Author Topic: WSJ: The Seven-Year Auto Loan: Americaís Middle Class Canít Afford Its Cars  (Read 16790 times)

Kazyan

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And another from the WSJ. A $45,000 Loan for a $27,000 Ride: More Borrowers Are Going Underwater on Car Loans

1/3 of loans underwater specifically for trade-ins...that's better than you'd expect with the "average people are very stupid" assumption, considering that trade-ins aren't the only way people get cars. Not exactly a good sign economically, but the overall population seems to be making okay car choices.

Just Joe

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I agree, I'm just pointing out a the stupidity of buying something you can only just barely afford and then complaining about being too stretched financially.

And on top of that, gasoline went up a dime this week (not really). That's left their finances in "shambles".

Amazing how some people choose play their budget so close.
« Last Edit: November 10, 2019, 02:10:19 PM by Just Joe »

Just Joe

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I was never taught personal finance, but (1) such books are widely available at libraries, (2) it's common sense not to spend more than you earn, (3) even loan contracts spell out the interest rate in big type. At some stage it is no longer a matter of education, but of stupidity and bad judgment.

But at what point did you learn the mathematics behind interest? Because I learned as a freshman in college.

I learned around the time we decided we were tired of floating our consumer debt back when. Then the self-education began.

Ynari

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I was never taught personal finance, but (1) such books are widely available at libraries, (2) it's common sense not to spend more than you earn, (3) even loan contracts spell out the interest rate in big type. At some stage it is no longer a matter of education, but of stupidity and bad judgment.

But at what point did you learn the mathematics behind interest? Because I learned as a freshman in college.

I learned around the time we decided we were tired of floating our consumer debt back when. Then the self-education began.

One of the huge problems with education is that very little "sticks" unless it is 1. particularly fascinating to the individual or 2. immediately relevant (I guess also if it's highly drilled into long term memory, but its impossible to know what each kid will need later in life, so it's not typically a great use of class time unless it's the #1 thing to get out of a class). In our school district, there's a personal finance unit in 8th grade that covers things like simple interest and sales tax, and high school mandates a 1-semester course on personal finance where you learn about W2s and compound interest and mortgages and things like that. It was a noble idea but it just becomes another class for students to zone out in. Another check box saying "I memorized this formula and these definitions, and then promptly dumped the information after the test". Really, best-case scenario is that the kid picks up some big life lessons (like that carrying a balance on a credit card is expensive) and that they vaguely remember some things to google later when they really need them.

When they see their parents, peers, society, etc., spending all they earn, it's really hard to effectively educate that kid into thinking they should try a different route.

Travis

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I was never taught personal finance, but (1) such books are widely available at libraries, (2) it's common sense not to spend more than you earn, (3) even loan contracts spell out the interest rate in big type. At some stage it is no longer a matter of education, but of stupidity and bad judgment.

But at what point did you learn the mathematics behind interest? Because I learned as a freshman in college.

I learned around the time we decided we were tired of floating our consumer debt back when. Then the self-education began.

One of the huge problems with education is that very little "sticks" unless it is 1. particularly fascinating to the individual or 2. immediately relevant (I guess also if it's highly drilled into long term memory, but its impossible to know what each kid will need later in life, so it's not typically a great use of class time unless it's the #1 thing to get out of a class). In our school district, there's a personal finance unit in 8th grade that covers things like simple interest and sales tax, and high school mandates a 1-semester course on personal finance where you learn about W2s and compound interest and mortgages and things like that. It was a noble idea but it just becomes another class for students to zone out in. Another check box saying "I memorized this formula and these definitions, and then promptly dumped the information after the test". Really, best-case scenario is that the kid picks up some big life lessons (like that carrying a balance on a credit card is expensive) and that they vaguely remember some things to google later when they really need them.

When they see their parents, peers, society, etc., spending all they earn, it's really hard to effectively educate that kid into thinking they should try a different route.

I know I learned the bare bones of how banks, loans, and compound interest work in public school, but I can't remember at what grade.  And I mean bare bones. I have no memories of wargaming things like taxes and personal loans.  I remember my 12th-grade economics class, but the only things that stand out were the macroeconomics that took up most of the curriculum.  Everybody left that class knowing what the Federal Reserve was, but not that an 18% loan was a bad thing.

ender

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I was never taught personal finance, but (1) such books are widely available at libraries, (2) it's common sense not to spend more than you earn, (3) even loan contracts spell out the interest rate in big type. At some stage it is no longer a matter of education, but of stupidity and bad judgment.

But at what point did you learn the mathematics behind interest? Because I learned as a freshman in college.

Knowing the math of interest and understanding the impact on life are two different things.

marty998

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I was never taught personal finance, but (1) such books are widely available at libraries, (2) it's common sense not to spend more than you earn, (3) even loan contracts spell out the interest rate in big type. At some stage it is no longer a matter of education, but of stupidity and bad judgment.

But at what point did you learn the mathematics behind interest? Because I learned as a freshman in college.

Knowing the math of interest and understanding the impact on life are two different things.

I learned the maths in year 12 (final year of high school in Australia). It was the end of the sequences and series topic (arithmetic and geometric progressions, combined with some exponents and logarithmic work).

You'd have to work out either the P (Principle), the r (rate), or the n (number of periods) or the total amount of payments made at the end of the number of periods, or the balance at the end of the nth period etc.

In no way at all was it designed to help you understand the impact on your life if you took out good debt, bad debt, or what purpose different types of loans served.

In some respects you learned how to become a bank computer, calculating amortisation tables. You didn't learn how to be a canny consumer of a bank product.

UnleashHell

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Just got an email from my credit union.

I'm approved for a 35,000 loan on a used car. which is nearly 4 times more than I've ever spent on one. I don't think the marketing department has got the targeting right this time....

oldtoyota

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Well, you know what type of car I drive. =-D


RetiredAt63

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Just got an email from my credit union.

I'm approved for a 35,000 loan on a used car. which is nearly 4 times more than I've ever spent on one. I don't think the marketing department has got the targeting right this time....

Perhaps they hope to get you thinking of an"upgrade"?

jinga nation

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I was never taught personal finance, but (1) such books are widely available at libraries, (2) it's common sense not to spend more than you earn, (3) even loan contracts spell out the interest rate in big type. At some stage it is no longer a matter of education, but of stupidity and bad judgment.

But at what point did you learn the mathematics behind interest? Because I learned as a freshman in college.

I learned around the time we decided we were tired of floating our consumer debt back when. Then the self-education began.

One of the huge problems with education is that very little "sticks" unless it is 1. particularly fascinating to the individual or 2. immediately relevant (I guess also if it's highly drilled into long term memory, but its impossible to know what each kid will need later in life, so it's not typically a great use of class time unless it's the #1 thing to get out of a class). In our school district, there's a personal finance unit in 8th grade that covers things like simple interest and sales tax, and high school mandates a 1-semester course on personal finance where you learn about W2s and compound interest and mortgages and things like that. It was a noble idea but it just becomes another class for students to zone out in. Another check box saying "I memorized this formula and these definitions, and then promptly dumped the information after the test". Really, best-case scenario is that the kid picks up some big life lessons (like that carrying a balance on a credit card is expensive) and that they vaguely remember some things to google later when they really need them.

When they see their parents, peers, society, etc., spending all they earn, it's really hard to effectively educate that kid into thinking they should try a different route.

I know I learned the bare bones of how banks, loans, and compound interest work in public school, but I can't remember at what grade.  And I mean bare bones. I have no memories of wargaming things like taxes and personal loans.  I remember my 12th-grade economics class, but the only things that stand out were the macroeconomics that took up most of the curriculum.  Everybody left that class knowing what the Federal Reserve was, but not that an 18% loan was a bad thing.

Learnt simple interest in Home Economics class in 7th grade. All boys Catholic school in East Africa, run by Irish Fathers.

Learnt basics of compound interest in 9th or 10th grade, in Mathematics class (fun fact: we call it Maths back home, not Math). I knew how much my dad was paying on biz loans, and how much grandpa was getting on CDs and treasury notes/bills/bonds, and how much dividends my dad was earning (he had the actual share certificates).

Learnt the real-world effects of loans in Engineering Economics class in Inkeneer Skool (South Florida Bulls!). When you have assets and liabilities and time value of money, and how to spread out payments, and etc etc in case studies. I found it easy, but a lot of fellow students struggled with real-world thinking. I'm glad I was doing app-o-ramas with 0% offers and had $100k-$125 stashed in 6+% CD ladders at ING Bank, and knew how to move money around.

Hindsight 20/20, my thrifty family saving money using financial instruments taught me a lot more than I give credit for.

mm1970

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And another from the WSJ. A $45,000 Loan for a $27,000 Ride: More Borrowers Are Going Underwater on Car Loans

That article just made me sad.  Several of the people in the article(particularly the guy who purchased 4 cars in 2 years, and the 2 young women from Hawaii with the pricey pickup) clearly haven't been taught the basics of personal financial discipline.  Makes me wish public high schools required learning about personal finance somewhere in their curricula.

Yes that was really sad.  There was a period of 5-10 years where my brother and his wife would replace cars every  6months to 2 years, often rolling over the unpaid balance.  I know this because my sister was their insurance agent.  It was painful to watch, even  more painful now when he has sewer work to do that costs $10k and he doesn't have the money for it.  48 years old, decent living, just bad money mistakes.

Quote
I was never taught personal finance, but (1) such books are widely available at libraries, (2) it's common sense not to spend more than you earn, (3) even loan contracts spell out the interest rate in big type. At some stage it is no longer a matter of education, but of stupidity and bad judgment.

Some people don't have common sense, and never go to the library.  I learned about compound interest in college, as someone else said. 

Just Joe

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Just got an email from my credit union.

I'm approved for a 35,000 loan on a used car. which is nearly 4 times more than I've ever spent on one. I don't think the marketing department has got the targeting right this time....

Perhaps they hope to get you thinking of an"upgrade"?

Did a voice softly say "ooooooo, nice car! hint hint hint" over your computer's speakers while you read the email?

Was there a "click here to approve loan" button that also notifies everyone in your Facebook feed that you're buying something nice real soon? Just to build anticipation for your friend circle of course.
« Last Edit: November 12, 2019, 04:03:30 PM by Just Joe »

MilesTeg

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Nothing inherently wrong with a long auto loan or even being under water. As always, it's the individual circumstances that matter.

Under water on a 6 year 3% loan? That can either be a bad financial situation or someone leveraging cheap rates and managing cash flow buying a vehicle they intend to drive into the ground.
« Last Edit: November 12, 2019, 08:14:30 PM by MilesTeg »

UnleashHell

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Just got an email from my credit union.

I'm approved for a 35,000 loan on a used car. which is nearly 4 times more than I've ever spent on one. I don't think the marketing department has got the targeting right this time....

Perhaps they hope to get you thinking of an"upgrade"?

if anything my next car will be an additional fun car. used and paid for with cash. I'm just not a good consumer.

RetiredAt63

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Just got an email from my credit union.

I'm approved for a 35,000 loan on a used car. which is nearly 4 times more than I've ever spent on one. I don't think the marketing department has got the targeting right this time....

Perhaps they hope to get you thinking of an"upgrade"?

if anything my next car will be an additional fun car. used and paid for with cash. I'm just not a good consumer.

You are a good consumer, in a Consumer Reports way. Thoughtful about your purchases.  Just not a profitable to industry one.  ;-)

The_Big_H

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Nothing inherently wrong with a long auto loan or even being under water. As always, it's the individual circumstances that matter.

Under water on a 6 year 3% loan? That can either be a bad financial situation or someone leveraging cheap rates and managing cash flow buying a vehicle they intend to drive into the ground.

Im sorry, that is plain bad idea (and un-mustachian) IMO.
One NEVER finances depreciating assets, certainly not on 72 months (on an unnecessarily expensive car)
The loan is telling you you cannot afford it, even if you have the money in the bank, if you cannot wrestle it out of the bank because you like to have it there "just in case", you still can't afford it

I have found that the "Oh I could pay it off but I'll just take out the loan at X% and invest at (X+Y)%" usually the investment part doesn't actually happen, its just a convienent excuse (and that savings gets 'spent' several time on consumer debt items).

Now, if you want to play that game with appreciating assets or investments as collateral (that you don't actually live in), maybe...  but understand you are playing with leverage (read: literally fire).

js82

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Nothing inherently wrong with a long auto loan or even being under water. As always, it's the individual circumstances that matter.

Under water on a 6 year 3% loan? That can either be a bad financial situation or someone leveraging cheap rates and managing cash flow buying a vehicle they intend to drive into the ground.

Im sorry, that is plain bad idea (and un-mustachian) IMO.
One NEVER finances depreciating assets, certainly not on 72 months (on an unnecessarily expensive car)

This is a gross overgeneralization, and hence wrong.  While I'm not advocating for taking out long car loans at today's rates, there are obvious contradictions of this in the not-too-distant past. 

In the wake of the Great Recession, car dealers were offering loans in the <1% range for 3-4 years, and <2% for up to 5 years.  When I purchased my car In September of 2011 I took out a loan because the interest rate was virtually zero and stocks were cheap at the time.  The performance of the stock market over the ensuing 36 months vindicated that decision.  Would I do the same in today's environment?  Probably not, but that's not the point.

The fact that the asset is depreciating is immaterial to this discussion.  The depreciating asset depreciates whether you pay cash or whether you take out a loan.  Overspending on a depreciating asset is a bad financial decision, but that's separate from the discussion of the loan itself.  Taking out a near-zero interest loan as an alternative to paying cash can be a very attractive financial decision in the right economic environment.

PDXTabs

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The fact that the asset is depreciating is immaterial to this discussion.  The depreciating asset depreciates whether you pay cash or whether you take out a loan. 

I concur. As a though experiment, let's say I needed a $20K car, perhaps related to my employment. I have $20K in cash, but Ford offers me a 0% 60 month loan. I'd be an idiot not to take the 0% loan and invest the cash.

EDITed to add - just the other day I was talking to a friend who is a manager that has a $400 car allowance per month and is required to keep a relatively new car, for example.
« Last Edit: November 13, 2019, 07:55:49 PM by PDXTabs »

MilesTeg

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Nothing inherently wrong with a long auto loan or even being under water. As always, it's the individual circumstances that matter.

Under water on a 6 year 3% loan? That can either be a bad financial situation or someone leveraging cheap rates and managing cash flow buying a vehicle they intend to drive into the ground.

Im sorry, that is plain bad idea (and un-mustachian) IMO.
One NEVER finances depreciating assets, certainly not on 72 months (on an unnecessarily expensive car)
The loan is telling you you cannot afford it, even if you have the money in the bank, if you cannot wrestle it out of the bank because you like to have it there "just in case", you still can't afford it

I have found that the "Oh I could pay it off but I'll just take out the loan at X% and invest at (X+Y)%" usually the investment part doesn't actually happen, its just a convienent excuse (and that savings gets 'spent' several time on consumer debt items).

Now, if you want to play that game with appreciating assets or investments as collateral (that you don't actually live in), maybe...  but understand you are playing with leverage (read: literally fire).

As others have mentioned, whether or not an asset is depreciating or not is completely irrelevant. You do the math, and determine which costs more money:

1.) the total cost of the loan (interest, fees, etc.)
vs
2.) the total opportunity cost of buying outright (lost interest, dividends, capital gains, tax payments, etc.)

This is exactly the argument/calculation that is discussed ad nausem in the "should I pay off my mortgage" threads that pop up almost daily.

Even though we are FI and could buy any car or house we want without a loan, we absolutely use someone else's money to buy things if the cost of doing so is less than the cost of using our own money.
« Last Edit: November 14, 2019, 11:32:59 AM by MilesTeg »

kendallf

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The fact that the asset is depreciating is immaterial to this discussion.  The depreciating asset depreciates whether you pay cash or whether you take out a loan. 

I concur. As a though experiment, let's say I needed a $20K car, perhaps related to my employment. I have $20K in cash, but Ford offers me a 0% 60 month loan. I'd be an idiot not to take the 0% loan and invest the cash.

EDITed to add - just the other day I was talking to a friend who is a manager that has a $400 car allowance per month and is required to keep a relatively new car, for example.

The problem lies with the fact that most people, once they've considered a car loan, bump up the amount they're willing to spend on a car.  Try buying a $3k beater and getting a loan.. not going to happen.  $30k new car?  2% loan?  Yeah, you got a "deal" but your costs went up 10x.  Additionally, if you buy a car for cash and it's inexpensive you don't have to carry comp and collision insurance, which is a savings that potentially dwarfs any investment gain from saving your cash.


Kazyan

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More to the point of the "don't take a loan for a depreciating asset" soundbite:

1) It's certainly possible to engineer a financial situation where a money-eating car loan makes sense for an individual. You can engineer a situation to justify pretty much any decision, but that doesn't mean it remotely applies to the pattern of car clownery across an entire society.

2) It's true that you could leverage your car with financing and investing your lump of cash instead of paying with that lump of cash at all once. But if that would actually be significant for your long-term finances (ignoring insurance; I'm talking about the leveraging itself), you're buying too much car in the first place.

Scortius

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No, there's really no reason the type of asset should be taken into consideration at all. Since we can assume everyone here will 1) not increase their purchase due to the availability of financing, and 2) they will pay off their loan in full according to the terms of the loan, then you're left with two completely separate objects. One is the item you purchased, which at this point can be considered completely decoupled from the loan itself. The second is an obligation due to a lender, which is completely independent of the state of the asset.

At this point, the only consideration is how to fulfill the obligation, as the purchased object has no bearing on this decision, it can be entirely ignored. Assuming the obligation can be paid off immediately or over time, it makes sense to pay it off over time if you can find a way to earn more money by taking the loan instead of paying the debt off in full. This is true of home mortgages, it is true of student loans, and car loans, as well as any other loan. Using volatile investments creates a risky leveraged situation which needs to be considered, but if you can get a loan for anything near a treasury note or a short term CD, then you'd be silly not to take the loan for just about any sized purchase.

robartsd

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At this point, the only consideration is how to fulfill the obligation, as the purchased object has no bearing on this decision, it can be entirely ignored. Assuming the obligation can be paid off immediately or over time, it makes sense to pay it off over time if you can find a way to earn more money by taking the loan instead of paying the debt off in full. This is true of home mortgages, it is true of student loans, and car loans, as well as any other loan. Using volatile investments creates a risky leveraged situation which needs to be considered, but if you can get a loan for anything near a treasury note or a short term CD, then you'd be silly not to take the loan for just about any sized purchase.
All true, but Kazyan makes a good point:
But if that would actually be significant for your long-term finances (ignoring insurance; I'm talking about the leveraging itself), you're buying too much car in the first place.

MilesTeg

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At this point, the only consideration is how to fulfill the obligation, as the purchased object has no bearing on this decision, it can be entirely ignored. Assuming the obligation can be paid off immediately or over time, it makes sense to pay it off over time if you can find a way to earn more money by taking the loan instead of paying the debt off in full. This is true of home mortgages, it is true of student loans, and car loans, as well as any other loan. Using volatile investments creates a risky leveraged situation which needs to be considered, but if you can get a loan for anything near a treasury note or a short term CD, then you'd be silly not to take the loan for just about any sized purchase.
All true, but Kazyan makes a good point:
But if that would actually be significant for your long-term finances (ignoring insurance; I'm talking about the leveraging itself), you're buying too much car in the first place.

Kazyan is conflating decisions on /what/ to purchase and /how/ to purchase it.

It's pretty easy, with today's market, to come out significantly ahead by taking advantage of low interest rates and a bull market. Both over the term if the loan and especially in the long run.

The_Big_H

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At this point, the only consideration is how to fulfill the obligation, as the purchased object has no bearing on this decision, it can be entirely ignored. Assuming the obligation can be paid off immediately or over time, it makes sense to pay it off over time if you can find a way to earn more money by taking the loan instead of paying the debt off in full. This is true of home mortgages, it is true of student loans, and car loans, as well as any other loan. Using volatile investments creates a risky leveraged situation which needs to be considered, but if you can get a loan for anything near a treasury note or a short term CD, then you'd be silly not to take the loan for just about any sized purchase.
All true, but Kazyan makes a good point:
But if that would actually be significant for your long-term finances (ignoring insurance; I'm talking about the leveraging itself), you're buying too much car in the first place.

Kazyan is conflating decisions on /what/ to purchase and /how/ to purchase it.

It's pretty easy, with today's market, to come out significantly ahead by taking advantage of low interest rates and a bull market. Both over the term if the loan and especially in the long run.

OK, so you are going to buy a car with a loan.  and you want to leverage the difference.

Well you are not getting <2-3% loan rates on well used 'mustachian' type cars, to get the best rates you need to buy newer, which completely ruins your goal of making money (because you just spent a ton more on a car).

OK, you got that 2% note.   What are you going to invest in.  Since the money is going to be needed in under 5-7 years (to pay back the loan) are you really sure you want to invest that money in stocks?  Well you kind of have too since bonds and cash are not going to pay a percentage worth leveraging, so you'll be investing shortish term money in equities.

How much money we talking here..  a few hundred bucks a year assuming stocks 7% your loan 2% = 5% on $10-20k (anymore = clown car).  That's a 3 figure number, maybe $1000.

Someone mentioned the higher insurance, excellent point.  The newer car, on a loan, will require much more insurance, probably enough to offset your few hundred bucks.

Suppose further that the economy tanks, you find yourself out of a job, and a big ol car note to deal with, and your investments are down.  OOPS guess you'll be selling low to pay your debt whilst unemployed.  Notice how Ive assumed you don't have a big E fund to cover unemployment. If you are the type to try and leverage your way into a few hundred bucks /yr  financing a $10-20k car, you are probably a type who cant stand having a $10-20k pile of cash sitting around at 1-2% interest and have promptly leveraged your E fund.

the point here: the risk is not worth the reward.

If you really want to make more than a pittance (ie 5+ figures), you need to leverage much more than a car.  Think 30 year lowest-down-pay-the-minimum home notes and keep refinancing whenever rates / equity allow (keep your house fully on the block to buy equities).... that doesn't have any historical evidence of going horribly wrong.

I think Id rather go into the next recession with paid off houses and cars, not leverage to the hilt.  Leverage of any kind is a recipe for being forced to do the one thing that causes investors NOT to make money... that is SELL LOW (by force or by panic)

The_Big_H

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More over I would like to add. Notice that car notes are about the only place you can ever hope to get sub 3% loans?

Credit cards, student loans, mortgages, personal loans, you name it...  ALL >3%.

Do car loan companies happen to be more generous, handing out arbitrage out of the goodness of their hearts, willing to give out a little free money to help the little man in purchasing that car?

That 0-2% car loan is a FICTION.  No one hands out "free money".  They are making up for that low interest in the form of the high-as-hell price of the car being sold.  (you'll again note that for lower priced cars and/or not-through-the-car-company financing you don't see these 0-2% loans).

Classic confidence game, the car companies have tricked so many middle-class Americans into thinking they are pulling a fast one on the car companies by getting "free money" at 0-2% interest, when in fact THEY are the mark.


Kazyan

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Granted, it should be noted that, yes, the math works out so that if you have the chance to leverage at 2% on an arbitrary item, you'd make more money doing so than just paying up front. If you're comfortable doing that for the extra $10 brick in your retirement castle, do it. If it's as simple as signing some paperwork and setting up an autopay, that might be a better pay rate than my job, come to think of it. Anyway, the real point I was making is that it's kinda irrelevant to get large sums, because the only way you'd have a big pile of loan to leverage with is if you got that loan on a clown car. And you don't want a clown car.

You can also get a low-APR loan if you're buying a home, in which case you can have a smart decision and leverage. But you can't really have that with a car.

TomTX

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OK, you got that 2% note.   What are you going to invest in.  Since the money is going to be needed in under 5-7 years (to pay back the loan) are you really sure you want to invest that money in stocks?

I'm going to invest in a broad based, low cost mutual fund and cash-flow the car payments from current income.

Duh!

DadJokes

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No, there's really no reason the type of asset should be taken into consideration at all. Since we can assume everyone here will 1) not increase their purchase due to the availability of financing, and 2) they will pay off their loan in full according to the terms of the loan, then you're left with two completely separate objects. One is the item you purchased, which at this point can be considered completely decoupled from the loan itself. The second is an obligation due to a lender, which is completely independent of the state of the asset.

At this point, the only consideration is how to fulfill the obligation, as the purchased object has no bearing on this decision, it can be entirely ignored. Assuming the obligation can be paid off immediately or over time, it makes sense to pay it off over time if you can find a way to earn more money by taking the loan instead of paying the debt off in full. This is true of home mortgages, it is true of student loans, and car loans, as well as any other loan. Using volatile investments creates a risky leveraged situation which needs to be considered, but if you can get a loan for anything near a treasury note or a short term CD, then you'd be silly not to take the loan for just about any sized purchase.

We can't assume that at all.

You generally only get good loan terms when you buy from a dealership, which means the car is already overpriced. You can get a private party auto loan, but the interest rate is not going to be as favorable, and they are typically more strict on the type of car you can buy (often having year and/or mileage limits).

Scortius

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More over I would like to add. Notice that car notes are about the only place you can ever hope to get sub 3% loans?

Credit cards, student loans, mortgages, personal loans, you name it...  ALL >3%.

Do car loan companies happen to be more generous, handing out arbitrage out of the goodness of their hearts, willing to give out a little free money to help the little man in purchasing that car?

That 0-2% car loan is a FICTION.  No one hands out "free money".  They are making up for that low interest in the form of the high-as-hell price of the car being sold.  (you'll again note that for lower priced cars and/or not-through-the-car-company financing you don't see these 0-2% loans).

Classic confidence game, the car companies have tricked so many middle-class Americans into thinking they are pulling a fast one on the car companies by getting "free money" at 0-2% interest, when in fact THEY are the mark.

But you're just proving the point. You stopped discussing the decision in terms of what the loan is for and moved to the discussion regarding what the loan rate was for. That's exactly what everyone else is already saying.

If you can get an auto loan for a 0% 2-year introductory period, take the damn loan and then pay it off after two years.

If you can't get a loan for 4% or less, then yes, don't take the damn loan. That's what everyone else is _already_ saying. The fact that it's a _car_ loan has nothing to do with the calculation.

Scortius

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No, there's really no reason the type of asset should be taken into consideration at all. Since we can assume everyone here will 1) not increase their purchase due to the availability of financing, and 2) they will pay off their loan in full according to the terms of the loan, then you're left with two completely separate objects. One is the item you purchased, which at this point can be considered completely decoupled from the loan itself. The second is an obligation due to a lender, which is completely independent of the state of the asset.

At this point, the only consideration is how to fulfill the obligation, as the purchased object has no bearing on this decision, it can be entirely ignored. Assuming the obligation can be paid off immediately or over time, it makes sense to pay it off over time if you can find a way to earn more money by taking the loan instead of paying the debt off in full. This is true of home mortgages, it is true of student loans, and car loans, as well as any other loan. Using volatile investments creates a risky leveraged situation which needs to be considered, but if you can get a loan for anything near a treasury note or a short term CD, then you'd be silly not to take the loan for just about any sized purchase.

We can't assume that at all.

You generally only get good loan terms when you buy from a dealership, which means the car is already overpriced. You can get a private party auto loan, but the interest rate is not going to be as favorable, and they are typically more strict on the type of car you can buy (often having year and/or mileage limits).

That is one of the starting assumptions. If you're going to need to increase your purchase price to qualify for a lower-rate loan then obviously you don't do that. Many people out there WILL do that, but most people here know better. So yes, I agree with you, the advice only holds in the presence of those starting assumptions, which is why I listed them. The only thing I'm arguing against here is that there's some fundamental difference between a $10k car loan at  2%, and a $10k student loan at 2%, or a $10k home equity loan at 2%. There isn't, but only if the first two assumptions hold.

The original statement was that you _never_ take out a loan for a depreciating purchase. That's simply not true. That's all I'm trying to point out.

MilesTeg

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OK, you got that 2% note.   What are you going to invest in.  Since the money is going to be needed in under 5-7 years (to pay back the loan) are you really sure you want to invest that money in stocks?  Well you kind of have too since bonds and cash are not going to pay a percentage worth leveraging, so you'll be investing shortish term money in equities.

In our case, we already have the money invested and are not going to sell those investments (and pay the tax on the sale!) to buy something unless that's actually cheaper option. But even choosing to take your lump money and invest it (while paying the loan via income/cash flow instead) is perfectly doable. You don't have to rely on investment income itself.

Quote
How much money we talking here..  a few hundred bucks a year assuming stocks 7% your loan 2% = 5% on $10-20k (anymore = clown car).  That's a 3 figure number, maybe $1000.

A quick calculation tells me I could save anywhere from 500-1000 dollars on the overall cost of the purchase with a 3% note vs 7% ROI. Substantially more if, like I mention above, I have to pay taxes when liquidating investments to pay cash. But even $500 ROI invested turns into a much higher sum of money over the long run.

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Someone mentioned the higher insurance, excellent point.  The newer car, on a loan, will require much more insurance, probably enough to offset your few hundred bucks.

Suppose further that the economy tanks, you find yourself out of a job, and a big ol car note to deal with, and your investments are down.  OOPS guess you'll be selling low to pay your debt whilst unemployed.  Notice how Ive assumed you don't have a big E fund to cover unemployment. If you are the type to try and leverage your way into a few hundred bucks /yr  financing a $10-20k car, you are probably a type who cant stand having a $10-20k pile of cash sitting around at 1-2% interest and have promptly leveraged your E fund.

the point here: the risk is not worth the reward.

Not carrying collision & comprehensive is an option, but a LOT higher financial risk option than investments in index funds that have never lost money over a sufficiently long time (roughly >= 7-8 years). All it takes is one incident that is your fault (liability coverage only will not cover YOUR losses) or that is not with another driver to lose all the money you put into that car. For example, getting hit in a parking lot, hitting a deer, black ice, tree limb, etc. OR, if you are involved in an accident with an uninsured or under-insured driver or a hit-and-run where you can't track down the at-fault party.

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If you really want to make more than a pittance (ie 5+ figures), you need to leverage much more than a car.  Think 30 year lowest-down-pay-the-minimum home notes and keep refinancing whenever rates / equity allow (keep your house fully on the block to buy equities).... that doesn't have any historical evidence of going horribly wrong.

You may consider $500 that can turn into 4 or 5 figures over time a pittance; I call it easy money.

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I think Id rather go into the next recession with paid off houses and cars, not leverage to the hilt.  Leverage of any kind is a recipe for being forced to do the one thing that causes investors NOT to make money... that is SELL LOW (by force or by panic)

A straw man there. I don't consider a debt that is less than a couple percent of our net worth to be anywhere near "leveraged to the hilt". I agree 100% that if you couldn't buy the car with cash you normally should not, and I also agree that there is risk involved, but if you go back to my original statement I am saying that loans (even for cars) can either be a good financial decision or a bad one and thus the "omg long car loans are teh evil!" that this thread about is not true.

Again, this is the same argument that is had every day here about paying off or not paying off your mortgage.
« Last Edit: November 18, 2019, 02:48:38 PM by MilesTeg »

robartsd

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A quick calculation tells me I could save anywhere from 500-1000 dollars on the overall cost of the purchase with a 3% note vs 7% ROI. Substantially more if, like I mention above, I have to pay taxes when liquidating investments to pay cash. But even $500 ROI invested turns into a much higher sum of money over the long run.
You eventually have to pay the taxes on the money you spend (if you don't ever sell an investment, your heir gets a nice stepped up basis with the investment when you die, so may not have to pay taxes on investment returns that you never spend). Since you don't get tax relief for the interest paid on the loan (assuming personal use), overall taxes are more likely to favor the lump sum purchase.

bacchi

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You eventually have to pay the taxes on the money you spend

Nah, not if you have LTCG and can control your income. $78k for MFJ.


MilesTeg

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A quick calculation tells me I could save anywhere from 500-1000 dollars on the overall cost of the purchase with a 3% note vs 7% ROI. Substantially more if, like I mention above, I have to pay taxes when liquidating investments to pay cash. But even $500 ROI invested turns into a much higher sum of money over the long run.
You eventually have to pay the taxes on the money you spend (if you don't ever sell an investment, your heir gets a nice stepped up basis with the investment when you die, so may not have to pay taxes on investment returns that you never spend). Since you don't get tax relief for the interest paid on the loan (assuming personal use), overall taxes are more likely to favor the lump sum purchase.

Except I have no choice but to pay 100% of the taxes on the income/money used for a lump sum purchase and that amount taken in taxes can never benefit me again. Conversely, keeping investments invested allows me to defer the tax on any gains indefinitely letting that tax amount continue working for me. Over time, even a modest tax savings will compound into significant money - easy money.

aceyou

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I was never taught personal finance, but (1) such books are widely available at libraries, (2) it's common sense not to spend more than you earn, (3) even loan contracts spell out the interest rate in big type. At some stage it is no longer a matter of education, but of stupidity and bad judgment.

But at what point did you learn the mathematics behind interest? Because I learned as a freshman in college.

I'm a math teacher.  It's in the common core curriculum under exponential growth and decay.  So, all students are guaranteed to receive those lessons now.  A whole unit is dedicated to it. 

As a supplement because I think it's THAT important...after the unit, I do a weeklong project on long-term financial planning, FIRE, etc.  This year 3 other teachers are going to teach the project, and 230 students will get the information.  Fun times!!!

One Noisy Cat

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This is very good info.  I heard recently (somewhere...at a neighbor's potluck maybe?) that you really cannot find ANY new car that you'd want for less than $30k.

The Ford Focus up until a year or two ago had a price point less than $20k (2020 base model $21k).  We bought a new 2003 for $16k, and I recall seeing a 2015 model new at the time for $18k.  Ford has flirted with cancelling the line because they're not as profitable as their trucks.


Was poor access to credit or lack of social media making luxury seem more accessible the stronger reason that kept the middle class decades ago from purchasing luxury cars in high numbers?

Iím guessing having a two income household become the norm made a lot of budget room for bigger houses and cars, especially with fewer kids per family making such purchases make even less sense.

84 month loans aren't new, it's just that there is now a big increase in people using them. Back in 2006 I had a coworker who was formerly a BMW salesman. He had stories then about people who would trade in cars they were upside down in just to get a BMW and to do that, they'd have to take out 84 month loans in order to get the payment manageable. Even then, there was demand for longer terms than 84 months. My co-worker said that he could have sold more cars if they went longer than 84.

I see that 96 month loans are actually offered now...
Stretching the loan out means the same monthly payments for a more expensive car.  Car Sales Tactics 101, Lesson 1: focus on the monthly payment and ignore everything else.  I remember as a kid in the 80s seeing well known dealership owner on tv mention "folks want to replace their cars every two years." Even at that age I thought that was ludicrous, but now it has me wondering what the typical 1980s car loan looked like? Were loans that much shorter, or was everything a trade-in?

Just in my experience buying new cars (compacts) back then
1979 bought a new Honda Civic CVCC in middle of oil embargo dealer said three years at $127.21 a month. But hey, it ran on leaded gas (a few cents cheaper than unleaded)

1987 I bought new Toyota Tercel (or whatever their compact was called). Dealer offered me a four or five year deal, like a fool I went with 5 years ($190.87 a month)

After that it was set aside money each month so no more car payments and I have bought used ever since

nouveauRiche

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I was talking to Partner about this thread & LittleRiche overheard.  We explained to him about the 7 year car loans to him & he said "Sounds like the person should just buy a cheaper car."

Partner & I said simultaneously "That's my boy!"

The_Big_H

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More over I would like to add. Notice that car notes are about the only place you can ever hope to get sub 3% loans?

Credit cards, student loans, mortgages, personal loans, you name it...  ALL >3%.

Do car loan companies happen to be more generous, handing out arbitrage out of the goodness of their hearts, willing to give out a little free money to help the little man in purchasing that car?

That 0-2% car loan is a FICTION.  No one hands out "free money".  They are making up for that low interest in the form of the high-as-hell price of the car being sold.  (you'll again note that for lower priced cars and/or not-through-the-car-company financing you don't see these 0-2% loans).

Classic confidence game, the car companies have tricked so many middle-class Americans into thinking they are pulling a fast one on the car companies by getting "free money" at 0-2% interest, when in fact THEY are the mark.

But you're just proving the point. You stopped discussing the decision in terms of what the loan is for and moved to the discussion regarding what the loan rate was for. That's exactly what everyone else is already saying.

If you can get an auto loan for a 0% 2-year introductory period, take the damn loan and then pay it off after two years.

If you can't get a loan for 4% or less, then yes, don't take the damn loan. That's what everyone else is _already_ saying. The fact that it's a _car_ loan has nothing to do with the calculation.

What the loan is for is always important.
If I come up to you and say "I want to borrow $10,000" your first question is "for WHAT"

The car matters here because its the primary thing for which loan are offered with rates advertised as lower than the cost of money.  No one can stay business making loans at rates cheaper than the cost of money, so one must critically evaluate where they are "making their money". 

There are two ways the lender makes money in these situations:
1) say its 0-2% and bury many-more-% in the form of a higher purchase price.
2) a teaser/come-on rate, 0-2% for x months but a lot-more-% after.

If you are taking a loan out on condition #1, then you are buying too much car or whatever is being sold, the loan is there to make you dull the pain of the overspending.  I suspect most 0-2% car loans are this.

If you are taking a loan out on condition #2, well then yes if you can pay off the loan before the 0% expires you are getting ahead on the spread, and they are making their money on the majority of people who will not.  Effectively profiting on the misfortune of others less savvy/good with money than you (much like a credit card, they make next to no money on the deadbeats who pay 0% and get 1-3% cash/points back, the money is made on the revolvers).  These are more reserved for the furniture/electronics stores.

I guess I just like SIMPLE financial transactions, no arbitrage, no playing-the-spread, just "I give you money you give me product/service" or "I don't want to / can't pay that much, no sale".

Lastly, the car thing matters here because, IMO, CARS are one of the biggest financial blind-spots people have, no matter where on the scale of mustachian one falls.  Nearly everyone understands/accepts that credit card, student, pay day debt are bad and generally to be avoided if you can help it.  Nearly everyone, even the most die hard Dave Ramsey type, accepts mortgages as a necessary thing.  But the CARS, that's where it all goes astray.  So many feel that car loans are just a fact of life and cars are "not a big deal" wrt personal finances.  When in fact they are one of the biggest cash drains we own.  Always depreciating, always breaking.  They cost a ton just to operate its bad enough to have to have an inexpensive used one paid off, to throw a loan with lots of depreciation on it... MADNESS.
« Last Edit: November 19, 2019, 11:09:34 PM by The_Big_H »

MilesTeg

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What the loan is for is always important.
If I come up to you and say "I want to borrow $10,000" your first question is "for WHAT"

The car matters here because its the primary thing for which loan are offered with rates advertised as lower than the cost of money.  No one can stay business making loans at rates cheaper than the cost of money, so one must critically evaluate where they are "making their money". 

There are two ways the lender makes money in these situations:
1) say its 0-2% and bury many-more-% in the form of a higher purchase price.
2) a teaser/come-on rate, 0-2% for x months but a lot-more-% after.

If you are taking a loan out on condition #1, then you are buying too much car or whatever is being sold, the loan is there to make you dull the pain of the overspending.  I suspect most 0-2% car loans are this.

Cars are always overpriced, not just when there is a loan involved.  If you want to buy a car, your first step is to set a budget, your second step is to negotiate a price. THEN you talk about how you're going to pay for it. Never, ever talk to any car salesman about "payment". Always talk total price. Always do your research. With the information available today it's very easy to determine what a good price is for any vehicle.

It's also not like a dealership is going to give you a "cash discount" so the truth that low rates help them sell more expensive cars affects you no matter how you eventually pay.

Quote
If you are taking a loan out on condition #2, well then yes if you can pay off the loan before the 0% expires you are getting ahead on the spread, and they are making their money on the majority of people who will not.  Effectively profiting on the misfortune of others less savvy/good with money than you (much like a credit card, they make next to no money on the deadbeats who pay 0% and get 1-3% cash/points back, the money is made on the revolvers).  These are more reserved for the furniture/electronics stores.

I guess I just like SIMPLE financial transactions, no arbitrage, no playing-the-spread, just "I give you money you give me product/service" or "I don't want to / can't pay that much, no sale".

Lastly, the car thing matters here because, IMO, CARS are one of the biggest financial blind-spots people have, no matter where on the scale of mustachian one falls.  Nearly everyone understands/accepts that credit card, student, pay day debt are bad and generally to be avoided if you can help it.  Nearly everyone, even the most die hard Dave Ramsey type, accepts mortgages as a necessary thing.  But the CARS, that's where it all goes astray.  So many feel that car loans are just a fact of life and cars are "not a big deal" wrt personal finances.  When in fact they are one of the biggest cash drains we own.  Always depreciating, always breaking.  They cost a ton just to operate its bad enough to have to have an inexpensive used one paid off, to throw a loan with lots of depreciation on it... MADNESS.

While I am 100% in agreement that people often spend unwisely on cars, as has already been repeated ad-nauseum, that a car depreciates in no way is relevant to the discussion. The only "madness" is taking a hard line on "what should be done" vs /always doing the math/ whenever you purchase /anything/.
« Last Edit: November 20, 2019, 02:24:29 PM by MilesTeg »

PDXTabs

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Cars are always overpriced, not just when there is a loan involved.  If you want to buy a car, your first step is to set a budget, your second step is to negotiate a price. THEN you talk about how you're going to pay for it. Never, ever talk to any car salesman about "payment". Always talk total price. Always do your research. With the information available today it's very easy to determine what a good price is for any vehicle.

I would go further and say that:
  • Cars are always burning money, the only question is how much.
  • Don't even talk to the sales person about price. Do your research online and then email some "internet sales departments" about how much they'll give you the car for. OR buy used through a private party. Buying a used car from a dealer is an exercise in getting taken advantage of, because they make almost nothing on new cars these days.

jinga nation

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Cars are always overpriced, not just when there is a loan involved.  If you want to buy a car, your first step is to set a budget, your second step is to negotiate a price. THEN you talk about how you're going to pay for it. Never, ever talk to any car salesman about "payment". Always talk total price. Always do your research. With the information available today it's very easy to determine what a good price is for any vehicle.

I would go further and say that:
  • Cars are always burning money, the only question is how much.
  • Don't even talk to the sales person about price. Do your research online and then email some "internet sales departments" about how much they'll give you the car for. OR buy used through a private party. Buying a used car from a dealer is an exercise in getting taken advantage of, because they make almost nothing on new cars these days.

Use CarGurus.com. Look at the price history. Use that to negotiate with the internet sales dept. never negotiate with lot vultures.

Also use https://www.autotempest.com/ (thanks ChrisFix)


aloevera

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I wouldn't pay cash for a car when i can use a (travel, cash back) credit card :D

I helped my kid buy one last month (yes, new) and put her down payment (about 1/3 the price of the car) on my travel card.

They only let me put $3500 PER CARD and kid was putting down $4k so I split it on two cards, no problem.   This was at the end of everything, rebates, price negotiation, she BYO'd financing, etc. I suppose not every dealer will allow large DPs on a credit card, but this one did.

Yay free travel.

AO1FireTo

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I wonder how many people are going to try and buy the new truck from Tesla.  I think this one might be a miss.

https://www.tesla.com/en_ca/cybertruck

The_Big_H

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I wonder how many people are going to try and buy the new truck from Tesla.  I think this one might be a miss.

https://www.tesla.com/en_ca/cybertruck

Someone over there needs to cut back on the reefer

better late

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I wonder how many people are going to try and buy the new truck from Tesla.  I think this one might be a miss.

https://www.tesla.com/en_ca/cybertruck

There is a lot to like about that Cybertruck. Looking forward to seeing how it progresses.

TomTX

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I wonder how many people are going to try and buy the new truck from Tesla.  I think this one might be a miss.

https://www.tesla.com/en_ca/cybertruck

Apparently it got ~200k* preorders in the first 24 hours. The answer seems to be "A lot."

Remember all the moaning and whining about the minimalist interior of the Model 3 at the reveal event? That Tesla would "have to" add knobs or a HUD, or something - else nobody would buy it.

In the USA, Model 3 is outselling all other EVs combined.

There's a market for a car or truck which looks different.  Which takes a leap on design.

Without the logos, I couldn't tell you whether a truck is an F150 or a RAM.

*Based on people comparing reservation numbers online.

Just Joe

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I wonder how many people are going to try and buy the new truck from Tesla.  I think this one might be a miss.

https://www.tesla.com/en_ca/cybertruck

There is a lot to like about that Cybertruck. Looking forward to seeing how it progresses.

Put that chassis under something a little more traditional and I'll be interested. How about that chassis under a Honda Ridgeline without any sci-fi movie looks.

MilesTeg

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Without the logos, I couldn't tell you whether a truck is an F150 or a RAM.


That's not a bad thing, it means form is following function, whereas the 'cybertruck' is the exact opposite which is why it will never be more than a curiosity. It's a massive step backward in Tesla's otherwise good design of the s and the 3 (and even the design issues if the x are minor in comparison).