The Seven-Year Auto Loan (2019)
wsj.com
wsj.com
You know, economists tell us that your automobile should not cost more than half of your annual income. So if you make an income of five thousand dollars, your car shouldn't cost more than about twenty-five hundred. That's just good economics. And if it's a family of two, and both members of the family make ten thousand dollars, they would have to make out with one car. That would be good economics, although it's often inconvenient. But so often, haven't you seen people making five thousand dollars a year and driving a car that costs six thousand? And they wonder why their ends never meet. [laughter] That's a fact.
Martin Luther King Jr., 1968 https://kinginstitute.stanford.edu/king-papers/documents/dru...
- If it was common to make references like that in Germany to Jewish institutions, groups, or tribes, ambiguously "honoring" them, would that be a bad thing? Would it be gloating over victimizing them, or commemorating their bravery?
- Given that (my impression is) they don't, what does the cultural difference really signify? Are Germans entitled to feel superior for it?
Like, I can imagine a world where there were sports teams called the "Maccabees" or the "Ghetto Fighters". I think that German cars do make reference to groups in ways that surely someone could find offensive, like the VW Touareg. Is this better/worse/as bad as using "Cherokee" as a name?
[0] https://oppositelock.kinja.com/i-used-to-take-it-as-a-given-...
A 2020 yaris starts at 15,650. With fees, should be around that mark.
The problem is, the median US household does not buy a Yaris. They spend more like double that. So 30-40k PER car, two cars per household.
And it seems obviously extravagant to me for a middle class family to have two new cars. One maybe, but two? But even so, by the formula, the family can afford two $30K cars.
Such a family would not want to spend more than 49K total on their cars. so that is 1 car for 49K or 2 for 24K
and that IMO should be the extreme absolute limit
My much higher concern is that the reason people take a seven year auto loan, as it is the default option given to them and see a lower monthly payment. By doing that, one can think they can afford the $40k or $50k car, not realizing that the total cost of ownership (i.e. maintenance, gas bill, etc.) also just rose, and the money they are paying in interest is also much higher now.
Not really a new thing. Ads and dealers have played the "low low monthly payment with zero down" (or whatever) forever.
https://www.calculator.net/lease-calculator.html?ctype=fixpa...
A $20,000 car leased over three years for $400 a month that depreciates to $10,000 at the end of the term has an effective interest rate of 9.539%
Worker productivity in the US has risen while wages have remained flat and expenses for healthcare and education have gone up. People really can't afford their cars any longer.
Besides, if you have a 90-minute megacommute a nice car is no longer a luxury, it's a necessity.
I used to commute 90 minutes on the bus and rail on a daily basis. I assure you, even at 90 minutes, a nice car is _still_ absolutely just a luxury. A dependable car may be required, but not a fancy one.
My impression also is that many of the most dependable cars are inexpensive. I've been so amazed at the reliability of the Honda Fit (it required no major repairs until it got totaled around 120k; my main beefs were with the hatchback which needed to be oiled quite often, and the tire pressure sensors that seemed to fail around once a year or so) I was amazed enough that I bought another one (with a three year payment)
I like Hondas, I like the Chevy Sonic, I like the Nissan Altima. I think the Nissan Sentra has dangerously little purchase on the road, and can't stand the drivability of either the Toyota Corolla (almost crazy optimization of gas car for high m.p.g.) or the Camry.
I think the roar of the engine and the sounds outside are an important sensory channel in driving, so "super quiet" doesn't matter for me.
I'd still rather take the bus and train than drive.
Even when I lived in a smaller city where the route would have allowed for such a thing, it isn't necessarily an option, because bus service often starts too late in the morning. Or there's my parents' house - they live in a moderate-size American city of about 250,000 inhabitants, but the nearest bus stop is half a mile away, along a road that lacks sidewalks. That walk would have barely been possible, let alone reasonable, many days of the year.
And yeah, all of that does imply that modern urban planning may be something of an own goal in the proverbial class war, but, nonetheless, that's the situation.
If you have a mega-commute, you should be buying the cheapest efficient, reliable car possible. You do not need a $30k+ car; you need a car that gets good gas mileage. Buy a Honda Fit and you'll get configurable storage and fun handling as a free bonus. Worst case scenario, you buy a ~$20k Corolla/Civic/Mazda 3. (The horror!)
EDIT: OK I just looked at the 2020 Honda Fit. Don't buy that. It's just too ugly.
When our 2008 Fiesta ceases to be economical to keep using, it’s at the top of our list for a replacement, especially as it’s available in Germany as a station wagon with enough towing capacity for my husband’s glider. Impressive little car.
What's wrong with a 90 minute commute in an old Corolla?
If you have to spend more than 100% of your total yearly income on an item that rapidly depreciates in value then yes it's not affordable.
People scoff at multi millionaires spending hundreds of thousands or a million dollars for a sports car. But that's a small amount of their total net worth or even their yearly salary.
Cars are so expensive to own too. I don't think people realize how much it costs to operate a vehicle let alone but it. The AAA says it costs about $7,000 per year in expenses; gas, maintenance, insurance, depreciation.
The question isn't why do people choose to buy luxury items but why debt is so easily accessible for the purchase. That's much more troubling.
I guess you could assume that the current taxes are precisely applied to externalities other than CO2, but given the large differences in taxation due to jurisdiction, I don't see how they could broadly match up. And requirements for them to do so surely aren't strict or universal.
In theory, you could tax gasoline to the level of true removal cost, but unless a market exists to actually remove the carbon it’s moot since the mechanism to clear the damage can’t exist without a functional market on carbon.
Thus, when you burn gasoline you are externalizing. As a result I cannot understand the desire to needlessly do this just so you can drive a superduty to your office job.
Trucks are for towing / hauling loads. If you're not towing or hauling a load then you're doing it wrong.
Rent a truck for 30$ the two days a year that you need it. You can put your sweatshirt and your backpack in the trunk of a correctly purposed vehicle for the other 363 days. I think you'll enjoy having an automobile that performs well.
This. I can respect the intent of CAFE, but at this point it’s providing a ceiling, not a floor. We should accept that CAFE got us over the oil crisis hump and that it’s not the right law for us now.
https://en.wikipedia.org/wiki/Phase-out_of_fossil_fuel_vehic... (Jurisdictions with planned fossil-fuel vehicle bans)
https://www.commondreams.org/news/2018/05/01/states-represen... (States Representing 44% of US Population Sue Trump's EPA for Blocking Auto Emissions Standards)
Heck, I make substantially more money now, and still have a pretty long 45-minute each way commute, with a lot of traffic. My primary vehicle is a $1600 motorcycle, and I _just_ added a truck as a backup (and to tow a track car). Spent $17k on the truck, it's perfectly fine, even looks good. Most I've ever spent on a vehicle by far, and I assume I'll have it for the next decade, at least. I'm driving it 4 hours out into the middle of the desert later today, and I have no worries about reliability.
Bought the truck and every other vehicle I've ever owned in cash. I think that's the big difference between some others and myself. When I could afford only a few grand cash, that's the kind of car I bought.
Honestly hard to feel too sorry for people that "need" a $30k+ car/truck/suv. I think these articles will always ring hollow for anyone that's been in the same situation and opted for a cheap car. Why on earth would you take out that long of a loan on a car that costs you a full year's salary or more?
Your $1600 car was once someone's new car. Without people buying new cars, you wouldn't have used cars to purchase.
Does a server at a restaurant need a new car? That depends on a number of factors including salary and budget. But to say no one needs a new car is bs.
You need someone else to buy a new car so that you can buy a used car.
> 'it sends a real signal to steer clear.'
I'm sure the feeling is mutual. Or at least I hope that it is.
I bought the cheapest house within commuting distance of where I work (in London) and am still trying to figure out how the hell to get out of that mortgage sooner than the final term. My car was bought outright as was my campervan.
I don't know how the people who drop half a million on a house and 50k on a Chelsea tractor, earning the same wage as me, sleep at night.
At least with T-mobile. Even if you have horrible credit as long as you pay your bill on time with them for 12 months, you are eligible for a no interest phone loan.
This doesn't mean they are rock-headed. Like all of us, they could have a blind-spot where a decisions made may not be in our long term economic interests.
It’s much easier to get a car with a $350/month car note where you won’t have unexpected repair expenses than getting a $200/month car note on a car without a warranty and then have an unexpected expense.
Now we have a credit card with the car shop we used that has a six months/no interest program. I use that even if I do have the money. But if we had bad credit, we could get a car loan much easier than an unsecured credit card.
I am at a point in life now where I can afford an expensive car repair bill and it just stings a little bit. When I was first starting out decades ago working at night as a computer operator while I was in graduate school during the day, any unexpected expense meant a call to my parents. Many people don’t have that luxury.
It can be rationalized with emotions, but not financial sense.
As far as four vs seven years. You’re hoping that you can figure something out in four years.
Whether this is good or not is completely dependent on the loan interest rate, a person's cash flow situation, and what they will do with the free cash flow otherwise..
$50-100/mo saved due to lower 7y payments reinvested elsewhere could quite feasibly offset the higher cost associated with the (assumed) higher interest rate of the 7y loan.
And, according to the assumptions in financial/economic theory anyway, if you can get a loan at or below inflation rates, you're getting a 'discount' on the total price w/r/t paying 100% cash now
But yes, this should be made as a 'financing' decision, not an 'affordability' decision - if you can only afford the vehicle with 7y loan at all, and aren't taking the longer loan as an savings/investment decision among weighing the TCO you probably should be buying a cheaper one.
You are still losing maybe 50% in the first year in depreciation. If you are paying it over 7 years then you are under water on the car from the minute you pick it up until it's paid off in full.
If you can finance at an interest rate below what you are earning in the market then you are better off financing. People who pay in cash are leaving money on the table for non-financial reasons.
I'm saying that financing can easily make sense with low interest rates. Nothing in my comment nor criklis has anything to do with buying a used vs new car as the same logic applies to both.
Mathematically, it makes a lot more sense for us to refinance to another 30 year loan (to get rid of PMI) and invest the difference but I am planning on refinancing to a 15 year.
Consider a $30,000 vehicle. I can finance it at 1.9% for 48 months or 84 months. The payment on the 48 month loan is $650/month (scenario 1) and the payment on the 84 month loan is $380/month (scenario 2).
In scenario 1 I invest $0/month for 48 months and then $650/month for 36 months. After 7 years I paid $31,178 for the car and earned ~$26,000 from investing (at 8%).
In scenario 2 I invest $270/month for 84 months. After 7 years I paid $32,062 for the car and earned ~$30,000 from investing (at 8%).
In scenario 2 I paid $884 more in interest but earned an extra $4,000 from investing.
There is a lot more that goes into this type of calculation but it is not nearly as cut and dry as "you're an idiot if you financed a car for 84 months."
But financing doesn’t make you an idiot.
Besides, as I've mentioned elsewhere, anyone offering a loan at 1.9% is aware that they are subsidising your purchase. You should be able to negotiate most of the difference into a decent cash deal.
Not to mention the non-trivial risk of being involved in an accident in a car which is worth less than is outstanding on it (which for a 7 year loan is probably 6+ years).
Your financing argument is actually flipped. You will get a better cash price if you finance because that is where dealers make money. Your best strategy if you want to pay cash is to finance the car and then pay off the loan immediately.
As far as being underwater is concerned... most dealers throw in GAP insurance these days. Removing GAP to lower the cost is counterproductive because the banks buying your loan want you to have GAP.
There really are just very few scenarios where paying cash at the dealer makes the most financial sense.
But yes most people don’t treat money this way.
Denying this reality will lower your risk profile but also lower your potential rewards. If you can’t control your spending and investing then don’t finance a car for 7 years.
But don’t pretend that economics and math are wrong.
The recognition that something -- like your case -- is an extreme exception proves the general validity of the rule. (Yes, I know there's a frequently misused version of the quote, but I use this modified, correct version.)
>That’s only true if you are already bad at personal finance.
That's kind of the point: you can't just assume away the case of "people making bad financial decisions", and that might be -- and probably is here -- the reason for the trend.
Nitpicking, but you didn't earn $30k from investing. You contributed $22,680, and ended up with $28,910, assuming dollar-cost averaging contributions monthly (bulk contributions at the beginning of the year would get you $31,223). So your total return, assuming 8% annual growth, is $6,230.
I didn’t even get into down payment or cash opportunity cost because just generally don’t even believe the basic examples.
They're under no legal obligation to cancel the transaction if your post-purchase inspection turns up something. In almost every state, used cars are sold AS-IS. It's entirely a 'good will' policy and from this video it sounds like they won't give you money back, but instead allow you to swap with another vehicle in their inventory.
Six months later, a major electrical issue damaged a significant portion of the internal computer system, which cost almost as much to fix as the car was worth.
Almost $8k down the drain in 6 months. You’re always rolling the dice on an old car, no matter how much research and prep you do.
For most people, over a lifetime of buying cars (say 60 years) buying the $15k car (at today's prices) every 5 years vs $30k new car every 5 years will save them $180k. You can replace a lot of computer systems with the savings (ignoring even more savings with insurance, etc.)
If new cars cost $30k and last 10 years, and used cars cost $15k and last 5 years, you break even.
Alternately if you always trade-in your car after 5 years to buy a new car, you'll end up paying a lot less than $30k each time.
Of course, lots of people make better (in my opinion) decisions than that. But then they aren't the ones that need to understand where rationalizing spending money isn't actual logical.
You buy a reliable used car with ~30k miles for half of the cost of buying new and then drive it until you hit 150k+ miles.
Where are you buying cars where you're only getting a 50% discount from new with half of the cars useful life spent?
Without concrete data to support this, it's absurd to suggest that any vehicle has a mean failure rate of just 1-2% after 10 years on the road. Years of being subjected to the elements (extreme elements in certain parts of the country), normal wear, etc. constantly cause failures in older vehicles.
First, of course without data it's anecdotal at best, and feelings at worst! I certainly feel like Toyotas last forever. That is, of course, variable on a lot of factors. I've seen average miles per year range from 10,000 to 15,000. Assuming the high end, 10 years would take us to 150,000 miles. Well-maintained models would likely still be running, but maintenance would have increased beyond brakes, spark plugs, etc. to alternators, timing belts/chains, water pumps, exhaust, radiators... they add up.
But more to my point, second - I'm talking about Big Failures like a very expensive CPU system or an engine or transmission. Those aren't likely to die before 150,000 in a reliable vehicle, and the Camry is one of the best.
It's just beyond me why people would buy a brand new car on loan. Only if you're poor/living from paycheck to paycheck and absolutely rely on a car to get to your job I understand why it would make sense on some level to get a car loan.
Taking a loan out for the car means I'm buying a 20k car for 18k, being able to return 10% a year on the money I borrowed, with the ability to pay off the car anytime I want.
Buying a car in cash is for those who can't get a low APR loan and/or are too risk averse to use debt properly.
That's why I like certified pre-owned. It's the sweet spot between new and used IMO. Get a car that is just a couple years old (often from a trade or a lease), an extended manufacturer's warrenty, and let the original owner take the major hit on depreciation.
I got the impression they list everything as pre-owned certified on the website and then try to up-charge people for it in person, without actually doing any of the supposed checks. On the other hand, if you can get it the warranty should help with any gremlins in the first few years.
Certified used vehicles are also significantly more expensive than a used vehicle and a warranty, and Consumer Reports recommends the latter.
Automakers are having trouble selling affordable and reasonably priced new cars causing them to drop them for pricier SUVs. Consumer behavior is driving these trends.
I’ve seen plenty of friends buy a new car that costs what they make per year. The only way to get by is to have 5-7 year financing or they’d be left with nothing after payments and insurance.
Google a ‘34 Ford and a ‘34 Chevy and tell me if you’d know the difference, same with 80s car or pick a generation.
Given the reputation of car dealerships, I'm surprised there's not a cooling off period for transactions like this.
> Yet for the auto industry, there was a silver lining: Interest rates had fallen to practically zero. Suddenly, it was much cheaper to finance a car. Loans made to buyers were snapped up by Wall Street investors looking for returns as income from supersafe Treasurys drifted toward zero.
> The combination of rock-bottom rates and yield-hungry investors helped bring the U.S. auto industry back to life. By 2015, auto sales had reached records.
> Low rates, in effect, served as a bailout for the entire auto industry. Last year, investors bought a record $107 billion of bonds backed by cars, according to the Securities Industry and Financial Markets Association, a trade group. That is the first issuance record since 2005 and nearly triple the amount two decades earlier. The outstanding pile of auto bonds swelled to a record $264 billion.
> So far this year, dealerships made an average of $982 per new vehicle on finance and insurance versus $381 on the actual sale, according to J.D. Power, a data and analytics company. A decade earlier, financing brought in $516 per car and the sale made dealers $837.
> Finance managers at dealerships typically use an electronic portal to hash out the terms of the loans. On the other end are various financial institutions that buy up the loan pretty much as soon as the dealer closes the deal.
So the entire incentive structure flipped to reward financing rather than purchase in the last decade. It's no wonder that dealerships are increasing the terms of loans. Banks are snatching them up and putting them into securities practically sight unseen while the debt just keeps piling on.
We can talk about consumer behavior all day, but did behavior really change over the last several decades (specifically since the 2008 Crash) or are other factors driving this like Wall Street types starving for yield? Looks like we're watching the highly anticipated sequel.
But you can't blame Wall St for this. This debacle is squarely on the fed.
All those extras do two things:
Drive up ave selling price and added complexity (meaning more maintenance).
It’s probably near impossible to get manual windows in any trim level.
They also tell customers “hey you can wait 10,000mi before changing oil”. That kills engine life, and they know it.
I’d really like to see how these services compare with the costs of running a cheap used vehicle in the majority of the US.
So if 80% of people want automatic windows and 15% of the remaining don’t care one way or the other it makes sense for a carmaker to deprecate manual windows to remove a part set.
Similarly I don’t want a fancy av system in my car, but the law requires a backup camera so standardizing on a single screen powered by ever more complex av software only makes sense for the car maker.
Options add value, in luxury cars, a sunroof and alloy wheels are pretty much essential, not getting one means negative value on resale.
The dealerships often mark up prices on cars just because... It always amazes me how many people think sticker prices are firm and fixed. I have never purchased a car in my life without getting at least $7k off the sticker price.
There are many walks of life. A self employed realtor, for example, can write off a car lease, and may need to regularly carry clients, so an expensive sedan or big SUV ends up helping them more. People are so used to projecting their own circumstances on evaluating everyone else when it comes to economics, benefits of financial decisions are always subjective.
This isn’t going to happen with high demand cars from Toyota or Honda or even F150s.
I was pretty much laughed out of two dealerships for trying to get $2k off sticker and they refused to negotiate much.
When I bought a car in 2010 I had no problem finding a small car (industry reeling from 2008.)
In 2018 I went car shopping and found that both Asian and American car dealers had no small cars in stock (the usual state w/ American car dealers) and all sorts of excuses why they didn't.
Right after that they will point you a whole bunch of trucks and SUVs all in a row, all with deep discounts.
Looking at this, I'd conclude that car dealers want to sell big cars, not that people want to buy them.
(A retired ag economics professor I knew bought the $70k corvette that the chevy dealer had for show for $35k at the peak of the 2008 crisis.)
Completely incorrect. The market demand for gigantic cars in the US is virtually insatiable. And will remain so as long as the price of gasoline stays around $2-3 per gallon. Once we see ~$6/gallon like what's common in UK for instance, cars will start to shrink again.
I remember a childless couple that went to a car dealer and got talked into a Chrysler Pacifica (monster minivan) at the steal price of $22,000.
I rode in it and it was the worst hunk of junk, the only car I've gotten seasick in. That car contributed to the implosion of their marriage.
American car makers have a huge incentive to sell 'trucks' because of this old protectionist law:
https://en.wikipedia.org/wiki/Chicken_tax
They make a bigger profit on 'trucks', so they can pay you discounts out of the premium they get.
My brother-in-law has a big-ass pickup truck with a plow attached and he takes a chunk out his big-ass payment by plowing driveways in the winter. He has worked his way up building roads and really does use his 'truck' like a truck.
> I have never purchased a car in my life without getting at least $7k off the sticker price.
What’s the mean and median price you’re paying? I assume for new cars?
I’ve never gotten more than that off anything under $35k sticker new.
I have seen a LOT more come off trucks that are stickers at $60k and sell for ~$45k which blows my mind they have that much markup.
I've heard the opposite, that options don't retain their value as much as the core of the car itself. It probably depends on the timeframe though.
I bought a 2011 Volvo C30 brand-new, with absolutely zero options. It was the cheapest car Volvo made that year - manual transmission, no extra-cost paint, nothing. I sold it last year and, looking at price guides, those nice options would have gotten me maybe an extra $1-2k. So sure, I could have spent an extra $5-7k to get a nicely equipped model, but there is no way I would have gotten an extra $5k back when I sold the car.
I'd concede that if you trade cars in while they're still quite fresh there might be some truth to this. If you have a really oddly configured 2-year-old luxury car, maybe it'd be "lot poison" without leather and a sunroof.
The cars here in ads are shown as very cheap (but zero extras). Want cruise control? 300eur. Want powered back windows? 200eur. This? 500eur. That? 300eur.
So a car with a price of 12.000eur is 15.000 just after the basic necessities for a comfortable ride (without heated seats, adaptive cruise control, sunroof etc). Automatic transmissions are usually the most expensive 'extra' here.
All those things are usually covered by warranty (~5years for most).
And most cars here need oil replacement ("service done") every 15.000, 20.000 or even 30.000 kilometers (a bit under 10k miles a bit under 20k miles). I dont't know why americans like changing oil so much. I had an old hyundai last 320.000km that way (service every 20.000), until it was too rusty to fix (engine running without issues).
The oil change industry wants you to think otherwise because they make a lot of money selling needless oil changes. Much better to put in a good oil and a good filter, great oil might be more expensive but the engine will last longer.
But engines are very different today than they were 15-20 years ago. They are machined with blueprint accuracy such that clearances are very fine and the resulting break-in period is very short if its needed at all. Additionally, most new vehicles use synthetic or synthetic blend motor oil which is much more durable and retains detergents for much longer service intervals.
I use the best oil I can find and do two oil changes a year unless there's a more driving than usual during a period. Generally, the service interval on my car is ~ 7500 miles, though 10k would not be a problem.
> They also tell customers “hey you can wait 10,000mi before changing oil”. That kills engine life, and they know it.
Depends. Some MFGs are still very strict about oil changes.
You're right that the trim 'bundling' is to drive up price though. Nowadays you can't get 'just' a sunroof if you want one, you need to pay for -all- the other stuff.
I get that simple cars are cheaper but I'm real disappointed that such a new car, top trim, is lacking such a basic feature (at least to me) from a car built almost 20 years ago.
If you have good credit is the US, you can basically borrow money for free to buy a car.
Isn't that pretty good? 1.9% is at inflation, so it's almost a free loan.
Did he finance amount due on the trade? Oooh, that's a huge no-no.
(I didn't go past the paywall.)
Dumb stuff like this happens across the country, at a wide range on incomes, and on more than just cars. It really is a problem with education - people simply don't understand interest rates, loans, or general financial planning/budgeting.
Yes, the $9k excess was from previous vehicles (the article says he had two previously).
Who should be held responsible for a bunch of molecules in your brain making you feel good about buying something you shouldn’t have? Who’s to say what you should and shouldn’t have bought?
I honestly don't care what people spend their money on. I may think it's a bad idea, or it's even stupid, but I'm far from arrogant enough to think that I should in some way, work to "protect them from themselves."
From my understanding, what is used is called an "opportunity cost". Meaning, if I took this loan rather than pay off the car, I now have $36,000 in my possession that I would not have otherwise. I have to be able to make more than %1.9 off the money I spent over seven years for that loan to have been worth it.
So let's say I just store $36,000 in a savings account that had a yield of less than %1.9 and used that to pay off the loan. I am still losing money on the deal. If I put it into some sort of investment that made more than %1.9, then I make more money than if I spent it entirely on the car.
This is at least my understanding of how it works out. I welcome other's thoughts if I am wrong.
I am trying to answer the question posed, which was "is this a really good loan?" I took that to mean "If I have the money to buy the car, is this advantageous enough to take a loan anyways?"
In short, the loan is a great deal if the terms of the loan did not affect they buyer's willingness to pay more for the car.
a) You have that sort of cash on hand. b) You do NOT miss payments.
If you miss payments, they typically have late/collection fees against you (I don't know how bad they are) or repossess your car depending on the situation. I assume both are structured to be advantageous to the dealer (I don't know specifics).
Also, it is in the dealer's interest to make the loan as long as possible, as this makes the advertised monthly payment as low as possible.
In addition, making the loan payments as low as possible helps decouple the true cost of the car from the buyer. This encourages more spending that otherwise would not happen.
I have no wife to reprimand me. :/
If you’re going to continue that madness you could at least save yourself some depreciation buying 1-2 year old models.
Far too often many buyers justify their purchase AFTER signing on the dotted line. The number of people who have a litany of excuses for buying something more affordable is endless, sadly. We live in a society where we are bombarded not just by advertisements but also endless shows which show a life people in general cannot afford. From buying flashy bling, to cars, homes, and hell based on dating shows, buying a pretty mate. Then top it off with politicians telling people how they deserve stuff for free and insinuating many who have stuff did not get it honestly and you end up with a society always in debt.
Cars are one of those interesting goods where the more expensive they get the less effective they are at their core competency (safely and efficiently travelling from point A to point B). Watches are another example. You can buy a watch for $100 that you never have to wind or change the batteries on, and moreover gets its time from the atomic clocks in various parts of the world, so you'll never have to set it. Or you can buy a mechanical watch that gains or loses time which you have to wind for $10k. (I'm aware that there are reasons for buying a watch other than keeping the time but I just find the efficiency-price inversion interesting.)
The surprising thing about being poor is how expensive it is!
Those taking out the car loans are paying more than the people who pay cash. It's a kind of quicksand that lulls its victim into a false sense of financial security.
All the while, debt begets higher expenses, which begets more debt. Suddenly, out of nowhere it seems - comes calamity.
This describes both the American consumer, and the US government.
The longer loan period is just another financial option. Attention to cash flow and use of leverage are not moral failings. Sure, people can make dumb choices when taking out a new car loan. People make dumb choices paying cash for a new car. People make dumb choices buying late model used cars.
But most people are not savvy and don't have pre approved loans, so they get stuck with shitty financing that the dealers make a killing on.
I bought a Tesla last year, and a Chrysler plugin hybrid. Both were eligible for $7,500 back from the US government, and another $2,500 back from my state. In both cases, the dealer offered a 6 year loan with the understanding that I could put $10,000 back into the principle once I got my refunds.
I bought a car that I expect to keep at least 5 years (and paid a bit extra for the peace of mind of a 5-year warranty).
To finance this, I specifically sought out a 7-year bank loan. The value of the car at 5 years should exceed the balance of the loan at 5 years, at which point I will probably sell the car, pay off the loan (with some left over), and repeat the process. This works out as a kind of hire-purchase plus minor incidental savings scheme.
I'm an economist. The car was good value and I got a good loan rate. But according to the WSJ (and several comments in this thread) this means I can't afford my car. WTF?
Why not pay off the loan and keep the car as long as you can?
The drop off in vehicle value over one year is very small at low prices. When you get to more expensive cars, the drop in value is more significant in a year.
His anti-debt/anti-borrowing views work really well for his audience of those that are struggling to live within their means, but are not optimal strategies for those who can use debt/credit without getting themselves in trouble.
But yes you can buy reasonably nice cars for ~25k. The truck market is driving up the prices.
Works out well if you have kids and a set of grandparents living with or near you, as the in laws are retired and they can serve as a redundancy for vehicles, babysitting, and if they have a separate home nearby, a spare home for emergencies.
I serve low-income people as part of my job, and I make $49,000/year gross. But my expenses are about half that. I spend $742 on housing and utilities, including phone and internet (remember: small-to-midsized town!). My food budget is $400, thought I haven't spent that much yet. I have (or had) a $253 car payment. And so, I consume about half of my post-tax income and can save the other half. If I were co-habitating, I'd be able to spend even less on housing. Living alone is a luxury.
So why are all of my clients in miserable living situations? (I frankly don't know how to make ends meet at less than 175% of the federal poverty line without going the rice-and-beans route, so let's set those households aside.) Part of it is due to issues highlighted by this article--why do my clients need a $22,000 sedan when I bought mine for $14,000? Part of it is due to the "cycle of poverty"--once you are poor, you can easily get trapped in poverty until you learn some life lessons the hard way (read up on "flex loans" in the state of Tennessee if you want to see some stuff that my clients have to deal with). Part of it is health care, where costs are unforeseeable, and when they arrive they are quite high, throwing a wrench in the plans/lives of budgeters who aren't extremely careful. And part of it is substance abuse--not the illegal stuff, but the legal stuff: tobacco and alcohol.
In the end, I have gone through a lot of clients' files, and buying a car that's too expensive or living in a place that's too fancy is rarely the primary reason for their troubles. Why am I in such a good financial position where I'd be able to make ends meet even if I made half as much? Well, it's because I live in a cheap area, don't have any substance addictions, am extraordinarily financially educated, have enough savings to buy things like smartphones up front, know how to fight tooth and nail for the cheapest possible option when it comes to big life expenses, and am fit as a fiddle. Oh, and though I am fully on my own now, my parents helped me start my financial life with a good credit score. It's hard for people to check all those boxes, and some are out of their control.
So eliminating paycheck-to-paycheck living is a multi-faceted problem, with solutions as varied as better financial education, moving to single-payer so that unexpected, burdensome health care costs aren't a thing, having robust anti-substance-abuse programs, outlawing 270% APR loans (yes, that's what flex loans are...), etc. There's a strange dichotomy: it's important to have the personal mentality that you are responsible for your own finances, and that the government can't and won't save you. That's how financially successful people think, no matter what their income level. But it's also important to realize that there are ways that the deck is stacked against people.
What does that mean? The price for consumer goods generally cluster around low, mid and high prices. This includes cars, phones, computers, shoes, appliance, tools and virtually anything you buy. The low priced items are usually the worst value because they are shoddily built and don't last and have no warranty. The mid-priced items are the best value because they are well-built and will last a long time and usually are backed by a good company. The high priced items are well-built and will last but you pay for fancy extras or the name brand/prestige or service, etc.
So the trap is that if you are poor you end up having to buy at the low end of the market and you are on a treadmill of replacement. I once had a pair of good quality hiking boots that lasted +20 years that had finally worn out. I don't really hike that much and was in a rush to replace and didn't want to spend time researching all the choices (another thing lacking when you are poor, your time). So I bought a cheap pair and they lasted a little over a year. I was shocked at the difference and realized that I should have stuck to the rule to buy the mid-priced products to get the best value for my dollar.
Unfortunately if you need work boots and don't have the money you are just going to get the cheap ones and have to replace them in a year or two versus getting years of use out of the more expensive ones. The same idea applies to cars, phone, computers, tools, appliances, etc. and is a real problem for people trapped in this cycle.
Drop collision coverage. Only carry liability insurance.
Feel liberated.
And alive.