Posted By RichC on December 1, 2012
This past week, I talked to a younger friend of mine about his growing family and making fiscally sound decisions. He politely told me how much he respected my opinion as he asked for some advice … and my head swelled with the less than deserved accolades (but who doesn’t appreciate complements?) His primary question had to do with buying cars and how to them.
At first, I chimed in by paraphrasing the advice given by most financial gurus … “new cars are a lousy investment and you should save until you can afford one and then only purchase a sensible vehicle where the initial depreciation has been taken by someone else.” I shifted to my long winded lecture about the years of driving old cars and the regrets I had when I purchased of a new vehicle when I finally “thought” I could afford one. It was a small Chevrolet S-10 pickup truck with a cap when I started my business – it was a mistake to buy a new truck and finance it for 3 years. I’d like to say that I learned a lesson, but a decade later the new car itch returned and took over my sensibility; once again we again financed a new car. To our credit, we’ve always been wise enough to keep the term to 36 months, but we were not disciplined enough to save the full amount first or always sticking to a used car.
Back to reality and the advice I think he was looking for. I found out that he and his wife “were” planning to replace both of their older vehicles … plural. Their temptation was to replace both of their older cars with new smaller and more efficient cars … stressing the safety of the family, blah, blah, blah. Believe me, I know the rationalization drill – been there, done that … how else could I have convinced my wife we needed an S-class Mercedes when the kids were young?
So I started with “yes, I understand” and figured that if their hearts were set on “newer” cars and fewer visits to the repair shop, that at least I should use some logic to help them rationalize what they were about to tackle. I asked the “why” question and the first answer was “reliability.” Good, I understand that … then start with different brands and models regarding reliability. I pointed to our positive experience with Hondas and Toyotas, but suggested that most cars are far improved in this area compared to a decade or two ago (he noticed I didn’t say VW – hmm?). Second was safety and again, my point was that all cars have improved, but that I was not alone in concern over the new breed of the sub-compacts coming to the market. I also mentioned that the complex technology and excessive electronics haven’t been proven long-term and could pose frustrating visits to the dealer. (I don’t have the statistics to back up my skepticism) He agreed and seemed very rational about borrowing excessively just to have options, but then the biggest issue.
I asked, “how are you planning to pay for a new car?” His answer, the trade-ins and low interest rate auto loans. I acknowledge that the rates were low, but that borrowing nearly the entire amount for two cars would be expensive and that the monthly payment alone would zap a family budget. We broached the “stretch the loan out” discussion, which is fairly common and seems to be acceptable today … far too common and acceptable in my opinion. He mentioned that if he and his wife each took out a 7 year car loan (ugh) that they could afford the payments. Quick answer … you really can’t afford new cars if you’ve got to borrow for 7 years.
I could see that he was disappointed, but I held to my advice and stated that it was not wise to buy two new cars or to finance them for 7 years. Hopefully in the end, they will compromise and consider one car with a shorter term and keeping the better of their two cars. I shared that one of the ways Brenda and I enjoyed the combination of an older car and newer cars for most of our life was to buy the new (or newer) reliable smaller car for Brenda … and that would justify an older used “cooler” car for me. I can’t say we’ve always practiced that (ie. Brenda drives a 1998 Rav4 currently), but it might be a way for him to be satisfied with an older second vehicle?
Car prices in the last four years.
- ’08 $25,505
- ’09 $26,317
- ’10 $27,644
- ’11 $28,337
- ’12 $28,318
As those prices have gone up, car buyers are looking to keep their monthly payment as low as possible. So they’re stretching out their auto loans further, often spreading new car payments over 6 and 7 years.
Year % of auto loans 72 Months
- ’08 23%
- ’12 29%
Source: J.D. Power