an 8 year loan on a Dodge truck? 

I picked Dodge because they consistently rank last in reliability. When they aren't last... it is normally Jeep. Jeep is owned by Dodge.
 

bacchi

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Re: Wow- eight year car loans?
« Reply #11 on: September 23, 2015, 09:24:50 PM »
If I could get an 8 year 0-2% loan on a used car, I'd take it in a heartbeat. That's some serious arbitrage.

TomTX

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Re: Wow- eight year car loans?
« Reply #12 on: September 24, 2015, 05:53:36 AM »
If I could get an 8 year 0-2% loan on a used car, I'd take it in a heartbeat. That's some serious arbitrage.

At the local credit unions, you can get the lowest rates out to 5 or 5.5 years. Small bump up at 6 years (still below 2%)  with a BIG increase beyond 6 years.

YoungInvestor

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Re: Wow- eight year car loans?
« Reply #13 on: September 24, 2015, 05:58:49 AM »


I'm not saying we should do away with any of these programs, but anytime you add social insurance or ways to escape responsibility you create moral hazard. Economists recognize this and adding in a government provided retirement/disability benefit is a great way to get people to spend more.

You're thinking of morale hazard. Not moral hazard. These are quite different.

Jags4186

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Re: Wow- eight year car loans?
« Reply #14 on: September 24, 2015, 06:56:35 AM »
TIME magazine has an interesting article in the Sept 28 issue, page 20.  Average price of a new car is now $33,453 so loans have slid out to eight years to "keep the monthly payment low."  So now, towards the end of the loan, the owner (or sucker) will be underwater, as the car depreciates faster than the loan is paid down.  Underwater, on an eight year old car.  To add insult to injury, one reason the price of a new car has gone up is because people are buying luxury trucks in larger numbers, now that gas is down. 

That's all so anti-mustachian as to give me the creeps!

PS.  Leaf's are selling for under ten grand right now, there's an over-supply of them and gas is cheap, both of which has pushed the demand down.  I'm looking for a blue one.

Towards the beginning of the loan the person will be underwater, not towards the end.

zephyr911

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Re: Wow- eight year car loans?
« Reply #15 on: September 24, 2015, 10:41:54 AM »
Towards the beginning of the loan the person will be underwater, not towards the end.
Or maybe both.
Underwater at the beginning is a given for virtually any 100% financed new car. It's really financed at 105-110% after taxes and various fees, and it initially depreciates faster than it's amortized; the longer the term, the longer that inequality is in effect.
Since amortization accelerates over the life of the loan, and depreciation generally slows down for the life of the vehicle, you're unlikely to be upside-down on an 8-yr-old car unless that was the case all along. (see attachment)

Beaker

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Re: Wow- eight year car loans?
« Reply #16 on: September 24, 2015, 10:57:29 AM »


I'm not saying we should do away with any of these programs, but anytime you add social insurance or ways to escape responsibility you create moral hazard. Economists recognize this and adding in a government provided retirement/disability benefit is a great way to get people to spend more.

You're thinking of morale hazard. Not moral hazard. These are quite different.

I started to type up a response saying you were wrong, but it seems you're right. I had never heard of morale hazard before. Interesting.

I understand the original argument, but I tend to think that even if the various safety nets didn't exist people would act the same way. They do this stuff not because they've rationally analyzed the various safety nets and decided to take the risk, but because they haven't considered any of the risks in the first place.

ShoulderThingThatGoesUp

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Re: Wow- eight year car loans?
« Reply #17 on: September 24, 2015, 11:16:16 AM »


I'm not saying we should do away with any of these programs, but anytime you add social insurance or ways to escape responsibility you create moral hazard. Economists recognize this and adding in a government provided retirement/disability benefit is a great way to get people to spend more.

You're thinking of morale hazard. Not moral hazard. These are quite different.

I started to type up a response saying you were wrong, but it seems you're right. I had never heard of morale hazard before. Interesting.

I understand the original argument, but I tend to think that even if the various safety nets didn't exist people would act the same way. They do this stuff not because they've rationally analyzed the various safety nets and decided to take the risk, but because they haven't considered any of the risks in the first place.

Huh. I thought that post was a weird joke.

eostache

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Re: Wow- eight year car loans?
« Reply #18 on: September 24, 2015, 11:41:44 AM »
A few years ago we were shopping for an older Toyota truck. We tried out one from a private seller. This truck was over 10 years old and had more than 100,000 miles on it. They would not take less than $9000 as that was what they owed on it. These older Toyota trucks go for a lot around here because people really like them and they last forever, but that was crazy to owe that much on a truck that old.

RWD

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Re: Wow- eight year car loans?
« Reply #19 on: September 24, 2015, 12:32:05 PM »
Towards the beginning of the loan the person will be underwater, not towards the end.
Or maybe both.
Underwater at the beginning is a given for virtually any 100% financed new car. It's really financed at 105-110% after taxes and various fees, and it initially depreciates faster than it's amortized; the longer the term, the longer that inequality is in effect.
Since amortization accelerates over the life of the loan, and depreciation generally slows down for the life of the vehicle, you're unlikely to be upside-down on an 8-yr-old car unless that was the case all along. (see attachment)
In order to be underwater on an 8-year-old car that you purchased new with an 8-year loan the car would have to have a negative value since the loan should be paid off then, right? Unless they refinanced or missed payments or something?

Marus

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Re: Wow- eight year car loans?
« Reply #20 on: September 24, 2015, 02:11:37 PM »
I hate nanny governments.   But it's stuff like this that makes me wonder.   Maybe many people really can't look after themselves financially.

You could also make the counter argument that all the protections put in place encourage people to do this. If there were no SS, no unemployment benefits, no bankruptcy laws, etc. would people be so unresponsible? Or would they save more and keep an emergency fund?

I'm not saying we should do away with any of these programs, but anytime you add social insurance or ways to escape responsibility you create moral hazard. Economists recognize this and adding in a government provided retirement/disability benefit is a great way to get people to spend more.

You don't need to speculate on this.  We had a long period of time where we didn't have social safety net programs.  And during the 1920s, before the nanny state supposedly made everyone irresponsible, 80% of Americans had zero savings.

I'd suggest the opposite of what you're saying: that a lot of people are just going to be financially impulsive and short-sighted, regardless of how benefits are structured.  If SS functions properly, it's effectively a mandatory savings program that's managed by the most trustworthy fiduciary in the world.  Take that away, and instead of some people putting 6.2% aside, you'd have people saving absolutely nothing.

Sid Hoffman

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Re: Wow- eight year car loans?
« Reply #21 on: September 24, 2015, 02:46:08 PM »
Towards the beginning of the loan the person will be underwater, not towards the end.

This put me through an interesting thought process as I wanted to quantify this.  The average length of ownership in the US is now 78 months.  That's 6.5 years.  I did some demo loans and checked KBB for resale on a couple cars and found that even for a car with below-average resale value, you should not be underwater at the 6.5 year mark of an 8 year loan.  I think that it's possible that people are largely waiting until their cars are either paid off or at least no longer underwater before getting new ones.

I'm not a fan of long loans nor silly low interest rates but the more I looked at it, the more I started to wonder if long-term loans are causing people to be less consumeristic, and that is the reason they are keeping cars for longer instead of trading them in so frequently.  From that same article, their data shows that in 2006 the average length of ownership of new cars was just 52 months.  From 52 to 78 is a 50% increase in ownership time!  The longer you own something, the better it typically is for you, especially since you have to pay a bunch of fees to drive even a used car home from the dealer lot.

So... now I feel conflicted on this subject.  I don't like the idea of people having such long loans, but I also loath the notion of buying a new car every few years.  It's possible that the low interest rates which made long loans possible is exactly what's encouraging people to hold on to their cars for so long in the first place.

Marus

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Re: Wow- eight year car loans?
« Reply #22 on: September 24, 2015, 05:02:38 PM »
Where I work we offer loans up to 10 years for cars!  I've never actually seen anyone take that loan for a car, thankfully...we'd be charging them over 9% which is just insane to me.


Indexer

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Re: Wow- eight year car loans?
« Reply #23 on: September 26, 2015, 08:20:19 PM »


I'm not saying we should do away with any of these programs, but anytime you add social insurance or ways to escape responsibility you create moral hazard. Economists recognize this and adding in a government provided retirement/disability benefit is a great way to get people to spend more.

You're thinking of morale hazard. Not moral hazard. These are quite different.

They are two different things, but in this case both are at play. Which is true pretty often. The basic idea behind both is that one party is taking on risk with the belief another party will be responsible for any repercussions.  Morale hazard focuses more on the party not caring about additional risk because they have insurance/protection(driving faster because you have car insurance). Moral hazard normally focuses more on active additional risk taking with the knowledge that you aren't responsible for the consequences(banks making riskier loans knowing the government will bail them out). Moral hazards are also normally associated with immoral things, like gambling with other people's money.

Someone not saving because they think SS income will be enough in retirement = Morale.
Someone taking on debt they will have a hard time paying back with the knowledge they can just file bankruptcy = Moral.

zephyr911

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Re: Wow- eight year car loans?
« Reply #24 on: September 27, 2015, 10:25:55 AM »
In order to be underwater on an 8-year-old car that you purchased new with an 8-year loan the car would have to have a negative value since the loan should be paid off then, right? Unless they refinanced or missed payments or something?
Good point, and I think the initial comment was actually about the later years of the loan, as opposed to the day it's paid off.

Making Cookies

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Re: Wow- eight year car loans?
« Reply #25 on: September 28, 2015, 01:08:28 PM »
A few years ago we were shopping for an older Toyota truck. We tried out one from a private seller. This truck was over 10 years old and had more than 100,000 miles on it. They would not take less than $9000 as that was what they owed on it. These older Toyota trucks go for a lot around here because people really like them and they last forever, but that was crazy to owe that much on a truck that old.

A coworker told me of a Dodge p/u he was considering that is ten years old and 180K miles = ~$13K. This is on a mainstream dealer lot here in town selling new cars as well as used.

All I can figure is either trucks like this are indeed worth that kind of money or they keep a "looker" around for the gullible.

Meanwhile someone told me about whose house plumbing flooded the interior of the house - laundry connection hose or similar. Every room wet from an all day leak. Can't afford to fix it out of pocket b/c of car hopping they've done over the past year or two. Insurance will pay for the repairs but apparently the homeowners need to front the repair money and get reimbursed for receipts. Dunno any more details than that.

I think I'd rather have emergency money in a bank account that I could rely on for a situation like this than shiny cars in the driveway.

Could it be that these long term loans exist b/c people who replace a vehicle rather than repairing/maintaining the old car for another few years may be more financially strapped now than in years past due to endless spending rather than savings/investing their spare cash? The average consumer is broke???

My teen pointed out this weekend that in a few more years our newest family vehicle will officially be an antique. Still gets the job done just fine. The factory original clutch might need replacement soon finally.
« Last Edit: September 28, 2015, 01:15:17 PM by Joe Average »

boarder42

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Re: Wow- eight year car loans?
« Reply #26 on: September 29, 2015, 11:00:52 AM »
http://kansascity.craigslist.org/cto/5228402950.html

9k for a leaf ... i'm sure they can be talked down

Sid Hoffman

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Re: Wow- eight year car loans?
« Reply #27 on: September 30, 2015, 04:33:03 PM »
A coworker told me of a Dodge p/u he was considering that is ten years old and 180K miles = ~$13K. This is on a mainstream dealer lot here in town selling new cars as well as used.

Well just saying "Dodge pickup" doesn't say much.  They sold for anywhere from $20k to $60k new.  I'm seeing KBB retail on a 2005 Dodge Ram 3500 with nice options and 180,000 miles as $16,700.  That's because this configuration is a genuine work/play configuration and they have excellent resale.  Lesser models with fewer options will be cheaper for sure, but pickup trucks really do hold good resale in a lot of places.

Making Cookies

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Re: Wow- eight year car loans?
« Reply #28 on: October 05, 2015, 01:11:45 PM »
A coworker told me of a Dodge p/u he was considering that is ten years old and 180K miles = ~$13K. This is on a mainstream dealer lot here in town selling new cars as well as used.

Well just saying "Dodge pickup" doesn't say much.  They sold for anywhere from $20k to $60k new.  I'm seeing KBB retail on a 2005 Dodge Ram 3500 with nice options and 180,000 miles as $16,700.  That's because this configuration is a genuine work/play configuration and they have excellent resale.  Lesser models with fewer options will be cheaper for sure, but pickup trucks really do hold good resale in a lot of places.

We you taught me something. We is likely looking at a 3/4 ton, diesel, 4WD and possibly a crewcab. Not a dually. I've listened to all the reasons a dually is bad over several lunches with my coworker... ;)

I had no idea someone would pay that much for a well used vehicle. I know as an owner of a very high mileage Honda that not all high mileage vehicles are valued the same. Some brands of grocery getters are done by 291K miles but some like our Honda has years left in it.

180K highway miles is different than 180K miles of crawling around the farm and through the woods too.

Still - I figured mileage like that indicates a few things will be breaking sooner rather than later and the value might be closer to $9K than $18K.

Thanks for the insight.

KodeBlue

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Re: Wow- eight year car loans?
« Reply #29 on: October 07, 2015, 09:00:51 PM »
  Leaf's are selling for under ten grand right now, there's an over-supply of them and gas is cheap, both of which has pushed the demand down.  I'm looking for a blue one.

is the plural of Leaf Leafs or Leaves.

Paul der Krake

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Re: Wow- eight year car loans?
« Reply #30 on: October 08, 2015, 04:35:09 AM »
  Leaf's are selling for under ten grand right now, there's an over-supply of them and gas is cheap, both of which has pushed the demand down.  I'm looking for a blue one.

is the plural of Leaf Leafs or Leaves.
If you rent one, it turns into a leaflet.

seanc0x0

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Re: Wow- eight year car loans?
« Reply #31 on: October 08, 2015, 09:45:33 AM »
  Leaf's are selling for under ten grand right now, there's an over-supply of them and gas is cheap, both of which has pushed the demand down.  I'm looking for a blue one.

is the plural of Leaf Leafs or Leaves.

If it's Leafs I'll get confused because when I see that, I think hockey. A Google search for 'leafs' also returns nothing but hockey results, but then I am in Canada so Google may weight that sense of the term higher.

'Leaves' does sound a bit funny when referring to a product name, though.

zephyr911

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Re: Wow- eight year car loans?
« Reply #32 on: October 09, 2015, 09:26:12 PM »
LEAFs.

Yes, it's an acronym. It's something really contrived that I can't exactly recall... Low-Emission, Affordable Family-friendly-vehicle or something, blah. LOL

Sid Hoffman

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Re: Wow- eight year car loans?
« Reply #33 on: October 15, 2015, 04:53:55 PM »
is the plural of Leaf Leafs or Leaves.

Under the rules of the English language, the plural of a proper name is supposed to be the name itself, with -s or -es at the end.

http://www.dailywritingtips.com/plurals-of-proper-names/

The link above even specifically lists the Nissan Leaf and drives home the point that plural is Leafs, not Leaves.