Friday, August 10, 2007

Embracing the debt culture - auto financing

I think financing an automobile is absurd. This is my opinion after having dealt with financing vehicles myself and currently being indebted to a financial institution for my wife's car. Financing a car, let alone financing a new car, doesn't add up. You pay more for the price of a purchase that is constantly depreciating. By the time its done depreciating, it's nearly worthless and you've spent thousands of dollars while paying interest on top of it to a bank.

There are 2 winners here: the bank and the dealership. The dealership wins again when you trade in your $30k car for $10k and they resell it for $13k!

But, consumers are more than willing to accept these terms in order to get into a new car. In fact, they are accepting even worse terms than our parents did. Compared to this, spending $500 on "rust-proofing" sounds like a good deal.

Buyers are paying more, extending loan terms and making smaller down payments, according to a recent study by the Consumer Bankers Association. Many buyers are also wrapping old loans -- for vehicles they haven't yet paid off
Way to go consumers!

According to this survey, 60% of buyers are opting for loan terms greater than 5 years. That's a staggering number. The average loan is 65 months. That could mean about a thousand extra in interest over the whole loan. Ouch!

Worse, while car prices are going up, down payments are going down. 1% was the average this year, or $3,000 on a $30,000 car leaving you with $27,000 financed. That must leave the bank salivating. Since your car probably depreciated more than that just by driving it off the lot, you're upside-down in the loan before you even park it in your garage. This also means when you turn it in, you'll probably be financing your old car along with your new one. The average amount a car buyer is upside-down when trading in their 2005 clunker? $2,600. I think we can safely say that 1% down payment is going nowhere towards the principle of the new vehicle.

It gets better. Apparently blind to the subprime mortgage crisis, banks are lending big loans to people with worse credit. Maybe the departments don't talk to each other? Or it could be that Americans are obsessed with their shiny vroom-vrooms, often skipping house and revolving credit payments to pay for shiny.

I was also surprised that a whopping 21% of people lease - ie, rent their cars.
"Overall there's a lot of debt," says Elmendorf. "And if you add that to credit card debt, and home equity debt, consumers are pretty tightly leveraged these days."
No kidding. I wonder what percentage of consumers just pay cash? I bet it's not very high. I often hear a car loan is, along with a mortgage, "normal debt". I guess normal is "leveraged", ie, "broke". When you think about the numbers, paying cash for a used car just makes sense.

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